TAKING STOCK 26 April 2018

THERE must be an acceptable explanation for the decision by the beleaguered Fletcher Building company to pay millions of dollars for a redundant underwriting agreement of its heavily discounted rights issue.

Fletchers will be paying the Australian investment bank Macquarie several million dollars for underwriting an issue that did not need an underwriter.

Markets professionals will surely want a credible explanation.

I presume that FBU’s new chief executive Ross Taylor, an Australian, had a relationship with Macquarie, perhaps going back many years.

In NZ Macquarie is of minor relevance, having quit its retail arm, but its Australian parent has grunt so its presence here is logical.

If FBU believed that its rights issue needed help in Australia, then there would be some logic in the New Zealand company’s use of Macquarie as the arranger of its rights issue.

A fee of maybe a million or so might have been credible.

What made the underwriting agreement absurd was the depth of the discount.

The new shares were to be offered at a discount of approximately 20 percent, and at a ratio of slightly less than one new share for every four owned.

Only those who have nightmares about FBU’s survival would not have taken up their rights.

The rights shouldbe worth more than a dollar, given the strike price and current market prices.

So what would make FBU waste precious millions of its cash to fatten the pockets of the Australian ‘’millionaires’ factory’’, as Macquarie was once disrespectfully known?

The obvious but disingenuous response might be that Fletchers is negotiating with various banks and other lenders.

Those suppliers of credit facilities might have made it a condition of their discussions that FBU had absolute certainty about the success of the rights issue.

If that were so, then FBU is being manipulated by its bankers in favour of Macquarie.

The lenders may also be forcing FBU into a weak negotiating position, when it sells its American subsidiaries, Formica and Roof Tiling.

One hopes that this umpteenth example of poor investment decisions by New Zealand companies will remain top of mind when NZ companies next seek to take over weak American (or Australian – Ansett anyone?) companies.

In areas like agriculture and possibly technology, NZ might have a valuable perspective to add in bigger countries, but in high-scale manufacturing we do not.

There is another aspect of this FBU debacle that NZ companies should not forget.

FBU has raised debt from a US Private Placement (USPP) of bonds taken up by second-tier American lenders, often second-tier insurance companies or hedge funds.

Generally, such private placements impose conditions on the borrower that penalise heavily any deterioration in the condition of the borrower.

For example, the lender may have their right to immediate repayment if the borrower’s credit rating falls, or if its ratios of income to interest bill falls behind agreed levels.

Immediate repayment might be damaging but the penalties might be severely destructive.

The FBU placement came with a penalty of $150 million, should FBU breach the covenants and be required to repay immediately.

There can be little doubt that the FBU commitment to sell its American assets, and raise capital, will be related to those covenants.

Perhaps the USPP providers required FBU to have its rights issue underwritten.

If so, it was a braindead requirement.

My guess is that Macquarie will collect a fee of at least $10 million for accepting an obligation (to underwrite) that was virtually certain to be redundant. I doubt Macquarie will find itself short of sub-underwriting offers.

Any risk of a shortfall was removed when the Australian and then the NZ media circulated the planted rumour that the Australian company Wesfarmers was planning to take over FBU.

The enquiry into this contrivance will no doubt begin by looking at which parties sold large amounts of shares in the days following the plant.

The ramping up of the share price – the logical outcome of this rumour – had the effect of making FBU’s rights issue highly attractive.

I imagine that Macquarie had nothing to do with the rumour, but I would be fairly sure that it benefitted from it, its underwriting fee becoming a fee for a sinecure, rather than a possibly expensive task.

I also imagine that every capital market participant expects the FMA and the NZX to identify who planted the rumour, and to prosecute anyone who acted illegally.

I expect the FBU shareholders to demand an explanation for the decision to have the fee underwritten.

 _ _ _ _ _ _ _ _ _ _ _ _

FLETCHER Building will not be the only company to be reviewing the wisdom of agreeing to the covenants imposed by suppliers of money under a US private placement.

Few will have forgotten the damage done by South Canterbury Finance when it breached the covenants imposed by a USPP group in 2009.

SCF, then guaranteed by the Crown, had borrowed US$105 million by providing debenture security to the American members of the lending syndicate.

The security ranked pari passu (equal) with the security provided to New Zealand retail investors, except that the USPP lenders could demand immediate repayment should SCF ever lose its investment grade rating, and could demand $20 million of ‘’lost future interest payments’’.

It lost that rating in early 2009and was required to repay the $120 million (NZ equivalent), and penalties of a further $20 million.

The NZ banks at the time believed that the penalties were usually waived, but SCF set out to negotiate a discount on the penalties, ultimately reducing the penalty to $15 million, still a huge sum, which the late Allan Hubbard paid (and probably later received from SCF).

To repay this money SCF had to borrow $60 million from Treasury and had to rely on the Christchurch asset arbitrageur George Kerr.

Naturally Kerr had his own conditions for helping SCF.

Ultimately Kerr ended up with a prior security to all debenture investors, received multi-millions in fees, and may have been the cause of the Crown’s decision to repay in full various SCF investors who were not eligible for the guarantee.

