Taking Stock 28 May 2020

WHEN financial markets were first rattled by the fears of a deadly epidemic, investors naturally sought to identify business sectors that would survive.

Food production and distribution, electricity generation, internet and telecom services, and technology-based deliverers of goods (like Amazon) were easy to identify. So too were those who produced medical protective clothing and respiratory-assisting equipment.

Not so obvious was the unheralded financial services monopoly, the NZX, on whose platform all New Zealand listed securities trade.

Yet in less than three months, NZX has been a star performer, after an initial slump in price. Last week its share price was higher than it was before the crisis, its profit forecasts confirmed, its dividends safe and possibly rising.

Those with good recall must see this restoration of NZX as almost as counter-intuitive as the rise in sales of an anti-malaria drug that apparently goes well with a daily diet of presidential-size McDonald's burgers, one being about as effective in countering the virus as the other, except in the minds of infants.

The NZX has indeed transformed. It needed to transform.

During the ugly years of the 1980s, the NZ Stock Exchange was a mutual, a non-profit organisation regarded as a cost centre by all NZ Stock Exchange members.

For a while it was run by Roger Gill, a former St Pats rugby prop with the build of a wrestler and the humour of a town jester. He was rarely surrounded by impressive people, though one ought to tip one's hat to Brian Kreft, who helped to improve the market surveillance bible that aimed to staunch the spillover from some pretty poor practices that characterised the 1980s.

The NZSE demutualised, enriching a generation of individuals, and became the NZX in 2002, listed on its own platform. It became a listed company, the market regulator, and the provider of services to all listed companies. The conflict of interest was obvious, and still is.

Having been established in the 1860s, headquartered in Dunedin, the NZX became just one organisation based in Wellington, shed of a past when at one stage it had exchange branches in Auckland, Wellington and Dunedin, all of which operated independently, often communicating by postman-delivered telegrams, enabling clever brokers to exploit pricing inconsistencies.

Buy in Dunedin at 11am, sell in Wellington at 11:01am.

The new NZX made a significant error when it transformed, its choice of chief executive poorly considered, in my opinion.

One of the late Lloyd Morrison's few lapses was his endorsement of the ambitious youngster Mark Weldon as the NZX Chief Executive.

Weldon, like most successful swimmers, was a loner. Having worked in New York, he was highly motivated to achieve personal glory but was never a team player.

In my view he lacked wisdom and was wrongly incentivised by a weak board, though in ANZ director Nigel Williams it did have one identifiable strength.

Weldon sought to diversify the NZX income streams, charging into other activities including newspaper publishing, but ironically duffing what would have been a pipeline to Fort Knox when he missed the chance to buy Diligent's board paper platform at a time when Diligent was seeking capital and was being sold for pennies.

Later Diligent was bought for more than seven times its listing price.

Dedicated swimmers, ambitious and often lacking social skills, rarely make great chief executives. They are loners, by definition.

The NZX, poorly led and poorly governed, managed to lift its share price, and then split the shares profitably, but it alienated the markets on which it depended and failed miserably to grow the staffing skills needed of a specialist financial services company.

Indeed, staff turnover at 60% per annum in one year was higher than any other NZX-listed company.

After ten years Weldon left, his legacy scarred by criticism from the other market regulator (the Securities Commission), by abject failure with the finance companies whose securities were listed on the NZX, not helped either by the dysfunctional staff relationships.

To be fair some blame must be accorded to the governors of the NZX, whose chairman was Andrew Harmos, a competent, aggressive Auckland lawyer, whose long-present director was Neil Paviour-Smith.

In my view the NZX was at that time a poor-performing market participant.

I was unimpressed by Weldon but also unimpressed by the failure of the exchange to uphold continuous disclosure obligations.

One of its most obvious failures was with South Canterbury Finance, whose adviser was Paviour-Smith, and whose principal, the late Allan Hubbard, engaged Harmos as his legal adviser.

SCF and Hubbard clearly did not listen, if Paviour-Smith or Harmos were demanding that continuous disclosure obligations be met.

Weldon resigned and took on a role, utterly inappropriate as a match-up of his skills, as chief executive of Media Works, then owned, to its subsequent regret, by a US private equity fund.

Today Weldon lives in Central Otago, his former wife managing some grape-growing land near Cromwell.

When Weldon left, a highly successful and sociable investment banker, Tim Bennett, agreed to take on the restorative role for five years, in part motivated by the presence in Wellington of his ageing parents.

He restored some goodwill in the exchange, settled the staff and dealt to some cupboards where old bones were rattling.

He also appointed as his deputy Mark Peterson, who succeeded Bennett and has brought a calm intelligent leadership to the exchange that has led to its current successes and its restored profile.

The confusing and irrelevant diversifications that so distracted the board have now mostly been solved, old disputes settled, and NZX now has a staff so empowered that the NZX has calmly navigated lockdown, while handling an unprecedented new level of transactions and foreign investment interest.

Indeed, in mid-April the NZX software had to handle a transaction number more than five times the levels of the same days, a year ago.

The software designed many years previously was unable to cope. A new challenge arrived.

Part of the growth in transactions came in the tiny ($5 minimum) orders that new NZX member Sharesies collected during the market downturn in March.

Sharesies attracts young first timers to the market, often armed with $5, $50, or perhaps $500, looking to buy perhaps three shares in X, five shares in Y and 10 shares in Z.

Transaction numbers were not the main issue, though they would not help reduce the strain.

The old software was complex, comingling the transacted deals with account enquiries, which greatly increased.

Simultaneously the NZX would have been attracting new foreign investment, exploiting the lower prices, and perhaps hinting that NZ is now a contender for more international funds management interest, as one of the few places left where solid companies, like the electricity generators, still produce 4% after tax returns.

The NZX has thrived but its software does need refining.

At $1.40 its share price is higher now than it has been for years.  Given its history, who would have guessed?

Disclosure: Many of our staff, including me, hold shares in the NZX.

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THE ability of Sky Television to find underwriters for a capital raising of $150 million frankly amazed me. The underwriting fee explains Sky's survival and the restored value of its 2021 bond.

The issue is at a horribly discounted 12 cents, just the tiniest fraction of the price when Todds sold out a few years ago, the share price sometimes surpassing $7.00 in those years. Todds quit Metlife and SKY TV and now has a focus on iron ore mining in Australia.

To underwrite such an issue, which aims to raise money to repay bank and, hopefully, bond debt displays significant faith in Sky TV's plans to recover, after losing during lockdown its main advertising magnet, international sport.

Those who pay Sky a monthly bill of around $140, as I do, are dwindling in number, barely a third of the audience Sky enjoyed just three years ago.

With international sport currently hibernating, and with Spark demonstrating that modern audiences will watch sport on tiny screens, Sky TV's recovery is by no means guaranteed.

Yet Goldman Sachs, leaning on its parent's balance sheet, and Forsyth Barr, with a smaller balance sheet but a large sum of client money under discretionary management, have agreed to fully underwrite the issue, for the sensibly high fee offered.

Of the $160 million sought, just $9 million will come from institutional placements.

