Big losses confirmed at Strategic

Strategic Finance debentureholders could get back as little as 12% of their principal

22nd Oct 10, 2:45pm by Gareth Vaughan

<p> Strategic Finance's directors before it failed</p>

Strategic Finance's receivers say secured debentureholders could get back as little as 12%, or NZ$44.1 million, of their NZ$367.8 million worth of principal investment owed when the property financier was tipped into receivership in March.

Receivers John Fisk and Colin McCloy warn investors in a letter to brace themselves for the return of between 12% and 35% of their principal and say the high end of this range "reflects some optimism" in their likely level of loan recoveries. Debentureholders, including the Bank of Scotland which is owed NZ$76.1 million, are Strategic's secured creditors.

"We emphasise that there are still considerable uncertainties relating to the recoverability of the property loans which will have an impact on the final recoveries that we will be able to achieve for secured debenture investors," the receivers say.

"The property market continues to be challenging and volatile, particularly in respect of development land and bare land subdivisions, both of which are prevalent in the Strategic loan book. Borrowers continue to face difficulties in achieving sales or refinancing of the property."

Secured debentureholders received an initial payment of 2 cents in the dollar, totaling NZ$7.4 million, on September 15. The receivers say they can't estimate when the next distribution will be made. Their next report is due by January 29.

Fisk and McCloy's estimate means Strategic debentureholders' returns are likely to be in line with those of other failed property financiers.

Low ball bids for loan book

The receivers say they have completed the sales process for Strategic's loan book with final, or near final, offers assessed against expected loan realisations.

"Unfortunately, given that the final or near final offers fell short of even our low estimates of gross recoveries from the loan book, we consider that the best possible outcome for secured debenture investors will be achieved via the receivers continuing to realise the loan book,' Fisk and McCloy say.

They managed to squeeze gross realisations of NZ$42 million out of the loan book between their March 12 appointment and October 1. But of these, Strategic Finance has pocketed just NZ$5.4 million with the rest paid to prior ranking security holders and/or used to cover direct sale costs.

As of February 28 the loan book consisted of 87 loans with a total net book value of NZ$229.1 million.

The receivers acknowledge one of the loan book offers provided for some potential future upside, but based on the information provided, they considered any potential upside could be hard to achieve and therefore couldn't be relied on in their overall assessment.

Lots of second mortgages

Fisk and McCloy say the reasons cited by bidders for their low offers included the high proportion (58% or NZ$131.4 million of the net loan book) of second mortgage positions, the threat of enforcement action by prior ranking mortgagees, the significant risk and uncertainty regarding the level of recovery in respect of many of Strategic's loan exposures and return they would require for these risks, the size of the deal and ability to generate returns and the complexities of the loan participation arrangements.

Strategic, whose CEO was Kerry Finnigan and which counted former All Blacks captain and ex-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.

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. Of the firm's 87 loans, about 25 of the borrowers are either in liquidation, receivership or the property owned by the borrower is in the process of, or has been, sold by the first mortgagee exercising its power of sale.

The receivers say they are "conscious" of a number of matters raised by investors and other parties in respect of Strategic's activities before receivership.

"A thorough investigation is currently being undertaken into the activities and conduct of the company and its officers by us," Fisk and McCloy say.

"Where appropriate, we are working co-operatively with the liquidators (Corporate Finance's John Cregton and Andrew McKay)." See the liquidator's first report here.

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, trustee Perpetual Trust called in the receivers in March after Strategic failed to generate sufficient loan recoveries for a repayment to investors' that was due in January. At that point secured debenture stock on issue was worth NZ$367.8 million, unsecured deposits stood at NZ$1.45 million, subordinated notes NZ$21.7 million and interest payable at NZ$54.67 million.

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21 Comments

by David B | 22nd Oct 10, 3:36pm 1287714975

While it is really sad to see what has happened to so many debenture holders in this and so many of the other finance company failures that is the fiasco of the New Zealand Finance Company, I still cannot for the life of me fathom why even one New Zealander with so much as an ounce of intelligence would put a single dime into any of these cheap and nasty corporate dumps, let alone the billions that they did.

The history of finance company collapse in this country has been so consistent and so persistent down through the decades, that any investment in them can only be regarded as having a dead certainly of failure. And it is this persistent feature of failure more than any other which makes the loss of money by the debenture holders in these companies all the more baffling.

One is left with only a simple single question? What were they thinking???

More so when you have regard for the vainglorious prancing ponies that ran them and who strutted the stage of corporate New Zealand as a flock of flatulent peacocks. A striking number of these individuals were well known failures from the past. And the best predictor of future performance is……? That’s right, it’s past performance!

So go figure.

So while it is sad to see the loss of so much debenture holder money, I can’t help but feel that the debenture holders themselves also need to take some responsibility for what has happened. After all it was their money that enabled these events, not someone else’s, so perhaps the loss of a large portion of it is, at least on one level, fitting?

by Justice | 22nd Oct 10, 8:35pm 1287732916

Maybe, just maybe if NZ dumped our welfare state system it would force Kiwis to be far more money and finance savy? Just an idea

by Kunst | 22nd Oct 10, 8:40pm 1287733205

But the story doesn’t end there. What is even worse that all responsible taxpayers, who didn’t speculate with higher returns, but just simply a safer term deposit are now paying for the greedy and megalomaniacs - bailing them out.