When SCF went into receivership, the Crown had to pay out all those with prior securities, and chose to pay out debenture holders, whether they were eligible or not.

Although Treasury says the ultimate nett loss was around $800 million, there would be some conjecture that this calculation ignored tens of millions of additional real costs, perhaps even hundreds of millions.

Currently I am in the process of writing a book about the errors and the illegalities that led to this write-off of taxpayers’ money.

It would be premature to spell out now all those appalling facts but there is little doubt that the SCF directors made an expensive error by not understanding all the covenants they were signing when the USPP was arranged.

The late SCF chairman Allan Hubbard claimed he was sideswiped by the recall of the facility by the Americans, stating no one told him about the requirement to maintain an investment grade rating.

One can reach three conclusions from his claim: -

1.That it is unwise to agree to a condition you cannot control.

2.Only the slackest governors would sign an agreement without fully understanding it.

3. Perhaps if Hubbard had understood the governance requirements, SCF might have behaved more responsibly.

The enormous cost to Crown funds of the SCF failure reflected very poorly on the skills and behaviour of the National Government, Treasury, and many other parties.

However, the saga of the repayment of the USPP uncovered SCF governance ineptitude and was not the fault of Key, English or Treasury.

(That might be a minor blessing. There were plenty of expensive errors that could be sheeted home to these parties).

 _ _ _ _ _ _ _ _ _ _ _ _

THE recent discussion by Metlifecare’s chief executive, Glen Sowry, regarding the contribution of his company to solving housing shortages will no doubt raise eyebrows.

Sowry noted that a new Metlife village with 200 dwellings was helping to solve the housing crisis because the 200 couples who move into Metlife will put their Auckland houses on the market.

His logic is reasonable.Any newly built dwelling is part of the solution.

Sowry will know about the problem.

He was previously the chief executive of Housing New Zealand, which is targeted with solving housing problems.

Sowry will probably remember that Housing NZ has many thousands of dwellings that have been allowed to deteriorate to a level of disrepair that makes those houses unfit for purpose.

Housing NZ has three separate tasks.

It must provide satisfactory subsidised rental housing for those whose circumstances need this form of government assistance.

It must seek to provide affordable housing for those who cannot buy at prices set by the market.

It must provide a solution for the dysfunctional who would otherwise be sleeping in cardboard boxes or in doorways.

Housing NZ’s new CEO Andrew McKenzie will know that thousands of existing stock must be bulldozed and replaced, a difficult task given New Zealand’s lack of tradesmen.

Indeed, the task would be impossible if the government were to close the immigration desk to builders and construction workers.

McKenzie will know that Housing NZ can achieve massive savings in building costs because of its scale.Which other provider could offer long-term contracts to suppliers of building materials and suppliers of labour?

In effect Housing NZ can help companies make long-term commitments, for example to build manufacturing sites and take on apprentices, because Housing NZ knows it will build thousands of houses every year, possibly for decades to come.

The supplier of the houses will know that if he signs a long-term contract he will get paid!

Sowry and Metlifecare are indeed helping to solve the crisis but it his ex-employer, Housing NZ, that will provide a sustainable solution.

My small suggestion is that Housing NZ should be promoting scholarships for building and other trade apprenticeships.

Perhaps it could offer free tertiary training in return for a bonded period of employment.

It could even offer priority to rental properties, or affordable homes, as an incentive to apprentices.

 _ _ _ _ _ _ _ _ _ _ _ _

LAST week’s discussion on the subject of setting savings targets for all New Zealanders was sparked by a fund manager and various financial salespeople nominating nonsensical targets.

Those who clip the tickets of savers naturally want superannuation saving to be compulsory, and naturally want people to save more.

The more people save, the more the clippers will be applied, currently at larcenous rates of around 1.5% per annum.

The Taking Stock discussion produced responses from readers who were mostly not clients.

One explained how demoralising and inappropriate such targets were if the reader was unemployed.

A mum who had raised children at the expense of her paid job pointed out that re-entering the workforce, even after retraining, was difficult because of the ageist attitude of employers.

No paid job meant no hope of saving anything.

A second respondent referred to the random events that affect one’s ability to save.

Broken marriages, inheritances and health may have a major bearing on one’s ability to save.

Others responded that it was insulting for wealthy fund managers and salespeople to discuss the savings target of hundreds of thousands of dollars, as though a happy, healthy retirement could be achieved only by the rich.

As we have been observing during the Australian investigation into banks and insurance companies, the exploitation of the financially disadvantaged is simply another form of corporate bullying, and even corporate theft.

My solution for New Zealand would begin with much greater subsidies available to those with a Community Services Card.

I would prefer to see the NZ pension income tested, and asset tested, and either have a token universal component, or a universal component that kicks in at a much older age for those who have ample income and assets.

Political accord would be needed, obviously.

Will we ever have real leaders to get such an accord underway?

 _ _ _ _ _ _ _ _ _ _ _ _­

THE extraordinary success of Synlait Milk, now enjoying a share price of nearly $10, might draw attention to the relative weakness of Fonterra’s governance.

