Taking Stock 19 December 2018

SO the glamour business entrepreneur Eric Watson, remembered as the owner of the Hanover Group, and Britain’s Power Group, as well as Pacific Retail Finance, has now advised that his company has insufficient money to repay a debt to the wealthy New Zealand businessman, Owen Glenn.

A UK court had ruled that Glenn was owed around $60 million plus interest costs, as a result of a mismanaged and mis-described joint deal with Watson.

Watson’s lawyers say the debt is beyond the means of Watson’s investment company, Cullen Investments.

Does this mean that without Glenn’s money, Cullen and perhaps Watson have been in deficit for some time?

The only surprised observer of all this must have been the compilers of absurd ‘’rich’’ lists, who have never acknowledged the difference between someone’s view of the value of gross assets, and the cold-blooded reality of nett realisable value. They think Watson is ‘’worth’’ hundreds of millions.

Those list compilers attribute unimaginable wealth to people with assets valued at prices untested by daily transactions that establish real values.

If one owns government bonds, bank deposits, even corporate bonds or listed equities, one can make a meaningful stab at their real value.

It is still only a guess, as a holder of large numbers of shares must find liquid buyers. Such necessary people or institutions drift in and out of markets.

A person with 100,000 shares in a company whose shares are lightly traded has more certainty of their real value on any particular day than someone with 10 million shares where a one-day sale might drown liquidity and cause massive price falls.

People like Watson, who buy real assets like land, property or businesses, never want to be forced sellers, least of all to meet an unexpected debt, like a court order.

Rarely do these people hold cash or even care about liquidity. They care about their ability to service loans.

I once heard an arrogant fool describe how cash was irrelevant. All one needed was the ability to service debt, he claimed.

His theory gets tested when the lender wants the capital repaid and no one wants to buy his asset (building etc) at anything like the ‘’valuation’’ price.

Watson now is facing a tax claim of tens of millions, an interim payment to Glenn of tens of millions, and very likely a further payment to Glenn of another $100 million or more.

If he is fortunate, his bankers will lend him all this money. He would be unwise to assume this.

If banks themselves worried about making illiquid loans, then the chances of borrowing huge sums, when one is stressed, diminish.

It is exactly these unpropitious circumstances that lead to forced sales, at bonfire prices, or bankruptcies.

All of this explains my derision when I read of the wealth attributed to people with huge levels of debt.

A genuinely wealthy person can write a cheque without conferring with his bank manager.

Most on the ‘’rich’’ list whose wealth is assessed by the ’’value’’ of an illiquid asset are at the constant mercy of their bankers.

Wise bankers know their first duty is to preserve the money belonging to their depositors.

The sight of a stressed ‘’rich lister’’ arriving at the door when the banks themselves are exercising caution is an omen of unwanted news.

Watson is challenging the two awards made against him, or his companies.

Glenn and the IRD will be jostling with each other if Watson’s appeals should fail.

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WATSON and Glenn will both know that the omens for 2019 are not encouraging.

Global financial markets have handed back the gains of the first nine months of 2018 and now appear to be in a dark mood, looking for reasons to fall.

It may be correct to observe that in New Zealand we have many essential companies reaping sustainable profits and paying attractive dividends.

We also have many companies striving to achieve revenue gains so that profits one day might emerge.

The latter group is vulnerable, always, but even the former group will be sold down if foreign money is repatriated unexpectedly.

Foreign markets are currently hyper-sensitive to the never-ending conundrums of trade wars, currency wars, territorial wars and bad banking practices.

One senses that large institutions are almost searching for an opportunity to be ahead of the pack, downsizing their risk portfolios for the certain values of cash.

Asset allocation changes have been noticeable.

New Zealand is in a much less vulnerable spot than most of our trading partners but if problems offshore lead to the repatriation of foreign money, our own savings pool would not underwrite our current values.

The result of a slowdown would be more difficulty in renewing bank loans (more margin, tougher covenants), tighter attitudes of bond investors (more margin required for bond investors), and a distinct unwillingness to feed money into rights issues.

The likes of Pacific Edge was wise to make a wholesale placement recently. Its retail offer will be watched with caution.

The Seeka rights issue will have reminded the market of the need to price rights issues, and underwriting services correctly. Underwriters and sub-underwriters are needed in tough times, and well worth their fees. The discounted price for the Seeka placement was large, ensuring the transaction succeeded.

My guess is that 2019 will be a testing time for global investors and may well lead to a glum year for short-term investors here.

The signal to focus on will be bank lending.

We still rely heavily on the savings of other countries which may need their own savings in 2019.

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MY book on the destruction of value after South Canterbury Finance collapsed regrettably will not improve morale when it is published in April, 2019.

The book has been a long time in incubation.

It examines the collapse of SCF, the four huge mistakes made by the late Allan Hubbard, the failures of the structures intended to mitigate errors, the people failures, the failure of the laws to protect investors and the utterly awful bonfire contrived by the rescue parties. Their behaviour was unforgiveable.

The book also traces the pathway to compensation, littered as it was with obstacles left by Crown agencies, Key’s government, and inadequate law.

The purpose of the book is to generate a rethink of the laws and protocols that absolutely must be changed before the arrival of the next iteration of non-bank deposit takers and non-bank lenders.

A central point is how we disincentivise greedy, cowardly, or illegal behaviour.

Ideally our moral base would guide behaviour.

If that fails, the ignominy of disgrace should mitigate dreadful behaviour.

The final sanction should be the law.

However when none of these are effective, we need a new form of sanction.

My solution for those whose behaviour is illegal or immoral is a non-discretionary outcome.

I suggest jail and banishment from the highly privileged world of capital markets, where the huge rewards should be matched by value-add and commitment to laws and morality.

Whether it be a lawyer harassing his female staff, a moneylender accepting bribes, an adviser putting his fees ahead of the client’s needs, an executive ignoring his legal commitments, or a director failing in his duties, the law must offer an effective sanction.

Not three strikes, not two, one strike. Sanction – jail and expulsion from the highly-paid capital markets.

The book ‘’The Billion Dollar Bonfire’’ outlines how so many parties failed to perform to a fair standard.

The money burnt was far in excess of what was unavoidable.

The title is accurate.

The book is now written, being prepared for publication by a group that specialise in non-fiction NZ books.

My ambition is to spark debate and bring about reviews of 13 laws and protocols.

We never again would want a repeat of the chicanery and lawlessness of the finance company behaviour seen between 2006 and 2010.

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FOLLOWING the publishing of the book next year I will revert to a shorter week, offset by the arrival of my son, Johnny, at our office.

Johnny has had a career in securities trading, having recently left ANZ, where he headed the equity desk for ANZ Securities.

He will join our team of five advisers, and will assist with city visits, as well as sharing the task of writing the weekly Taking Stock newsletters.

I will have a little more time to focus on grandchildren but will continue to visit clients in other cities and be in our Paraparaumu office on Mondays and Tuesdays. There is no rest even for those who are not wicked!

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OUR office is now closed. It reopens on Monday, January 7.

We wish clients and readers a joyful holiday season, and a healthy, fun-laden 2019.

Chris Lee

Managing Director

Chris Lee & Partners Limited