Taking Stock 20 June 2019

Our apologies for the second iteration of todays newsletter, the version sent earlier today was sent in error.

Chris Lee writes:

If you were lucky in life you would never have any correspondence or contact with a liquidator, a receiver or anyone that falls under the heading of an insolvency practitioner.

You would never have been involved with a failed business, never invested in its shares, lent it money, or supplied it with goods or services.

Your luck would almost be the equivalent of drawing a royal flush in a poker competition.

Sadly, nearly every adult will sooner or later be in receipt of a letter from an insolvency practitioner, advising that the usually male receiver/liquidator is doing his best, at your expense, to salvage some money from a failed enterprise.

I was told last week, by one of the country’s most celebrated receivers, that there are 111 registered insolvency practitioners.

Judging by a group of 35 of them, most are male and work for accounting practices.

They must be registered, must be experienced to win registration and, thankfully, must be fit and proper people, meaning they are experienced, knowledgeable, moral and law-abiding.

The insolvency practitioners must be subjected to the inspection of the Registrar of Companies but are regulated by its own body, contracted to perform this task by the Registrar.

Insolvency practitioners are privileged people to be permitted this self-regulation.

They are also privileged because their charges are paid for with other people’s money and are approved by people in charge of other people’s money.

A bank or a trust company is often the ‘’approver’’ of the bill, paid for by other people’s money.

Receivers usually are brought in to clean up a mess, hired by a trust company or by a secured creditor like a bank.

Often the enemy is the Inland Revenue Department, which usually has a prior call on any money available.

Banks and trust companies rarely swap Christmas cards with the IRD.

Right now, Parliament is on the edge of approving a new bill, the Insolvency Practitioners Act, which seems to reinforce the rights of receivers and seeks to define maximum penalties for errors made by receivers and the like.

Those who made submissions to Parliament on this new act include a number of powerless people, often referred to as unsecured creditors. Alternatively they are known as the unheard victims of failures.

The number of these people who made submissions would be the same if doubled or tripled.

None.

So we have a third reading of a bill that has been created by the practitioners and those with whom they interact like lawyers, trust companies and bankers.

I was sent the proposed new act by a well-intentioned receiver who I know to be a nice, decent man, a description that might apply to many receivers.

The receiver I most admire has now left his large firm and is a tough, shrewd, fearless fellow who would not blink if faced by a drawn bow and arrow at three paces.

I hold the view that there ought to be changes imposed by the law on all insolvency practitioners.

1.     Their decisions should be overseen by a panel that includes unsecured creditors.

2.     That Committee should have the power of veto.

3.     The pathway to court hearings for disgruntled creditors should be cleared of all major obstacles, the cost minimised.

4.     Accountability for unilateral decisions (if any) should be automatic.

5.     Disbursements paid out on behalf of creditors should be at levels agreed by a court or by a regulator.

6.     Insolvency practitioners should be required to report specifically on decisions not to pursue compensation from third parties.  For example, receivers should be asked why they are not suing directors, trustees, auditors, bankers etc. I guess an alternative is to have a litigation funder on the supervising panel.

If I were a creditor I would certainly want a litigation funder to sit on the overseeing panel.

My ideas might lead to problems.

Who would ever insure receivers if there were easy pathways to sue the receivers?

Would receivers join auditors as being the ‘’deep pockets’’ so often targeted by the victims?

These would be problems.  Life is full of problems. Solve them. The new Act has a stench. It answers none of the issues that are front of mind to unsecured creditors.

Right now one of the problems is that unsecured creditors often feel that receiverships are run to achieve the best and quickest result for the secured creditors, usually banks.

The unsecured creditors are always the most vulnerable.  They are the last in the queue.

They need reformed laws and practices to give them a better chance.

Self-regulation, for people effectively paying themselves with other people’s money, is a recipe for a deep level of distrust, and a potential for a similar level of disrespect.

The politicians voting on the proposed new act need to defer their decision and consult with the people who are the most likely victims of a system that lacks checks and balances. So far their voice has been silent.

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Capital markets were abuzz on Monday when the ANZ Bank behaved in a most unbank-like way and aired its soiled linen outside its chairman’s top floor window.

New chairman John Key advised that ANZ had “parted company” by “mutual agreement” with its high profile chief, David Hisco.

Hisco’s health was a factor but Key observed that the health issue may have been related to the stress of being fingered for some rather unseemly expense claims, totalling perhaps $50,000 over many years, Key said.

When I heard the news I wondered if my right leg, if pulled, might play ‘’My old Man is an All Black’’.  Does any bank ever display a concern over CEO expense claim?

Key’s statement was astonishing.

A bank CEO paid three million per year is ‘’parting company’’ over expenses that he thought he had the right to claim?

A New Zealand bank is airing this sort of issue?

Banks have no track record of being transparent on matters of executive, or even junior staff, excesses.

In the 1990s a junior New Zealand corporate banker prepared a loan application for a property developer.  The application was successful, though as it transpired the loan was to lead to write-offs.