Synlait has a smart business model, a smart chief executive, and one or two smart directors (and one, Richardson, who I do not admire).

Its market capitalisation has soared, as, of course, has A2 Milk.

Both these companies have found ways of turning a commodity into a more valuable product and built markets based on relevant partnerships.

Fonterra, meanwhile, has made far too many errors.

Its head office culture has not been refreshed for many years, its wastage, according to some, is legendary, its army of richly paid executives apparently not capable of the victories that its sheer size should have enabled.

Arguably Synlait and A2 Milk are enjoying share prices that are over-optimistic.

Fonterra’s share price has stagnated since the shares were listed.

It has an opportunity now to appoint a CEO who will reinvent its culture, perhaps with the help of a re-energised and smarter board. Perhaps it needs a chairman and board to focus on all stakeholders in Fonterra

Like Fletcher Building, its future success may depend on a clean-out of poor attitudes.

 _ _ _ _ _ _ _ _ _ _ _ _


I will be in Christchurch on 15 and 16 May and in Whangarei in June (date to be advised).

Mike will be in Auckland on 8 May.

Kevin will be in Queenstown on 15 June.

Edward will be in Auckland on 28 May.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

TAKING STOCK 19 April 2018


THE intended audience for these newsletters is our client base, so by definition any preaching about the practice of saving money would be redundant.

Our clients are well versed in the processes of saving and investing.

Yet regularly we do observe uncertainty about the quantum needed to achieve a retirement not spoiled by a lack of money.

Generally those who preach on this subject are those with a vested interest in the savings process. In particular fund managers and financial salesmen are pretty good at obtaining air time to implore the population to save more (with fund managers).

As an aside, I often wonder whether their message does have the effect of turning away many of those who might feel intimidated by the colourful claims of the salespeople.

Often the fund manager, or Aunt Daisy in the finance pages of the Saturday newspapers, will advocate a savings target of half a million or more, a target not even remotely achievable by at least three quarters of the population.

Currently the median (50 percentile) retired person (at 65) has savings of around $30,000 so will be demoralised by the lofty targets of those salesmen.

Perhaps 15 years ago, the data I had acquired from clients confirmed that a savings pool of $200,000 enabled a retirement with options, while a pool of $400,000 was an ample pool for those with an unencumbered house.

Nothing much has changed for many such people today, largely because of the much greater value of one’s home, and the growing acceptance of home equity release loans, now offered by mainstream lenders at credible interest rates.

Most couples today who had spent their savings by the age of 75 would find it easy to arrange a cash flow of $2,000 a month from a home equity loan.

Indeed I frequently see plans that begin by budgeting to spend on travel while the retired couple has good health and energy.

If they have the desire to travel even at an older age (say 80 plus) they know the home equity loan will still bolster their pension for more decades.

For all these reasons I have no respect for the claims of fund managers, Aunt Daisies and salesmen, that savings targets must be at levels like the $725,000, claimed earlier this week by a fund manager.

Those whose incomes are in the top 10% of the country might find such a target would be achievable, but for most people winning Lotto would be the only route to such a quantum of savings.

Fund managers, gleefully clipping their captured clients at rates of 1.5% (on average), do much better if the funds they manage are five billion, than if those aggregate funds were three billion. Costs do not rise much as the pool managed grows, but fees do not come down.

Is it a surprise that they prevail upon the media to supply a platform on which to preach the value of higher savings targets?

What is even more sickening is their constant refrain that New Zealand ‘’lags the world’’ in its savings performance.

Whether or not we like to admit it, New Zealand is a cosseted, rich country, with a population spoilt rotten by nature, and benefitting daily from social programmes taught to us by Britain (and Canada).

We have socialised education and health, we have a luxurious welfare system, and an extraordinarily generous pension system (regardless of IMF opinions).

If anyone wants to debate that they should begin by listing other countries that have similar programmes.

To put matters into context, 51% of all adult New Zealanders are in the top 10% of the world’s wealthiest people.

Not one New Zealander is in the bottom 43% of the world.

Any New Zealander with a house and savings that in nett value exceed $1.2m is in the world’s top 1%.

And we grizzle? Really?

It is, of course, a separate debate as to whether we spend our riches wisely.

One statistic that might lead that debate is that there are just six countries in the world with more motor vehicles per 1,000 people than New Zealand.

 _ _ _ _ _ _ _ _ _ _ _ _

FUND managers talking up their own book was also the motivation for the recent criticism of the NZX, which somehow is now the cause of an Australian managed fund taking a 5% share of the beleaguered Fletcher Building Group.

At least one Australian organisation has bought around 5% in FBU, taking advantage of its falling share price, after years of poor management and dismal governance.

The Australian buyer is taking the not unreasonable punt that a new CEO (Ross Taylor, an Australian) and a new chairman (yet to be announced) will untangle Fletcher Building and help it to earn profits in keeping with its market dominance and privileges.

Given that Fletchers is domiciled here and that most of its repeat revenues are achieved here (retail and building materials), it would seem to be logical that the New Zealand fund managers should be more able than Australians to forecast FBU’s future performance.