The remaining money will be from a non-renounceable rights issue, meaning the rights are not tradeable. I am unsure why the issue does not have tradeable rights.

One imagines there will be ample ''force majeure'' conditions to annul the underwriting agreement if there were unhealthy developments in the market during the term of the agreement.

A major Sky shareholder is NZ Rugby, which two years ago traded off a cash payment for Sky's access to rugby, in return for shares in Sky TV.

These shares were issued at around seven times the price Sky TV is now putting on its shares, meaning NZ Rugby has a heightened level of interest in the recovery of Sky TV. NZ Rugby itself is short of cash today, and is an improbable subscriber to the new issue.

The arrival of a vicious virus that seems destined to become endemic has caused great damage to all sporting codes, including those that do not involve physical contact.

If professional sport were to pay extreme sums to sportspeople the key issues would be gate takings and broadcasting rights.

Two-metre separation health protocols do not allow the world's sporting stadia to be filled, so gate takings are a problem, at least in the short term. Lower takings would naturally lead to lower revenues, lower salaries, and fewer paid professional sportspeople, an unvirtuous cycle.

Without a constant diet of top sport, the television sports channels would have a weak story to sell to advertisers.

As a sports lover as well as a constant user of international news channels, I commit to keep paying my monthly dues to Sky. I hope I am not in a diminishing minority.

Further I hope Sky TV's shareholders, of which I am not one, are committed to make up revenue needs by injecting cash. One hopes these injections are not required at regular intervals.

 _ _ _ _ _ _ _ _ _ _ _ _

THE Sky TV underwrite has brought about a great occasion for me personally, ending two decades of an arduous search.

The underwrite by Goldman Sachs and Forsyth Barr is priced correctly at about five or six per cent, setting a long overdue benchmark that correctly prices the value of sharebroking firms' balance sheet-threatening commitment.

If the Sky TV rights issue fails, GS and Forbar will subscribe for all of the shortfall. Bless them.

This correct pricing gives me the opportunity to end my long hunt for common ground with Forbar's chief executive Neil Paviour-Smith.

Ever since he ascended to the right hand of the Forbar principal, Eion Edgar, roughly 20 years ago, I have wanted to find an opportunity to offset the very occasional, usually kind and mild, but nevertheless critical comments I have offered on Paviour-Smith's strategies.

Mostly we have lived on different planets.

I would have had an opportunity to praise him highly 10 years ago had he succeeded in getting Key's government to discount its liability to South Canterbury Finance investors by paying the distressed asset maestro Duncan Saville to take away the Crown's roughly $2 billion liability.

Saville wanted the Crown to pay him around $400 million in return for his agreement to take over SCF's assets and their investor liabilities.

Saville offered to underpin his offer by adding his New Zealand share portfolio to the pot, pretty well ensuring the Crown could not lose more than $400 million.

If Key and his colleagues had had financial objectives and business acumen, rather than political goals and cosmetician skills, the offer would have been accepted, Saville would within a few years have cleared the liabilities, and the Crown, through profit share, would have escaped its obligations, without any destruction of taxpayer wealth. In five years Saville's patient approach would have netted him a tidy profit and all the shareholders and creditors would have been satisfied.

Politics and cosmetics prevailed. Key won two more elections. Taxpayers watched at least a billion dollars destroyed. Key's legacy had been set in concrete, his judgement defined by the behaviour with SCF.

Egregious Crown errors were not disclosed to the world until Key, English, Joyce and Power had retired from political office. An idiotic receivership was allowed to destroy a billion of taxpayer money, and disgrace descended on the 18 people who must bear principal responsibility for corporate and political vandalism.

Paviour-Smith, representing the late Allan Hubbard who hatched ideas like this, tried his best to persuade Treasury and Key to accept Saville's offer.

Had his effort succeeded, my book, The Billion Dollar Bonfire, would have had an opportunity to laud Edgar's right-hand man.

I remained patient.

I now applaud Paviour-Smith and Forbar for the new standard set in pricing the small firms balance sheet guarantee.

For years, all banks, investment banks and sharebroking firms, including ours, have agreed to sub-underwrite or underwrite at ridiculously low prices, grossly under-pricing risk.

In effect, we have committed our capital for a musket and a bag full of pippies.

This time, the size of the underwriting fee acknowledges the value of that underwrite.

May this new standard become the new norm

Praise be to Neil Paviour-Smith and Forbar.

_ _ _ _ _ _ _ _ _ _

ONE of the great privileges of being a long-time financial adviser and capital market participant is the contact it brings, often with old-timers who helped build New Zealand.

One meets retired engineers who built our dams and bridges, farmers who helped develop our reputation for premium food, horticulturists who foresaw the need to develop our apple varieties, industrialists who followed in the steps of the likes of Jim Wattie and Woolf Fisher, and many others. The latter might not be household names today but what they achieved, with much less access to technology and finance than applies today, was often material for legends.

We lost one such fellow last week when Christchurch farewelled one of its many successful business leaders, who carved out careers in the grim days after World War II.

Wyn Fairclough died last week, just three months after his 100th birthday.

Having fought in World War II, Wyn returned to a fairly bleak New Zealand, its people and financial resources diminished, but within a few years was the South Island manager of Dominion Sales, a Fletcher subsidiary which provided the scarce building materials of the time.

Fun-loving, bright, indeed shrewd, and with admirable judgement and high personal standards, Wyn went on to join WJ Scott Motors, a Christchurch automotive business formed by his grandfather and two uncles. By 1954 he was running the business, growing it and helping to mobilise Christchurch.

In those days, cars were imported under licence. The licensing system often led to families like the Fletchers and the Todds exploiting political connections, gaining import licences and then having dominant high-margin businesses in essential products. Little businesses had to be clever to gain licences.

Wyn travelled to Europe in 1957 and returned with a franchise for the Goggomobil, a tiny 250-500cc car which, because of its engine size, was blessed by low sales tax imposts.

He gained an import licence enabling WJ Scott to scoop up the Holden and Mercedes Benz franchises, a treasure trove eventually sold to Cable Price when Wyn semi-retired in 1975, still owning the original auto workshops and its premises. His business serviced thousands of people.

What I came to see as special about Wyn was what I learned after he rang me in the mid 1990s and asked me politely if he could become a client.

He had decided that he shared some of the values I used to discuss in the Christchurch Press in a regular column provided to various papers between 1987 and 2003. Within a year he was a ''friend'' of everyone in our offices. He knew how to charm both genders.

Wyn had wisdom. He saw through veneer, he knew that many expensive cars were paraded by people who had borrowed to buy, he was unimpressed by glib property developers always funded by debt, and he had some great sayings.

''Eat your cake while you've got your teeth,'' was one of them.

He ate his cake. He had won a Canterbury championship with a yacht and later become Patron of the sailing club. He played golf and bowls, the latter till he was in his 90s, he played bridge every week and was still skiing Mt Hutt until he was 80.

He invested on the basis that he could see excellent, committed people. Short-termism was never in his lexicon. He was not greedy. You might say he was a model client for our business.

