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Strategic returns likely to mirror those of other failed property financiers

Strategic returns likely to mirror those of other failed property financiers

Strategic Finance debenture holders look like getting back no more money than investors in other failed property financiers, probably something between 10 and 25%, after its receiver revealed an initial distribution of no more 2.5 cents in the dollar. This would mean the confirmation of losses for 13,000 investors of more than NZ$300 million. 

Other failed property financiers such as Bridgecorp, Capital + Merchant, Lombard Finance, Belgrave Finance, Dominion Finance and St Laurence, have returned, or are expected to return, between zero and 34% of investors’ money. Capital + Merchant’s expected returns are the least, at 0-2%, with St Laurence the highest at 34%.

See our Deep Freeze list here, which details how over 199,000 investors have NZ$6.8 billion frozen or lost in 59 finance companies, investment trusts and mortgage trusts.

Strategic’s receiver, PricewaterhouseCoopers (PwC) partner John Fisk, won’t comment on what the likely total recovery will be because PwC is still trying to sell Strategic's loan book.

The loan book was valued at NZ$477 million in 2008. By February this year it had a net book value of just NZ$229.1 million - in management accounts - and Fisk says the majority of updated loan valuations since February are at levels “significantly below” the ones from February.

“Valuers are having difficulty actually putting numbers on things at the moment,” Fisk said.

“When you’ve got development land, and there’s still money that needs to be extended and then a sales process to sell down sections and things, it becomes very difficult.”

The loan book consists of 87 loans with 58% of the net loan book secured through second mortgages over property. By location the lion’s share is in Auckland with 33% and 27% overseas, notably in Australia and Fiji. At 38% the biggest slice of the book by type is commercial development, with 24% in residential development and 23% in residential subdivisions.

Strategic, whose CEO was Kerry Finnigan and which counted former All Blacks captain and New Zealand Rugby Union chairman Jock Hobbs among its directors, was involved in financing Auckland's Soho Square development, the Sentinel Tower project in Takapuna and the Fiji Hilton. On the loans that are second mortgages, there was NZ$544.4 million worth of debt held against Strategic's loan book assets that ranked ahead of Strategic's claims, as of February.

Most of Strategic's loans were on a capitalised interest basis, meaning interest accruing was added to the loan balance and received on repayment of the loan, rather than being paid to Strategic on a monthly or quarterly basis. In their first letter to investors the receivers said about 25 of the 87 borrowers were either in liquidation, receivership or the property owned by the borrower was in the process of, or had been, sold by the mortgagee exercising its power of sale.

Fisk told there were now “less than 10” parties remaining in the loan book sales process, with final bids expected in September. PwC had started the sales process with the idea of selling the whole loan book.

“(But) I haven’t discounted the idea that it may be a combination of outcomes in terms of loans that we recover as receivers or loans that are sold,” said Fisk.

“It’s a challenging market but we are getting on with the receivership at the same time as the sales process. I guess I should emphasis that the sales process might not result in a sale. It could be either a partial sale or it could be the counterfactual, (which is) the receivership continuing.”

The reason why a range of 1.5c and 2.5c in the dollar  (outlined in the receiver's second letter) had been provided for the interim distribution, due by September 3, was because some property transactions were expected to occur over the next couple of weeks.

Fisk said PwC could look at investing money recovered from one loan into another, but would be cautious about doing so, not taking the risks a property developer would take.

“Our role is to get the money back for investors,” said Fisk. “(So) we’d be very careful about punting money that we’ve recovered on one loan on another loan.”

“But if we can justify it on the basis that it preserves the asset or potential asset and the risk is appropriate, then we’d do something. But we’re certainly not betting all our recoveries on another loan or anything like that.”

A payout of 1c in the dollar required the freeing up of NZ$3.7 million, he noted.

Strategic froze repayments to investors in August 2008 blaming tough conditions in the property market. Investors then voted for a moratorium in December 2008 that aimed to repay them 100% of their principal investments plus interest through asset realisations over five years.

However, Perpetual Trust called in the receivers in March, with about 13,000 investors owed about NZ$417 million, after Strategic failed to generate sufficient loan recoveries for a repayment to investors' that was due in January. Fisk noted the interim distrbution would be the first money Strategic investors had received since August 2008, two years ago.

PwC expects to issue its next report by October 29, at which point it should be able to advise on the outcome of the sales process and says the nature and timing of further distributions should be clearer.

 * This article was first published in our email for paid subscribers earlier today.See here for more details and to subscribe.

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