If it really were a fund manager priority to keep our biggest companies’ listings within the NZX, you might ponder why they have not been buying up the ‘’cheap’’ shares themselves.

Is it because their investment performance is focussed on quarterly returns, rather than on long term sound strategies? Are they selling to the Australians?

Have the words of Warren Buffet never resonated with our fund managers (buy value, hold forever)?

It is certainly true that the likes of the robotic exchange traded funds (ETFs) can never take long-term strategic decisions.

The new small NZ fund, Simplicity, will adjust its portfolio at very short-term intervals to reflect the FBU percentage of an index.

If FBU’s shares fall by 25% but the index remains the same, the ETF will sell Fletchers at any price.

Simplicity is too small to have any significant effect on the index but if it ever were to achieve scale, then its selling of FBU would force down FBU’s price even more, further reducing its share of the index, requiring even more FBU selling.

Heaven knows why the media ever consult with the administrators of ETFs.

Their views are irrelevant!

They perform no research and can hardly influence any board of directors by threatening to buy or sell any particular share.

Their buying and selling is already set in concrete by the programme that operates the robot.

Real fund managers do matter.

Those that have guts and a real research base can challenge companies, can effect change, and in theory can make long term strategic decisions.

It is these fund managers who will determine whether Fletcher Building becomes an Australian company or remains in NZ hands. It is they who should be chatting up the media.

The NZX can do nothing about it.

Its job is to provide platforms and rules, but it cannot stop Aussies from buying any available shares.

_ _ _ _ _ _ _ _ _ _ _ _

WE should be grateful that both the FMA and the NZX are investigating the recent exploitation of the media, probably by large-scale sellers of FBU shares.

The Sydney Morning Herald published the most improbable rumour that the Australian giant Wesfarmers was looking to take over Fletchers.

The publication of this nonsense led to a leap in FBU’s share price, resulting in investors, presumably fooled by the rumour, lifting demand for FBU shares, causing a price leap of nearly 15%.

No doubt the fund managers were selling gleefully, for they would have known the concept of such a takeover was absurd.

The Commerce Commission is hardly likely to allow even greater domination of the retail building supplies market, already dominated by Fletchers and Carters, with Wesfarmers (Bunnings) a smaller player.

The FMA and the NZX will seek to uncover the smart alec who beguiled the dopey journalists into consenting to publish this nonsense.

It is illegal to manipulate share prices with misinformation.

Fletchers acted properly by reporting immediately that Wesfarmers had not recorded any share purchases.

Wesfarmers stated the rumour was nonsense.

A small Australian fund manager had bought a 5% stage in FBU, taking the contrarian view that FBU might one day restore itself.

Fund managers, even Australian fund managers, are allowed to buy shares in NZ listed companies.

The Sydney Morning Herald and its owners Fairfax ought to suffer financial as well as reputational loss for co-operating with the publishing of this silly business.

 _ _ _ _ _ _ _ _ _ _ _ _

THE disgraceful shenanigans at Powerhouse Ventures Ltd continue.

Within the past few weeks, PVL has first announced a discounted rights issue, then hailed its initial success, then scurried around the market to cover its ultimate failure, then replaced it with an ugly convertible note issue.

Chaos reigns.

PVL in November 2016 put out a totally misleading prospectus containing obsolete valuations, trying to raise $20 million, but committing to return any money unless PVL raised a minimum of $10 million.

It did not raise $10 million from investors though it came close, so it paid some early somewhat surprising bonuses to key staff in return for a commitment to invest in the issue, getting PVL past its minimum $10 million figure.

This was itself ugly but, as far as I can see, a legal means of getting past the minimum figure.

PVL then had three chairmen resign within a few months of the share issue.

Remarkably the slack Australian regulators (PVL is ASX listed) have done nothing, at least in public, to address the issue of the grossly misleading investment statement in 2016.

Since then PVL has seen its flagship company HydroWorks fail, unable to raise funds for its growth plans, and has had two of its other subsidiaries declare war on their parent company.

Here we are, 17 months after the $1.07 public offer, with PVL now offering shares ostensibly at A$0.20c.

Within days of this offer, which was not underwritten, we hear that the shares not taken up in the rights issue are being tendered to market participants at even bigger discounts.

Perhaps the plan was to sell to the ‘’underwriters’’ at 0.20c but offer a 10 cent ‘’underwriting’’ fee to those who wanted to buy the unsubscribed shares for 10c.

Then, days later, we are asked to accept that the rights offer is cancelled, perhaps to be replaced by a short term 12% convertible note, the notes converting to shares next year at 20c (assuming no hidden conversion rights or discounts).

How can a company with virtually zero cash flow afford to take on 12% (or any percent) debt?

I guess the answer is that selling assets at a discount would generate cash to repay debt.

Does this not sound like the stupid process followed by South Canterbury Finance, that cost New Zealand taxpayers an unnecessary amount, of hundreds of millions?

PVL, it must be said, has failed to monetise good innovative ideas from the university research programmes because it had hopeless governance and hopeless management.