After his wife Dot died in her 90s, Wyn's memory for detail began to fade but he continued to read Warren Head's ''Headliner'' business magazine until the last of his days, and met with me monthly to review his portfolio, often wearing a tie and jacket to formalise the occasion.

Even at 90 he would travel down to the Chateau on the Park near Hagley Park, arriving when my day was over, to enjoy a drink and a chat.

The youngsters of today would learn heaps from the ''oldies'' when they share their stories, displaying their tenacity in tough times, and their ability to find fun in these austere moments in our history. Heaven knows, that ability to find fun in today's environment is a crucial talent.

I hope those youngsters know how to listen.

Wyn is survived by his son Scott, a retired law firm partner, and Scott's wife, son and daughter.

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The government hints that air travel may be normalised before the end of July.

We hope to resume our city visits to Blenheim and Nelson at that time, if we are in Level 1.

I intend to visit Auckland and Whangarei in late June to see clients, under the same condition.

Clients should contact us to discuss dates and times.


Chris Lee

Managing Director

Chris Lee & Partners Ltd


Taking Stock 21 May, 2020

THE absurdity of fining an organisation for the goofiness and sometimes negligence of its directors has become increasingly obvious.

We have seen companies – banks, as an example – badly let down by their directors, resulting in massive fines, sometimes in billions, payable by . . . the innocent shareholders.

Quite why such appalling behaviour by directors and executives should be borne by the innocent shareholder is a mystery.

This week we saw it happen again in Dunedin, a city that for decades has been blighted by poor work by elected and unelected governors.

A court has fined Dunedin's lines company, Aurora Energy, almost $5 million for the negligent and incompetent behaviour, of directors appointed by the Dunedin City Council, going back to 2007.

Dunedin's council had set up a holding company to own its electricity line company (Aurora) and then appointed various directors, many of whom sit permanently on my Never Again list, to run Aurora.

Despite ample evidence and official reports about the danger of the rotting wooden poles supporting its lines, the directors deferred or ignored maintenance while still paying dividends to the council.

One linesman died when a rotten pole collapsed; another was critically injured.

Hundreds of rotten piles were photographed. A whistle-blower, many, many years ago, bravely had put his name to a campaign to address that and other problems of unmaintained assets.

The Aurora company paid the Dunedin Council dividends, the same Tartan Mafia directors kept winning directors' roles and far too little was done to address a really serious problem.

Today, various Otago and Central Otago towns, including Wanaka, face massive price hikes for power distribution and maintenance. Brown-outs or power failure are inevitable. Today's customers will be paying for egregious errors made as far back as the previous decade.

So, the High Court has fined Aurora a huge $5 million, money that the lines company does not have. It will borrow that money, in all likelihood.

It is fair to say that at least some of Aurora's board have been appointed only recently, effectively receiving a hospital pass from the directors of the period 2007-2011, when this structure was developed.

The Dunedin Council, 13 years ago, appointed the likes of Mike Coburn and Stuart McLauchlan to the board of its holding companies, McLauchlan regarded as an Eion Edgar, Tartan Mafia colleague who, like Edgar, had a loud voice in key Dunedin institutions such as the University and Otago Rugby.

When Coburn and McLachlan succumbed and resigned from Aurora, they were replaced by other wearers of tartan, like Bill Bayliss and the late Denham Shale.

Throughout this whole period, quite dreadful decisions continued to be made, including investing in property subdivisions in the Canterbury and Central Otago areas when the state of the market was, to be polite, highly stressed.

Millions were lost.

Inevitably, there were many potential conflicts of interest, with Aurora directors being contemporaries with property developers, often working together on different ventures.

Coburn, McLauchlan, Edgar, Bayliss and Shale were all highly involved in South Canterbury Finance, whose demise was caused by dreadful decision-making right up to the day the government set fire to a billion dollars, John Key carrying the match box while many others, including the directors, provided the kindling and the petrol.

For me, it was difficult to find any respect for the failures of those parties in their work with SCF.

So now a High Court fines Aurora, owned by rate-payers, $5 million, for the incompetence displayed by Aurora's past governors.

Those directors whose bull-headed, indeed stupid, decisions led to this fire endure no penalty, other than permanent exposure on our Never Again list. The fine, wrongly in my opinion, does not land on the desks of those who were incompetent.

When will New Zealand reach the day when the punishment fits the offence?

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REGULAR readers of Taking Stock may recall my deep disaffection for trust companies generically, and my particular lack of respect for Perpetual Guardian Trust (PGT).

PGT is the vehicle that amalgamated Perpetual Trust, NZ Guardian Trust and Covenant. The ex-British Macquarie London officer Andrew Barnes borrowed to buy all three companies with a plan to rationalise costs and list the new group on the NZX.

Barnes' admission to New Zealand might have required an investment of this type, if he was granted entry on the basis of his declared wealth when Key was Prime Minister.

When the NZX-listing plan failed he tried to sell PGT to other companies, and for a short while thought he had sold it to two youngsters in Australia for a price of around $200 million, an outcome as improbable as any I could imagine. I said so at the time.

Unsurprisingly, that deal collapsed, so after some anxious years, with mezzanine debt costs compounding, and facing personal health issues, Barnes capitulated and provided Direct Capital with an option to buy in at a much more modest price, in return for possible help in reducing debt.

Direct Capital is a successful private equity fund run by Ross George from Auckland.

Today Barnes and Direct Capital are effectively joint owners of a business that does not impress me, in a sector that I regard as being on the verge of an endless bleak winter. Trust companies, in my opinion, have no comparative advantage. They attract competent clerical people, no doubt, but make their money from funds management. It is hard to imagine the talented people in this sector going to a sunset sub-sector.

Accordingly, I have opined to our clients and readers of this newsletter that if any family or individual absolutely must use a trust company, the only choice I would endorse is the Public Trust.

I have suggested that other historical arrangements should be cancelled and better decisions made.

Last week, a family arrived with a tale of their experience that will likely lead to a formal complaint against PGT with the industry regulator, the Financial Markets Authority (FMA).

One hopes the complaint is resolved.

In the weeks to come I may publish here the exact details but the headlines of the family's experience are these:

* A 93-year-old mother died, leaving her home and $14,000 of bank deposits to her five offspring.

* Over an 18-month period, the house on a hill near Whangarei was tidied up by a family member, employing and paying for a builder, and was then sold for just under $400,000.

* Several weeks after the value of the house had been converted to cash, each of the five beneficiaries received cheques for $52,000 and eventually a somewhat bald summary displaying PGT's charges, totalling more than $60,000, including gst.

Four hundred thousand dollars of assets return $260,000 to the beneficiaries.

* The deductions for overseeing those transactions were for an executor's fee of $15,000 plus gst and special charges for PGT's unspecified time costing $40,000 plus gst, a total of $55,000 plus gst – or nearly 14% of the value of the estate. No time sheets were offered to justify this extraordinary impost of ''extra'' charges.

PGT advised that the beneficiary correspondence was a significant task not covered by the executor's fee.

I asked another trust company what its fees for such an estate would have totalled, including handling explanations that the beneficiaries would have required, unsurprisingly.