The junior banker would have been especially pleased that the loan was approved.  He had privately negotiated with the applicant, to provide the banker with a free 15% ‘’corner’’ of the equity in the development, if the junior banker could persuade his bosses to approve the loan.

The junior banker’s behaviour was later outed by the developer when the bank called him in at a time when the loan was in default.

The developer disclosed the ‘’secret corner’’ arrangement, when he was asked to contribute new capital.

When exposed, the crooked banker was asked by his boss whether he wished to quietly resign, or be pushed out.  He resigned. Silence reigned.

Years later this appalling lack of scruples surfaced elsewhere when the crooked banker emerged in another financial institution.

He should not have been able to work in the sector again.  He should have been fired and handed over to the law, judged for his ‘’secret’’ illegal arrangement.

By allowing him to remain anonymous over a clear swizzle, the bank created future problems for others.

Yet now we have a bank effectively eviscerating a chief executive over disputed expense claims.

Something has changed.

Has Key, a master in schmoozing the media, signalled a change which, if it had been introduced strategically, might change the face of business? Might all executives be forced to spend company money with restraint, and become accountable through the clear disclosure of such use of other people’s money?

Perhaps this might be Key’s legacy that convinces his admirers of his ability to add value to his role.  Is Key going to become the leader of a campaign to reinstate corporate morality? What a coup this would be, for an FX trader, now comfortably retired.

At a Wellington meeting on the night of Key’s announcement, the reaction to the explanation provided by Key was one of astonishment. Was this a media spoof?

What a dramatic change to the corporate environment it would signal, if now new standards were set and enforced, retired FX trader being the pilot.

Might accountability might return at all levels?

Is this a one-off, perhaps representing a solution to an incompletely-disclosed problem, or a recognition that the banking sector needs to display rectitude and apply its standards consistently.

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Johnny Lee writes:

Readers may recall, about a month ago, the launch of US IPO, Beyond Meats. The company uses the proteins found in some vegetables, and turns them in to a product with qualities similar to meat. In its simplest form, Beyond takes a natural process performed by livestock, and performs it in a laboratory.

Beyond’s competitors are now struggling to supply the huge demand for its products (a good problem to have!) and Beyond are reporting rapidly growing revenues in its first report to market.

Beyond is now considered a ‘market darling’, and has more than doubled in price since last month. It is now trading above $150 US dollars. Its IPO was priced at $25. But not everyone is a believer in the company.

It is among the most shorted stocks on the market, at one stage having over half of its stock on issue sold short.  

Short sellers are those who sell a share without owning it. Normally, this is facilitated by a third-party agreeing to lend the stock to the seller, at an agreed rate. This rate varies with supply, sometimes to eye-watering levels. The short-seller wins if the price falls, allowing them to buy them back at a cheaper price.

The short sellers lose if the share price increases. The short seller loses immensely if the share price quintuples over a two-month period, as has been the case with Beyond.

Short selling of an IPO is not as odd as it sounds, and can be used to stabilise a share price by effectively creating a floor in its value. In practice, this usually works by overallocating stock in an IPO, with an agreement in place with the issuer to purchase these shares if need be. This convention, known in the US as a Greenshoe, gives underwriting brokers the ability to sustain a share price once it has listed.

However, short selling without these backstops is far riskier. As these sellers of Beyond have discovered, short sellers have no natural cap on their losses.

In New Zealand, short selling is permitted but rarely practiced. Some of the larger fund managers are either exploring, or have established, managed funds that specifically allow short-selling as a tool to bolster returns. Some are able to engage in stock lending for the same effect.

Smartshares, for example, is permitted to lend stock for short selling on some of its funds, with a proportion of the profit from this being attributed to the fund investors. This practice is justified internationally as allowing funds to maintain low management fees.

In Beyond’s case, traders saw an asset listing in a highly priced market, with many competitors in a field that some see as a flash in the pan. However, with losses in the hundreds of millions and no more stock left to borrow, the market is reinforcing the adage: no one is bigger than the market.

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Infratil’s rights issue has now closed, and those who participated in the issue have had their shares allocated to them. They would be pleased to see the share price rising following the issues conclusion.

Those who chose not to participate will be credited the value resulting from the retail bookbuild process, which equates to approximately 35 cents per entitlement. Those who took part in the retail bookbuild will be pleased, as the current price represents a handsome profit.

Barring any intervention from regulators, Infratil will soon be a part-owner of one of New Zealand’s largest corporates, Vodafone.

It is pleasing to see capital markets producing outcomes for the benefit of all parties; shareholders, companies and the economy at large.

TRAVEL

 

Chris will be in Auckland (Mt Wellington) June 24, and Albany June 26.

David Colman will be in Palmerston North on 2 July.

Edward will be in Auckland (Remuera) July 9, Albany July 10 and in Wellington July 12.

Johnny Lee

Chris Lee

Chris Lee & Partners Limited