Its subsidiaries have never been given the support they were promised.

Any money raised seems to have gone into high executive salaries and bonuses for PVL’s people.

Is it not time for the ASX to intervene?

 _ _ _ _ _ _ _ _ _ _ _ _



I will be in Christchurch on 23 and 24 April and again on 15 May.

Kevin will be in Queenstown on 15 June.

Mike will be in Auckland on 8 May.

Edward will be in Remuera, Auckland on 28 May.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited


TAKING STOCK 12 April 2018

THE generally mixed standard of NZX new listings in recent years discussed in Taking Stock last week is illustrated by the big variations in returns but the subject is clearly ruffling investors.

Our reference last week to the astonishing variation led to requests that we analyse results over longer terms and that we publish real data.

Over the past five years there have been 28 new issues, several of which have been excellent, several poor, and three utterly disastrous.

The analysis indicates that there is either a major variation in the due diligence process, some NZX firms much better than others, or it suggests that some NZX firms are willing to promote higher risk ventures, or have simply had back luck, often.

In descending returns order, with the names of the organising or joint lead broker shown, the 28 issues that were analysed were –


Synlait Milk       FNZC/GS          295.6% 

Scales              FNZC/DCL        180.6%

Gentrack          UBS                   177.1%

Vista                 McQ                  151.1%

Serko               CAM                  118.2%

Airworks           FNZC                107.7%

ZEL                  FNZC/GS           98.9%

Meridian           GS/McQ/DCL     96.3%

King Salmon    FNZC/McQ         89.3%

Genesis           FNZC/UBS         54.5%

Mighty River    FNZC/GS/McQ   30.0%

Eroad               FNZC                 26.7%

Oceania           FNZC/McQ/DCL 24.2%

Arvida              FB                       24.1%

Fliway              FB                       (1.7%)

Investore         GS                       (4.0%)

AFT                  FNZC                  (8.9%)

Tegel                GS/DCL             (43.9%)*

Evolve              GS/FB               (44.0%)

Metro P.G         UBS/McQ          (56.5%)

IKE                   FB/DCL              (64.5%)

SLI                   DCL/FB              (78.0%)

Geonet             CAM                   (86.2%)

OHE                 FNZC/DCL          (87.0%)

Veritas              DCL                    (96.9%)

CBL                  FB/UBS             (100.0%)

Intueri               McQ/UBS          (100.0%)

Wynyard           FB/UBS             (100.0%)

These issues varied from outstanding to disastrous.

*It should be noted that FNZC advises it was not involved in the pricing of Tegel, but was essentially the manager of the NZ distribution of Tegel, which was priced by GS and Deutsche Craig.

Those who simply distribute are not shown on the above charts.

As discussed last week, there was far too big a variation in results between those arranged and promoted by the various investment banks/NZX sharebrokers.

FNZC led or fronted eleven issues. Had an investor put an equal sum into each issue he would have enjoyed an overall gain of 73.7%.

Goldman Sachs organised seven, plus 61.2%.

Macquarie seven, plus 33.5%

Cameron Partners two, plus 16.0%

Deutsche Craig eight, minus 8.7%

UBS six, minus 20.8%

Forsyth Barr seven, minus 51.5%

One market participant asked what effect on this research would have resulted had the research been based on seven years, or ten years.

The unreasonable difference between the various brokers would have been even more exaggerated, as longer time spans would have picked up the highly successful new issues of Heartland, Summerset and perhaps Xero, all of which were FNZC lead issues.

In my view the five-year time frame is enough to make the point that the variation in results must be of concern to retail investors.

There will be several issues to consider.

Should any investor find that his portfolio has an unnatural level of unsuccessful issues, the obvious outcome must be a serious discussion with the adviser.

Years ago it was common for investors to grizzle about their lack of access to the best issues, and the overweighting of issues that had been hard to sell.

The Financial Markets Authority and NZX should be examining adviser behaviour well enough to ensure that today no investor should be treated as cannon fodder.

Those advisers that operate under a discretionary investment service – the adviser buys/sells without discussion – must be able to demonstrate that any sale or purchase is linked to the investor’s declared strategy and risk tolerance.

The wise investor would stipulate that his adviser could not invest a significant sum in any speculative share, and might go further and define the shares in which the adviser can trade.

The NZX and the FMA have ample powers to drill into any adviser’s behaviour.

A second issue to consider is the standard of due diligence expected of NZX brokers when they list a new company.

It should not have been hard to foresee, as an example, that some of the poorest performers were highly speculative.

Conversely, there were 14 new issues (exactly a half) that have produced gains for investors.

Of these issues, the lead or joint brokers were –

FNZC     nine times of 11 issues led or joint led

GS          four of 7

DCL        three of 8

McQ      five of 7

UBS        two of 6

Cameron one of 2

FB           one of 7

Of the 14 issues that lost money, the table looks like this –

FNZC     two of 11

GS          three of 7

DCL        five of 8

McQ      two of 7

UBS        four of 6

Cameron one of 2

FB           six of 7

The NZX ceased to behave like a fraternity when it moved from an effective cooperative model to a listed public company, in which the broking firms were allocated shares.