It is fair to say that PGT's fees and costs were more than four times the estimate I received. Why anyone preparing a will would agree to such corporate fees is beyond my imagination.

The file will go to the Financial Markets Authority unless there is a new chapter to this story.

My advice to my clients and readers remains consistent. Allow a trust company to write a will and appoint itself as executor only if there is no other option. If there is no other option, choose the Public Trust. Its published charges are barely half of the charges PGT displays on its website.

_ _ _ _ _ _ _ _ _ __

WHEN it became clear to bankers that the Covid-19 virus would infect, indeed poison, our economy, the bankers changed their behaviour towards the Reserve Bank of New Zealand.

Instead of concealing their bank errors and weaknesses, as ANZ's poorly-led directors had done, the banks sought Reserve Bank help at any cost.

The Reserve Bank obliged, but it also used the chance to impose conditions that should, at least temporarily, bring banking culture back into reasonable social boundaries.

The RB promised to keep the banks liquid, ensuring there would not be failure even if hundreds of billions of bank funding was withdrawn from NZ, repatriated to foreign bank depositors. (Happily that has not happened.)

That promise of liquidity virtually guaranteed there would be no banking failure this year.

Although the Reserve Bank did not promise to keep the banks solvent if bad debts destroyed bank capital, the RB would leave open the possibility of buying shares in the banks.

It did not offer to buy the bad debt ledgers from banks.

Preferably, shareholders would be tapped, not the Reserve Bank, if bad debts were to damage, but not destroy, bank capital.

To put this into perspective, for bank bad debts to create insolvency, housing prices would need to fall by half, or unemployment reach 1930s levels, or business and farming closure reach those 1930s levels.

In February, no one knew the extent to which the virus would damage New Zealand's business structures.

Indeed, at one stage, government departments were contemplating models that extended to 100,000 deaths, our rest homes decimated, our hospitals so inundated that dying at home might have been a more dignified outcome. No one knew. Worst possible outcomes were considered.

So the banks had no negotiating power and were willing to accept the conditions that the Reserve bank imposed.

Those conditions in NZ are likely to have been bank acceptance that there would be:-

1. No dividends paid until the RB decreed;

2. No repayment of subordinated debt;

3. No repatriation of funds to Australia;

4. No executive bonuses;

5. No capital buy-backs.

It is also likely that executive salaries were to be reviewed, downwards, at least in the case of the Australian banks. Perhaps bank Chairs also agreed that thereafter the Reserve Bank governor would be addressed as ''Sir''.

The banks are lucky that the RB governor, Adrian Orr, was not tougher.

He might have also demanded that:-

* Bank credit card margins be reduced;

* Bank executive pay be limited to a multiple of some benchmark, like average wages;

* Bank-appointed receivers/liquidators be supervised by an independent panel, to ensure proper processes and sensible prices at asset clearance sales, banks being accountable to unsecured creditors;

* Fit and Proper person tests of all directors and senior executives be far more stringent, the process published and external input required, tests to be retrospective, as well as for future appointments;

* Any phase-out of cheques be done only after a long consultative process with customers;

* Any branch closures occur only after a long consultative process with affected towns;

* That mobile banks (caravans) be used for those towns where there is no banking facility.

Had he used his negotiating strength fully, Adrian Orr might have made a difference far beyond the survival crisis of 2020, when the unknown reach of the virus was a subject that petrified even the most cynical of bankers.

Of course the problem is by no means over. Banks are still surveying daily damage. It is too early to see the ultimate outcome.

Perhaps a second wave of the virus lurks, to be handled by more lockdowns, by new anti-viral medicine or, in some places like Brazil, by those who regard the cull as a part of an evil plan of nature.

If Orr gets a second chance to impose a wish list in a less hurried environment, one hopes that his ginger, so sneered at by Australian bankers in earlier years, brings a biting tang to the conditions required of banks.

Surely, no one believes that those who were so absurdly enriched by bonuses from the likes of Merrill Lynch, Goldman Sachs, Macquarie etc should ever be repeated by a new generation of feudalists, moronically boasting of loot wrongly allocated, the money, sometimes, the European banks allege, sourced from money stolen from European taxpayer coffers.

Step up, Mr Orr, if the opportunity arises. Here would be a chance to make a real difference.

_ _ _ _ _ _ _ _ _ _

WHILE the Bank of England, the Federal Reserve Bank (USA) and the International Monetary Fund baldly forecast an imminent depression, and fear of a global collapse of asset prices, the sharemarkets drift upwards.

The market movers, like fund managers and exchange traded fund operators, say that they see through the short-term economic costs of Covid-19 and that by 2022 or 2023 the world's economy will not be coughing or spluttering.

They argue the huge volume of zero-cost printed money (quantitative easing and fiscal deficits) will feed into activities that lift asset prices, in so doing rescuing from default thousands of pension funds and annuity funds that rely on exponential asset price growth.

The optimists cite the likes of the technology shares (Amazon etc) which might dominate the world, growing exponentially, if the virus changes consumer behaviour and spending.

Likewise, some medical research and drug companies might blossom.

Meanwhile, the boring providers of water, sewerage, electricity, transport and telecommunications will all plod along, growing in value slowly, though not exponentially, providing the dividends to enable retired folk to maintain their lifestyles.

So, the argument goes, look past the current problems.

The world might be an even better, and more profitable place, discovering via new technologies a way to handle any protests from nature about the abuse of our planet. Have faith!

A widely-attended conference in the USA last week, an event annually presented to financial market leaders, heard this view from various speakers.

It also heard the view from other respected market leaders that these optimists are now mining for fools' gold, pretending that printed trillions (nine, so far) can make us all rich.

The other side of the exponential growth debate says that housing prices must fall, businesses will fail, unemployment will not quickly or cheaply be resolved and that health doubts, coupled with employment doubts, will reverse the concept of exponential growth that relies on excessive consumption.

This side forecasts asset price reductions, hastened by new trade wars, as self-interest surfaces in places like America and China. This other view was scary.

The US conference in effect was invited to ''place your bet''.

Go long, buying everything, or go short, waiting for the collapse.

Personally, I have elected to reduce risk significantly, and wait.

I suspect the signals will be clear well before the NZ election, when Jacinda Ardern seems likely to suffer the fate of having to handle all of this for another three years, a period of time that must surely test her appetite for the job.

In my opinion, those who have stepped back their risk appetite - say, by shifting their Kiwisaver to a low-risk fund – are not panicking, as the Kiwisaver managers scornfully claim.

Those investors are repositioning themselves based on their uncertainty that world asset prices can ever again be based on the theory of exponential growth.

They are being honest about their inability to absorb the severe losses that would occur, should there be a new long-term trend to align price with current values rather than guesses about future values.

Salespeople have a vested interest in encouraging the status quo. Agony aunts offering free advice in newspapers are neither trained to offer advice, nor accountable for their offerings.

I am not so sure that the salespeople and the unaccountable media ''advisers'' understand that the exponential growth outcome is possible, but by no means a certainty.

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Under Level 2 Covid-19 conditions, our offices are now open but only to clients who have arranged appointments.

We understand that until we reach Level One we will not be allowed to visit other cities, to meet with clients or to hold seminars.

Be assured that when the path is clear, we will be visiting cities and holding seminars to discuss what we are learning. Clients are welcome to notify us now of their wish to meet in the cities we hope to visit.

Chris Lee Managing Director

Chris Lee & Partners

Taking Stock 14 May 2020


THE mainstream national media in Australia labelled the New Zealand invasion last week as ''audacious'', involving ''the hiring coup of the year'', others likening it to the Kiwi horse trainers who raid Australia's richest horse racing events, like the Melbourne Cup.

Their admiration was in the headlines across the country. They were referring to the decision of the New Zealand Investment bank Jarden, which last week announced in these complex and perplexing times that it had persuaded four of Australia's highest-profile investment bankers to head up Jarden Australia, a new investment bank.

New Zealand-owned, it would then have three branches in Sydney, Melbourne and Brisbane, employing hundreds of people, headed by the four that Jarden had stalked for a long time, to put together what it, and now the Australians, saw as a ''dream team'' to offer a different approach to Australian's capital markets, under Jarden's Kiwi banner.

The National Business Review here noticed the news. Radio, television and the daily papers either did not notice, or failed to see what the Australians could see.

At a time of great market uncertainty, here we had a privately-owned New Zealand company displaying long-termism, executing a strategy that had had a prolonged gestation, probably going back to the decision of First NZ Capital to change its name to a more global Jarden, two years ago.

Our media may not have understood but the reaction in our capital markets to this news was astonishment.

Yet one worldly, veteran capital markets mate rang me, pondering whether this display of courage might not just be a tactic to bolster market confidence. Would it really happen, he wondered?

He recalled the aftermath of the 1987 property crash, a time when the New Zealand media worshipped the high-profile property punters, like Colin Reynolds, Phillip Stratford, Ollie Newland, Pat Rippon and Jones.

At that time the now defunct Evening Post published an article signalling a wave of confidence returning to commercial property, claiming that Jones had bought two high profile properties at full prices.

Of course he had done no such thing, as it later was revealed, but the hype from the Evening Post ignited for at least a short time the hope that the property slump was over.

(In fact Jones' announcement, as he later explained, was that he had signed a CONDITIONAL agreement. The conditions were not met so no purchase proceeded. The media, he said, misunderstood.)

Last week the cynical old-timer who rang me wondered whether Jarden was just aiming to boost confidence with its announcement.

There could be no comparison, in my opinion.

Jarden had executed a plan choosing a time of great uncertainty to raid from competitors four market-leading executives.

The plan probably had its first step with the name change. First NZ Capital might have been too ''local'' to attract key market participants in Australia.

So Jarden Australia now has four market leaders, headhunted from UBS, Citigroup and Goldman Sachs, who will form an impressive team, reporting to their New Zealand owners.

In my view Jarden will need to mitigate a new risk.

The Australian investment world is generally characterised by greed, self-focus and disrespect for the spirit of the law, as we saw in the Hayne's Commission of Enquiry two years ago.

Jarden's longevity and its success in New Zealand has been built around attracting the best people, keeping its hands clean to a Covid-19 standard and building long-term relationships, here and worldwide.

It must have a plan to transfer its culture to its Australian operation and must offer the Australian arm its New Zealand board of directors, which may be as skilled as any board in New Zealand, certainly streets ahead of the New Zealand competition.

Jarden is chaired by Bill Trotter, appointed CEO of Jardens in the 1990s when he was 35, now the market leading governor with genuine experience, and expertise.

The long-term plan to set up in Australia with the smartest operators – three men and a woman – took years to achieve, but as the Australian market says, has derived from a hiring coup and an audacious commitment to the long term when so many in capital markets are bamboozled by the conflict between disastrous economic news, shrouded by unimaginable fiscal stimulus.

This display of commitment, and excellence, was not seen as relevant by the New Zealand media.

 Perhaps the media's own problems preoccupies the sector.

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MEANWHILE, capital markets here have again been buzzing following yet another display of cavalier behaviour by the American investment bank Goldman Sachs, a tiny, niche player here with just a handful of staff to address the institutional market in New Zealand.

Goldman Sachs's unconventional, often self-centred, behaviour worldwide had long been identified, The Guardian once referring to Goldman Sachs as a blood-sucking vampire squid. (The Guardian can be colourful.)

Z Energy is a retail fuel seller, highly regarded and committed to be a trusted retail brand appealing to ordinary people, and servicing a wide number of retail shareholders.

Thanks to Covid-19, it has suffered falling revenues, resulting in a lower profit, turned into a large loss, by writedowns of intangible assets.

To satisfy the covenants of its bankers who provide Z Energy's debt, the company needed around $350 million of new capital, to repay debt and to bolster working capital.

It proposed a $290 million share placement offered to institutions and retail investors, and a $60 million share issue to existing shareholders.

Z Energy wanted its plans to be underwritten, to give certainty. Goldman Sachs had permission from America to part underwrite the plans, but at a maximum price of $2.75 per share.

Jardens and Citigroup had weeks ago arranged a huge underwritten $1 billion offer for Auckland Airport, most of the money raised offshore, and Jarden had underwritten and raised $200 million or so for Kathmandu, eventually buying tens of millions when the shareholders' portion was undersubscribed.

Oddly, Z Energy invited the tiny NZ branch of the American company Goldmans to run a New Zealand book build with institutions and brokers, nominating a price range for bidders of $2.65 to $2.85.

Obviously if the book build was settled at more than $2.75 there would be no call on the underwriting agreement. The book build took place on Monday, May 11, and asked brokers to bid before 5pm at the price levels nominated.

Absurdly, by 4pm Goldman had discovered that it could lift the price to $2.90 and still raise the $290 million. So it changed the range, creating chaos.

I am unaware of the structure of its fees so whether it was incentivised to make this change is not something I know.

But by shifting the price range it effectively excluded the thousands of retail investors who had agreed to pay the top price of $2.85.

Their bid was thus redundant. They had been doughnutted as the market might say.

Had Goldman Sachs abided by its own rulebook, the retail investors, upon whom Z Energy relies (as committed users of its petrol brand), would not have been shoved aside, in favour of a narrow bank of Goldman clients. Even for those who had time to alter their bid to $2.90, scaling was applied.

Readers may recall the involvement of Goldman in the Mighty River Power issue, some years ago, where scaling was needed because Goldman Sachs had fed so many shares to overseas investors, many of whom flicked on the shares, profitably, within days. Real investors were cast aside in favour of arbitrageurs, a standard American strategy.

Some may also recall the Synlait Milk issue, the Blue Star Print subordinated bond issue and going back further, the Montana bond issue, all of which involved behaviour that seemed arrogant and cavalier, ignoring market conventions.

In the past Goldman Sachs was in New Zealand a big enough player that it perhaps could afford to thumb its nose at the market. That is not the case, now. It is tiny, now, and may be irrelevant.

In my view Z Energy's highly competent chief executive Mike Bennetts, should be taking notes, as he ducks the flak that he must be observing after this shambles.