Prior to that time broking firms could expect to participate in all new listings, obtaining reasonable allocations from the lead brokers.

Matters are much more complicated today.

For example the best issue of the past five years – Synlait Milk – was distributed predominantly by the best broking firms, with very little allocated to some.

This trend may end up affecting the returns of investors whose brokers either do not obtain useful allocations, perhaps because of dysfunctional inter-broker relationships, or perhaps because some brokers will not want to help others to distribute their issues.

Goldman Sachs and JBWere have a well-earned reputation of promoting their own issues wholeheartedly, but stepping aside from others.

Perhaps the NZX, under its pleasant and capable CEO Mark Peterson, might want to contemplate the levels of cooperation between brokers.

Capital markets are a highly competitive, alpha-like environment but retail investors should never be a victim of this sort of behaviour.

It is not possible to take the obvious action of allocating issues predominantly to NZ investors.

As we saw with the Crown asset sales, there was some need to allocate offshore, to ensure tension in the pricing of the issue.

Clearly New Zealand ended up donating money to overseas fund managers, certainly in the case of Mighty River Power, where tens of millions were simply stagged by the offshore investors while all NZ investors were scaled to small parcels.

During that process, Meridian and Genesis became victims of buffoonery in parliament, resulting in those shares being absurdly discounted to offset the threats of disgraceful political chicanery.

If in the future more Crown assets are sold – Kiwibank one day should be listed if it cannot obtain capital to achieve growth – one hopes the NZX will help Treasury manage the process better than it did with the power companies.

Much work must be done to strengthen the NZX’s hand.

It should not be its own regulator.

The FMA should be beefed up so it can regulate the NZX, and perhaps even the banks and insurance companies, if the Reserve Bank’s behaviour with CBL is an example of their best capability.

The problems of the depth in our investment banking companies are visible in the tables displayed earlier.

Perhaps we are at a crossroad.

Can we reboot our capital market and regulatory models?

Or should we be looking for a quick fix by calling in the Australians?

My preference is a beefed up NZX, a better funded and staffed FMA, with more expected of it, and a great deal more emphasis on the symmetry of information.

(It still is sickening to see the similarities between the regulatory and Crown failures to surface from South Canterbury Finance and CBL.)

The NZX,30-odd years ago, appointed a competent, balanced broker, Brian Kreft, to head up a committee that rewrote the NZX rule book.

The wild west behaviour was addressed.

Insider trading, rampant in the 1980s, is now a criminal offence.

Yet we still have other issues to solve.

Fourteen out of 28 new issues in five years have either failed (three completely) or are struggling.

Is that not, on its own, a signal for the need for some new leadership in capital markets?

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IT is a good thing for me that this modern day attempt to ban senior staff from forming personal relationships was not in vogue in the 1970s.

Had that been the standard in the 1970s, I would never have dated then married Giovanna, and our capital markets would have three fewer participants, each of our sons making their mark in this sector.

We met while working at a large company in London, married three years later, and recently celebrated our 41st anniversary.

Recently I met a senior executive of a US company which has a large branch in NZ.

He told me the modern standards have led to his firm requiring all of its 2,500 staff to sign an agreement that leads to automatic dismissal if there is any evidence of harassment or objectionable behaviour.

One wonders why the solution cannot be so much simpler, in the corporate world.

What happened to good manners?

Do we need our universities to teach this obvious solution?

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I will be in Christchurch on April 23 and 24, at the Airport Gateway Lodge, and will be back there on May 15 and 16.

Kevin will be in Christchurch on 3 May.

Mike will be in Auckland on 8 May.

Edward will be in Remuera, Auckland on 28 May.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

TAKING STOCK 5 April 2018


AS the ANZ Bank contemplates the NZX listing of its long-held finance company UDC Finance, many in capital markets continue to lament the generally poor quality of listings in recent years.

The Auckland financial market commentator Brian Gaynor, once a research analyst with Jarden & Co (now First NZ Capital), recently was critical of the due diligence of some of the organising brokers of recent listings.

One cause of his criticism was the failure to notice the weakness in CBL Insurance, which listed only two years ago but has already collapsed.

CBL has since been exposed as having weaknesses and undisclosed issues at the time of its initial public offer.

The finance company UDC Finance is most unlikely to have undetected weaknesses but if it were to be listed it would face new challenges without the ANZ’s significant support.

For example its source of funds is currently guaranteed by the ANZ. Its cost of funds is similar to bank rates, it can be certain of access to funds at any time, so it can borrow short and lend long. In addition, it would now have access to the ANZ database, making its lending decisions easier.

If it had been bought by the Chinese investment companyHNA, the UDC credit rating would have fallen, reflecting a much weaker ownership.

So had UDC then sought wholesale or retail funding externally, it would have been forced to pay at least one percent, possibly two percent, more.

It would then have had to find borrowers willing to pay higher rates, leading to a higher-risk loan portfolio.