One wonders how much effort in the post Covid-19 world the major capital market participants will make to include Goldman Sachs on investment banking panels.

The Z Energy placement might be unimportant to politicians, the media, and the general public but if a future issue was to be blackballed by those with a memory of this latest debacle the outcome would be dramatic for every New Zealander. We do not need such behaviour in our capital markets.

Does New Zealand need any American brand here?

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Johnny Lee writes:

AS mentioned earlier, Z Energy is the latest company to pass around its hat, asking new and existing shareholders to inject $350 million dollars into the company as the country begins to exit its self-imposed lockdown.

$290 million has already been raised by way of a share placement, leaving $60 million for retail shareholders. These shareholders have been invited to apply for up to $50,000 worth of shares at a price no higher than $2.90, with the offer closing on 29 May.

The sheer size of the offer highlights the difficulties the company has encountered, as Kiwis stay flightless and at home. The weekly fuel volume data supports that, although we are starting to see a return to car usage.

The cashflow crisis has resulted in Z Energy being forced to approach its lenders, allowing it to have greater levels of debt in relation to its earnings. This concession has been granted but comes with some strings attached. Among these conditions includes the announced capital raising and a freeze on dividends to shareholders.

Dividends will not be permitted until after September 2021. Shareholders taking part in this rights issue should consider this aspect carefully.

The share purchase plan is not underwritten, and the discount is modest. Z Energy has raised enough through the public placement to stave off its lenders for now, and the worst of its cashflow problems appears to be behind it.

Fuel distribution has and will continue to be an essential part of our society going forward, allowing us to travel on the road, on the water and in the air. The bigger risks now, assuming the quarantine does not return, will be changes to people's habits.

Will we continue to drive as much as we previously did? Overseas polling suggests many employees and employers are keen to explore making telecommuting, or ''working from home'' a permanent option for staff, at least on an occasional basis.

Air travel is another question mark. Will we witness a resurgence in domestic and international travel once bans are lifted here and abroad? Or will changes in habits persist, such as people and businesses connecting virtually?

One industry that has proven itself as truly essential has been the trucking and courier sector, helping to facilitate our move from brick and mortar to online shopping.

The short turnaround for this Z Energy offer requires shareholders to react promptly. Clients are welcome to contact us.

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HALLENSTEIN Glasson has provided an update to the market, showing a predictable and steep fall in sales following the lockdown. The company also expects a return to profitability from May onwards, but at a reduced level as the economic slowdown tightens.

The update provides us with a microcosm of the broader retail sector.

The quarter ended for Hallensteins in a small loss, as the company adapts from being a predominantly brick and mortar clothing chain, to an online clothing retailer supported by distribution warehouses.

One comment that caught my attention was ''We (Hallenstein Glasson) believe that the significant increase in our online business most likely marks a permanent shift in consumer habits in New Zealand and Australia.''The company intends to prioritise investment into this channel.   (Shopping mall owners please note!)

It seems inevitable that, in the short-term, online stores will remain the preference until freedom of movement, and confidence in public health, is restored. Consumers will not be congregating in retail stores to purchase clothes handled or worn by strangers. It makes sense for companies to respond to changes in consumer habits.

However, if this is instead to be a permanent change, it will have ramifications on other sectors, including property, courier services and employment.

The next few months will include a period of rapid change in the retail sector. These changes will bring new opportunities and new risks. Hallenstein Glasson is looking to position itself ahead of these changes. Its brand recognition will give it a distinct advantage, but it needs to ensure that whichever path it chooses to focus on correctly matches the needs of its customers.

The likes of Kiwi Property Group will be watching intently.

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THE listed property sector is facing a period of uncertainty, as the full economic impact of the lockdown is digested, and discussions with tenants continue.

Most are confident in their short-term prospects, as Government subsidies, changes to depreciation allowances and falling interest rates provide some degree of comfort. Construction projects and other capital expenditure are largely being postponed, as companies look to analyse the impact of the virus on demand for the property sector. Updated valuations are varying wildly, with some sectors performing well, while others, especially retail, are struggling.

Argosy Property will update the market next week but is confident that dividends will be maintained. More than half of its revenue is from tenants that are essential or Government agencies, highlighting the importance of securing strong tenants.

Vital Healthcare has also indicated confidence that it will maintain its dividends. The company has secured increased debt facilities, giving it flexibility with its lenders. It has settled its aged care acquisitions, as it expands in this sector to drive growth.

Kiwi Property appears to be the most adversely impacted by the virus. It has cancelled its next dividend payment, and valuations are significantly lower, especially in Sylvia Park and its other regional shopping centres. It is reviewing all expenditure, and believes the pandemic will have a material impact on the company. However, it has significant headroom with its lenders, and no maturities due until the 2023 financial year.

Property for Industry is maintaining its dividend and is in discussions with its tenants to provide support, predominantly for its smaller tenants. In some cases, it is agreeing to defer rental payments.

Precinct Property is confident it will meet its full year guidance for its dividend, and has reduced its gearing as it defers some development projects and continues others. Its flagship development on Queen Street in Auckland has been mothballed, acknowledging the unknown immediate future of property demand.

Investore has announced a capital raising, but notes it expects to maintain its dividend, and derives a significant proportion of its revenue from supermarkets. It has refinanced some of its banking facilities and agreed to a new five-year facility with its lenders.

Stride Property has seen a small valuation decrease, but still expects to maintain its dividend.

Goodman Property Trust has yet to update the market but will do so on 28 May.

The property sector faces an uncertain long-term outlook. This uncertainty is leading most to postpone expansion or development projects until the economy stabilises. However, our listed property trusts are largely confident in their short-term prospects, and have been quick to ensure they have adequate liquidity to weather the current storm.

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Under Level 2 Covid-19 conditions, our offices are now open but only to clients who have arranged appointments.

We understand that until we reach Level One we will not be allowed to visit other cities, to meet with clients or to hold seminars.

Be assured that when the path is clear, we will be visiting cities and holding seminars to discuss what we are learning.

Chris Lee Managing Director

Chris Lee & Partners

Taking Stock 7th May 2020

IF investors are confused by the volumes of money gushing into the sharemarket, spare a thought for the advice sector.

Bewilderment might be the response from many advisers, as they observe the chasm between two conflicting responses to the current crisis created by a conflation of a pandemic, unimaginable debt levels, undeniable climatic extremes, and rapidly-growing inequality.

How do the different parties reach such a cocktail of responses to such mayhem?

Currently, those with the most power to set prices are the robot fund managers, and to a lesser extent the active managers of global savings, like Kiwisaver managers.

The former operate to a model that believes that underlying economic and social conditions, for all intents and purposes, are never-changing.  Buy everything, always.

The torrent of money allocated to them by wealth managers enables the index funds to buy into every large company.

The savings managers ignore the power of that money at their peril.  They will try to eliminate the worst sectors or at least unweight those sectors, but the momentum will be one way, while index funds are in charge of other people's money.

Here is how those people justify their views of exponential asset price increases.