If UDC does decide to list, its obvious preference would be to retain an ANZ link, perhaps remaining partly owned by the bank.

An alternative would be to find another institutional shareholder, like Heartland Bank, Kiwibank, or perhaps either the ACC or the NZ Superannuation Fund, to take a significant ownership role, if not total ownership.

If the public then took up any remaining shares, UDC might remain a low-cost operation, enabling it to remain a low margin, high quality finance company.

My guess is that the ANZ would prefer to ingest rodents than to pass UDC on to a competitor, so the institutional pathway may be more palatable.

Whichever path it chooses, and it is not certain ANZ will sell, the transaction will need to be organised, presented and distributed optimally by an investment bank, to achieve the price that ANZ expects to receive.

At decision time, the ANZ will be wary of who might best take on the role of organising brokers.

It might look at some recently available research highlighting the common factors in successful, well investigated and organised IPOs in recent years.

This was a point Gaynor touched on, and it is one that troubles many in capital markets.

Too many of the IPOs of recent years have left investors to face underperforming new companies, dramatically falling share prices, or in three cases, total collapses, (Intueri, Wynyard and CBL).

The research examined the organisers of each new issue (joint or lead brokers) over the past seven years and tracked the share price from issue price to current levels.

It then calculated the average returns achieved by the new issues of each joint or lead broker (those who set the price and perform due diligence).

In this period First NZ Capital organised 11 new listings which on average have returned positive gains to investors of 73%.

Goldman Sachs organised six issues, with an average gain of 61%.

Macquarie had five issues, plus 31%.

Cameron Partners had two, plus 16%.

Craigs had eight, minus 6%.

UBS had six, minus 20%.

Forsyth Barr had seven, minus 51%.

Craigs and Forsyth Barr are predominantly fund managers and distributors of new offers.

Though both retain some research capacity, both gain most of their revenue by charging clients to manage the portfolios selected by the broker.

Craigs is said to have around $25 billion of client funds under management, of which around $12 billion is invested directly by Craigs, without need to seek client approval, under the pre-arranged discretionary contract between Craigs and clients.Craigs is based in Tauranga and half owned by Deutsche Bank.

Forsyth Barr, Dunedin based, is privately owned, the Eoin Edgar family its biggest shareholder with around 24 percent, though Edgar is no longer a director.

FB is said to have around $11 billion of client funds under management of which around $4 billion is subject to a discretionary management agreement.

It was not chosen to participate in the Government asset sale process as either a lead or joint lead manager but distributed the offers as did all brokers, including our firm.

Forsyth Barr’s role in organising new issues has attracted companies like IKE, SLI, Evolve, Metro Performance Glass and Arvida, all of which remain listed but its average returns have been badly affected by the collapse of Wynyard and CBL, whose issues it jointly arranged.

Perhaps FB has simply had bad luck with the issues it has brought to the market but at very least it must be reviewing its screening processes.

UBS also had a poor record, it being the lead manager of Intueri (collapsed), as well as being lead manager with CBL and Wynyard.

UBS has no distribution capacity, so it will not have retail clients with portfolios damaged by Wynyard, CBL and Intueri, but these failings do damage reputations and are likely to be factors in future issues, when the issuer selects a skilled and successful team to perform due diligence and arrange a listing.

Investment bankers should have skill in performing due diligence and possess a genuine understanding of individual business models and capital structures. They are quite different people from retail portfolio managers, transactional sharebrokers, or those who focus on market research.

Naturally the best bankers and research specialists congregate in the companies that have achieved leadership in this sector. The alpha syndrome applies.

FNZC has regularly won awards for research and investment banking, leading to its dominant position.It has concentrated on what some would call the ‘’corporate’’ end of the market.

Accordingly, investment bankers and analysts who have been identified as outstanding in the sector have gravitated to FNZC.

Unsurprisingly, when the media has sought broking participation in ‘’picking winners’’ for the next year, FNZC has lorded it over its rivals.

One might assume its knowledge of company performance and prospects is superior because it has attracted the better standard of corporate clients, and has the best investment banking and research teams.

What is concerning to me is the enormous gap between the best performers, and those with the worst results.

FNZC will have been helped by the successes of the likes of Synlait Milk, Heartland Bank, Summerset, Oceania Healthcare and Eroad, offset by the disappointment, so far, of Orion Healthcare.

It also was a joint lead of Mighty River Power (now Mercury) and Genesis Energy when they were listed.

Goldman Sachs’ average returns were boosted by its success as a joint lead with Synlait Milk, only slightly offset by Tegel and Evolve.

It also was selected by the Crown to lead two of the Crown asset sales, though its performance with Mighty River Power did not please everyone.

Much of this stock was allocated by Goldman Sachs to offshore clients, while NZ residents were being heavily scaled.

Macquarie also participated in the asset sales as an organiser.

This year if UDC Finance and Vodafone both choose to list they would be seen as high quality, proven companies and would most likely look at all aspects of what leads to a successful IPO.

They would need to find distribution brokers, where Craigs and to a lesser extent Forsyth Barr will have selling power, but one imagines that the organising brokers are likely to be chosen from Macquarie, Goldman Sachs or FNZC.

Perhaps this highlights a potential weakness in New Zealand as only one of the three most successful brokers is New Zealand owned (FNZC).

Sadly, there is no sign of any new entrants in this crucial area of our capital markets.

Indeed, if anything, our sharebroking numbers are rationalising.

ANZ has already sold ANZ Securities (once named Direct Broking) to FNZC.

Only the ASB, of the banks, will retain a direct presence in sharebroking once FNZC takes over ANZ Securities in September, though the BNZ is a silent partner in JBWere, the other owner Goldman Sachs.

One has to wonder whether ultimately the ASX will take over the NZX.

Another possible alternative is for Macquarie to buy Forsyth Barr, to bring in a wider range of capital market skills and add to its scale.

There is one other possible outcome.

Any or all of Goldman, Deutsche Bank, Macquarie and UBS may conclude that the NZX is too small to warrant a NZ office.

Would that leave us with too little pricing tension in the high end of broking services?

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DURING my career in capital markets, there have been various times when international investment banks have targeted New Zealand, using a hit and run approach.

For at least 50 years Jarden & Co (now FNZC, once Credit Suisse First Boston) has been a street or two ahead of the competition but it has had to see off some big names.

The likes of Merrill Lynch, Citicorp (mercifully), Indo-Suez, Credit Suisse, Lloyds, NatWest, Bank of Scotland, Barclays, Deutsche Bank, GE, ING and Chase NBA have all disappeared, after coming here at a time when there seemed easy opportunities for quick returns.

The floating of our dollar in 1985 saw off those which lost heavily when our currency was so unpredictable, and when call interest rates were reaching 1,000 percent, as they did in February/March 1985. Chase NBA was one to disappear in a hurry, Citicorp another.

More recently, others left after the Crown asset sales had produced tens of millions in fees for joint and lead managers and distributors.

That one-off selling programme offered income to short staying foreigners.

It is hard to envisage what will be the next event to attract the interest of moonlighters.

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WHILE our investment banking and sharebroking sectors continue to shrink, the introduction of KiwiSaver has had a dramatic effect on our funds management sector, many new entrants appearing.

In the 1980s this sector was dominated by constipated, dull-witted giants like AMP, National Mutual and a number of British companies, which seemed to transfer people out here either as a reward, or perhaps as a punishment.

Government Life morphed into the dreadful performer, Tower.  National Mutual was bought by the equally turgid AXA, which was swallowed eventually by the Australian dullard AMP.

New Zealanders paid dearly, insurance prices being uncompetitive in an era of Old Boys Networks, where quail and pheasant were served at boardroom lunches, before the Tawny Port bottles were opened.

Today there are a number of small high achieving fund managers, the likes of Salt, Mint, Devon, Aspiring and Harbour Asset Management all creationsof the last decade or so.

Milford and Fisher Funds are now the big advertisers, but the Australian banks are the giants, leveraging off their databases and sales forces to dominate KiwiSaver.

Their main competition might be from Craigs and Forsyth Barr which concentrate on managing retail portfolios, but are small players in KiwiSaver.

When eventually the fees reach a sane level, say 25 basis points, the inept and inefficient will be weeded out. The banks are likely to lead the fees lower if only because of pressure.

By then the practice of paying any bonuses will have ended, I hope.

The concept of eating your client’s lunch will surely end one day.

Perhaps the only long-term value of the robotic exchange traded funds will be the effect they have on fees.

One wonders quite why any New Zealander allows the likes of trust companies with poor management skills to charge up to 2% or more to manage the funds unwisely left in the hands of trust companies via estates or family trusts.

Almost as improbable is the 1% to 2% of fees debited from client funds by the retail brokers who manage portfolios.

Where is the evidence that those fees will ever equate with added value in an era of low returns, let alone in an era when returns might be negative?

ETFs will be an unlikely solution.

Without research or analysis, the ETFs will be too slow to move when markets periodically subside and liquidity becomes a problem.

The first sign of the ETF bubble bursting will be with ETF bond funds. When bond yields increase, and portfolios are revalued (downwards), the withdrawal rate should be at extreme levels.

My guess is that the alert, light-footed funds like Salt, Mint. Devon, Harbour and Aspiring will have high appeal when equity markets fall.

The problem they would face would be obvious if those small funds ever become mainstream and huge.

Liquidity then becomes the issue, as does agility. It is always easier for small players to shine.

Increasingly these trends lead one to conclude that Australia and New Zealand might become one capital marketin the not too distant future.

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I will be in Auckland on Tuesday April 17 (pm) at Albany Motor Lodge and at Waipuna Lodge, Mt Wellington on Wednesday April 18 (am).

I will be in Christchurch on Monday April 23 (pm) and Tuesday 24 (am), the usual schedule adjusting as Wednesday April 25th is a public holiday.

Kevin will be in Ashburton on 12 April and in Christchurch on 3 May.

Edward will be in Remuera on 10 April and Albany 11 April.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a meeting.


Chris Lee

Managing Director

Chris Lee & Partners Limited

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