They foresee the political solution, to maintain calm, law, and order, will be to print money, pricing it at a negative rate, offering it directly to the banks to lend to their most trusted customers at virtually nil cost, maybe even negative cost.

The bank lenders see their biggest market for safe lending as being to their wealthiest clients and companies.  Thus, those borrowers will have access to the glut of money, at a cost, perhaps literally, of nothing.

The political and banking sectors expect that the wealthy will actively pursue the best available assets, be they homes in Wanaka or Waiheke Island, shares in our food, health or infrastructure companies, or ownership of our food chain, or land.

Wealth funds perhaps emanating from countries without a food chain might be obvious buyers, fuelled by free money.

The nil-cost money will enable the wealthy to pursue those assets at a volume that at least matches the requirement of others needing to sell those assets to create money, or escape debt.

The sellers might need money to repay debt, perhaps because they have had wage cuts, lost jobs, or as I note increasingly, they might need money to offset the low returns from their investments. I also observe many people of my age group taking on responsibility to fund grandchildren or even adult offspring.

The printed money thus provides the pool of liquidity to soak up forced sales.  Free money managed by robots will create a pool large enough to ensure pricing tension between acquisitive wealthy people and needy forced sellers.

The fund managers see the Covid virus as providing an opportunity.

Cruelly but privately, the boldest fund managers opine that the Covid-19 virus culls those with the most tenuous hold on life.  They see the media portrayal of the virus as exaggerated and creating panic, rather than describing a sanguine, calm response, solved by hygiene, and isolation only of the vulnerable. (This view ignores the close shaves that people like Boris Johnson had in Britain.)

Trump is the loudest of these voices. He seems to regard the Covid threat as just an electioneering opportunity.

In contrast, one of the world's most optimistic fund managers and media commentators, American John Mauldin, notes that it is main street, not Wall Street, that drives earnings, margins and dividends, and thus asset prices.

He notes: ''Index investors, as I have been saying for years, will get their heads handed to them.  If the market starts turning down will they (the Fed) start buying ETFs like Japan is?  Dear Gods, I hope not.''

''I will bet that over 100 companies in the Standard & Poor 500 (US index) will not be there in 12 to 15 months' time. This is going to be a stock picker's market.''

By contrast the index funds and the savings industry generally, pumped up by the prospect of printed money, believe the trickledown theory will prevail. They anticipate that current citizens of the globe will all be well served by the printing madness.

So the fund managers boldly bid for shares in listed companies, knowing that printed money at negative costs, available to wealthy borrowers, will prop up asset prices, at least in the short term, the only horizon that matters for many fund managers, trying to preserve their mandates.

There is no need to consider value, they will argue. If prices keep rising, who cares about value?

The politicians delivering the free money then can bask in the pre-election glory of having avoided a pricing bloodbath.  The bankers will find enough margins in lending to strong borrowers to offset losses from failed borrowers.  Investors interested in value can sell at satisfactory prices, thanks to the ''funny money''.

The issue of further inequality, raising the likelihood of an ultimate social disconnect for most people, is not visible in the months before an election.  Things like pitchfork rallies have long gestation time frames.

There is off course a second group of investors.  They see the ''Fine silk'' of the emperor as comprising thin air.  Funny money is fine silk.

Why, they would ask, would one put money into a fund that buys shares in companies that will endure lower revenues, lower margins and pay no dividends, for years, or perhaps ever?  Their argument might focus on assets like Air New Zealand or Auckland International Airport, or even Aramco, the huge Saudi Arabian oil producer. Warren Buffet sees this lack of future value.  He has sold all of his $6 billion worth of airline shares and bought 1% Treasury notes.

This value-focussed group observes the following:-

Significant rises in unemployment, causing deep social disruption;

Widespread reductions in take-home pay caused by any of wage cuts, reduced hours, inevitable increases in taxes, or simple job losses;

Widespread small business failure, in areas as diverse as retail shops, car yards, travel and adventure companies, bars, restaurants, motels/hotels, or taxi services;

Inevitable falls in disposable income, exacerbated by loss of consumer confidence, resulting in a much lower velocity of money, a natural response to fear or uncertainty. Consumption will fall, they conclude;

Corporate bond markets propped up, temporarily, by central banks, enabling weak borrowers to gain money while transferring risk to the taxpayers.

From these bases, they look out at a future believing that returns on assets will be much lower, be they Airbnb houses, educational facilities geared to foreign students, downtown commercial property, retirement villages as well as other residential properties, or service sectors which price their wares based on supply and demand.

In New Zealand they might wonder how readily we can replace the Fijian, Sri Lankan, Filipino, Thai and Indian people who currently support our aged care sector, our construction sector and pick and pack our exportable crops.

When they see shares in sustainable listed companies being priced at 20 times their earnings, they might invest, given the deposit rate alternative of 2%.

But when they see those multiples going to 30 times earnings, and ponder the robustness of the earnings, they pause.

If they sell, they preserve the capital, providing the glut of money does not fuel inflation. But there is no option to hoard cash and receive a return.

They observe a bond market that prices risk at nothing.  There is no margin for liquidity risk, inflation risk, or repayment failure. In the USA analysts forecast a default rate of corporate issuers this year of 20%.  That would be a bloodbath. Who would invest in a global bond fund?

Alternative assets, like gold, do not generate income.

Rental property returns are most unlikely to be boosted by capital gains or overnight windfalls from tourists hiring Airbnb properties.

This second group of Value investors must either accept the growing gap between price and value, and ride the sharemarket, or it must sell and revert to spending capital, rather than risk losing it, accepting the nil income from hoarded cash.

The collective view of this group is that there is no such thing as silk so fine that it is invisible. They believe current pricing is set by ticket-clippers, not by analysis.

To be complete, I should add that there is a tiny third group, led by the environmental lobby, which sees the current huge dislocation as an opportunity to recalibrate the world, if only we could behave unselfishly.

These aspirational people perceive that the outcome could be an elimination of mindless consumerism, an end to global joy-riding, a united effort to safeguard our defendable borders, eliminating the virus, enabling New Zealand to emerge as a premium place, producing untainted food from clean rivers and unpolluted soils, selling eco-tourism to small numbers, rebuilding rural cities as we de-urbanise.

They argue that the crisis tills the soil for much tastier crops.

They foresee the gradual withdrawal from globalisation, and overpopulation, the reversion to a society that does not rush to fast food and coffee as its ‘’fix’’, and one where education, health, law and order combine with an altruistic population to show the world the new alternative.

For many of my age group, who recall the decades of the nuclear family, the real weekends, the home-grown vegetables and bottled fruit etc, this third scenario has the appearance of a gold standard.

Oddly, the promoters of this aspirational plan currently hide behind tired, over-worked commentators, many of them journalists, who observe but do not participate in the productive sector.  Journalists are not leaders.

There ought to be credible leaders speaking out if such dramatic change is to be factored into the plans of contemporary politicians.

So in summary we have pricing currently ignoring value, being set by the prospect of exponential growth in our money supply, its advocates being robots that drive pricing decisions, based on the belief that we are not facing structural changes, but simply observing a repeat of previous cycles.

If this school of thought is right we will soon again have millions of tourists to fill the tills of a nation that has geared up for exponential wealth growth, an increasing level of that wealth in a decreasing number of hands.

We also have at least a classroom of people who believe that expensive structural changes will reward some, but that many business models will not survive. The nature and value of employment will change. Exponential growth in consumerism is doomed, even if we can selfishly arrange for the cold reality of change to affect everyone else, (but not me!)

The third tiny group must be prepared to tackle the mass mindsets that create a lifestyle and a future for a planet they will inhabit for just a decade or two.

My guess is that the fund managers' gung ho mentality will prevail in the immediate future, while the money printing is being mooted.

The second group, without the power to influence prices, will remain bamboozled, wondering why anyone would pay more today for Auckland Airport shares than they would have paid in previous years, when international tourism was soaring, the airport thriving.

The third group would require leadership and a selfless audience that this corner of world has yet to see.

Foreign fund managers control nearly two-thirds of New Zealand's equity and bond markets.

Domestic fund managers (active and passive) control another 25%.

We now know to whom we have given the power to price our assets.

Who will establish the value of our assets?

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ALSO confusing the market is the future of our listed retirement villages, Ryman, Summerset, Oceania, Metlifecare and Arvida.

Should these be regarded as essential health providers, protected by the Crown to ensure care of the aged and infirm is not returned to the public sector?

Or should these be regarded as high-margin property developers and property owners, leveraging lucrative profits, tax free, from the inflated residential property market?

Their role in healthcare explains the Crown offer to protect the sector with money, necessary resources, people and flexible application of laws. So far the Crown has given $16 million in protective equipment to the rest homes and private hospitals.

But the profits are earned from developments, currently stalled and incurring holding costs, and re-sale margins, including the rather extravagant deferred maintenance charges. During lockdown housing sales stop, so there will have been few new sales at the retirement villages.

Share prices have dropped, on average by about 30 per cent, from their pre-Covid highs, almost a standard fall, implying all listed retirement villages are the same.

They are not.

Ryman is mature, still developing here but particularly in Australia, though developments have stalled.

Summerset wants to grow in Australia, and is spread across the country.

Oceania is largely Auckland-centric, and is in the midst of developing its existing sites.

Arvida is in many low-growth rural towns, and has more of a focus on care than real estate.

And Metlifecare is in a world of its own, forlornly battling to enforce a marriage agreement that was signed pre-Covid and would only proceed if the now unwilling groom is walked up the aisle accompanied by a shotgun.

Of these operators Metlife faces the most difficult future, a perpetual victim of an ugly childhood, its listing as hairy as could be, and later left with various guardians including a stint with the unloveable Todd Group, which had a controlling interest for some years.

Very few people who get invited to the Todd table leave with a doggy bag of goodies.  Most slink off, if not emaciated, certainly fed on stale bread and stock.

The market has been unable to identify which retirement village companies will lose the most momentum but is pricing them knowing that they all face headwinds.

To keep Covid-19 out of the private hospital wings, the village managers have collectively spent multi-millions on staff, processes, hardware and training.

These days all staff are paid more, somewhat offset by the additional charges some operators can make for personal services and premium rooms.

But nothing compensates the holding costs on some billions of dollars tied up in uncompleted developments.

I expect all will face property devaluations, all will have far more costs and none will be unwise enough to pay dividends, for at least two years.

Yet none of the listed companies should fail.  Their residents both appreciate their villages, in many cases need the care services, and in all cases accept the business model that provides minimal costs to the living, offset by maximum bites from the estates, effectively paid for by beneficiaries. This is an ingenious model.

Perhaps share prices will fall to levels where takeovers occur, the most logical buyer being a large unlisted retirement village operator seeking a backdoor listing.

As is the case with all pricing of shares now, there may be more room for pessimism, especially if Covid sweeps into the listed companies (a real risk), but it is unimaginable that the Crown would ever want to take on the costs and responsibilities of providing facilities for the ageing.

I guess that if any listed or unlisted large provider ran into solvency issues, the Crown might take a shareholding for a few years, following the Air New Zealand model.

To me, the sector looks like a survivor.

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LAST week’s item recording the inevitable mayhem that will stem from the work of inept valuers and insolvency practitioners did not imply that there were no competent and ethical providers of these services.

It just implied that at times such as these we will have revealed to us the type of incompetence that our weak laws allow.  Incompetence is widespread.

Absurdly, such law is all but drafted by the parties from whom the law is supposed to protect us.

The latest iteration of the Insolvency Practitioners Act was written after consulting with receivers, liquidators, trustees, bankers, lawyers and accountants.

But no submission from creditors and shareholders were used to balance such self interest.

Who loses when an insolvency occurs?  Creditors and shareholders.

Who wins? Receivers, liquidators, lawyers, accountants and sometimes investment bankers and valuers.

Is there anything to notice about this?

Well do I recall listening at a meeting I attended to a lawyer, whose blood pressure at both ends vastly exceeded his IQ.

One of the calls I fielded last week was from the owner of one of the country's larger contracting companies, with 60 years' experience of surviving in a world that deals heavily to any hard-working business owner down on his luck.

In affirming the need to upskill the insolvency practitioners, supervise them and force them to be accountable for lazy and overpaid service, the veteran contractor told me of some of his experiences.

He went to a liquidator's sale to buy one heavy-duty fork lift.  There were four for sale, of almost identical features.

He was prepared to pay $70,000 for one.  He bought the four for a total of just over $70,000 and had sold three of them, each for $70,000, before he had reached his truck outside.

The liquidator might have needed ten minutes of consulting with the sector to have achieved the same result. Why would any receiver, liquidator or even any auctioneer not ensure pricing tension by spending an hour ringing around market participants? Laziness, or incompetence?

In this instance the pool to creditors was diminished by possibly $200,000 by that laziness or incompetence.  Supervision and accountability would have changed that.

At another such sale, the contractor bought six, superbly maintained giant bulldozers, for a total of $165,000.

He sold two of them each for more than $100,000, before he had time to write his cheque, both to competitors who had not known about the fire sale.

Until the receivers and liquidators are supervised by a committee including creditors and the failed business owners and are personally accountable for outrageously inept process – I mean financially accountable – then the sector will be judged by its worst performers.

The Ministry of Business, Innovation and Employment includes control of the Companies Office and the law-making people from the Justice department.

Its Minister is former journalist Kris Faafoi.

MBIE simply must be pressured into re-addressing the IPA which it rewrote, badly, last year.  The act needs to be re-written before we observe the surge of business failures in coming months.

If it is not re-written, the creditors and owners of business that die during the Covid-19 chaos will be royally rorted, badly let down by those poor performing insolvency practitioners who blight their industry.

They need to be accountable, transparent and supervised.

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Under level three Covid-19 conditions we will continue to operate from our home bases, as directed by the government.

We understand that until we reach Level One we will not be allowed to visit other cities, meet with clients or hold seminars.

Be assured that when the path is clear, we will be visiting cities and holding seminars to discuss what we are learning.

Chris Lee

Managing Director

Chris Lee & Partners

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