Long term I'm thinking is the safer the stupid one !

by Kunst | 22nd Oct 10, 8:56pm 1287734201

Talking about the rather greedy BB genration - here another issue: Will the next generation bail us out ?

Moreover, global aging experts say, measures like pension reform are inadequate, piecemeal responses to the giant demographic shift that is upon us. Link to full article below:

http://www.nytimes.com/2010/10/17/business/17stream.html

by Matt in Auck | 22nd Oct 10, 9:26pm 1287735968

Unfortunately the truth is well over half of the NZ population aren't very bright, hence the stupid things the masses continually do - invest in finance companies, buy leaky homes, believe house prices rise forever...

the herd mentality reigns supreme

by jh | 22nd Oct 10, 5:00pm 1287720036

Strategic Logo = a couple fencing. I guess their man lost?

by heathcliff | 22nd Oct 10, 8:19pm 1287731942

A classis case of wisdom in hindsight, David B. You say that finance company failure was 'consistent and persistent down through the decades'. A bit of exaggeration there, care to enlighten us which companies failed 'down through the decades'? As I recall the first failures were Provincial and Western Bay, c 2005.

It really was a case of the perfect storm. Without repeating the bleeding obvious, the sub-prime crisis which started in the US in 2007 and led to the worst recession since the Great Depression, has found out the finance companies, and alas their investors. But what really gets my goat is the cavalier attitude of the directors and management and the way they bled these copmpanies dry. And Strategic is no less guilty. Its management made appalling loans, which are now revealed, and as recently as 2008 its CEO Kerry Finnigan was pulling $800k pa out of the wreckage as annual recompense.

How does he sleep at night?

by David B | 23rd Oct 10, 1:05am 1287749104

No exaggeration at all (obviously your memory isn't as good as mine!) And given that many of those who have lost money are much older than me, they were presumably around during these company collapses just as much as I was. So no wisdom in hindsight I'm afraid, more of a case of remembering history so one avoids repeating it! That's why I lost $0 from all the finance company collapses of the last several years. I wouldn't put a nickel in.

Here's a link that gives a nice overview going back to the 1960s.

http://www.stuff.co.nz/sunday-star-times/business/776473

by Andy Rodgers | 22nd Oct 10, 8:34pm 1287732853

heathcliff says - "A classis case of wisdom in hindsight, David B."

Not at all, all these finance companies were guilty of borrowing short and lending long, so the first signs of problems brought the vast majority of them down. What saved those that didn't crash e.g. SCF, PGGWF was the Gov't G'tee.

by heathcliff | 22nd Oct 10, 9:05pm 1287734739

Not really Andy.

You would probably find that the loans were (initially) over a similar period as the average deposit term, probably around two years. But the finance companies relied on a continual stream of new money, in addition to the reinvestments, to manage liquidity. A sort of Ponzi scheme if you like. The problem was that the recession which caused a drop in property values, and dried up the purchaser stream, meant the loans were not repaid within the original term. And of course by then investors wised up and didn't invest/reinvest.

This is where it really gets nasty. The finance companies then 'renegotiated' the loans, added another year's interest and still called them current. And of course called the (non-paid) interest 'income' which went to pay Finnigan's extravagant salary. All the while the auditors were asleep at the wheel.

by Matt in Auck | 22nd Oct 10, 9:30pm 1287736225

I agree Andy, didn't take too much nous to see the finance companies were just destined to fail

Unless of course you subscribed to the fallacy that the housing bubble internationally and in NZ would just continue to inflate without bursting. Of course probably more than 90% of the population believed in that myth, having been conned into that view by constant bank, real estate and media propaganda

by Southern Dude | 22nd Oct 10, 8:52pm 1287733920

Kerry Finnigan and Jock Hobbs have totally shafted the Strategic investors. The directors were directly responsible for losing 88% of the investors deposits - 12 cents in the dollar to maybe be repaid.

Did Strategic Finance declare that one of its directors and their consultant ( quasi director ) were former directors Equiticorp in the late 1980's - no they didn't - why wasn't that declared in all prospectuses - because no one would have invested in Strategic.

Where is the SFO ?? I sit too political with Jock Hobbs involved - rugby world cup etc??

Where is John Key's honest government he promised at the last election? - nowhere to be seen.

by David George | 23rd Oct 10, 6:59am 1287770340

" Where is the SFO?" Good question Dude.

Hobbs, Finnegan and co paid out almost $150 million in dividends to themselves and their mates over the two years prior to moratorium. The loan book was clearly deeply impaired at this time. Suspect loans were being rolled over, property sales were stalling and the whole development sector was shaky yet there was no provision of consequence for impaired loans.

What's the term? Extend and pretend.

by Gareth Vaughan | 26th Oct 10, 10:42am 1288042941

FYI Kiwi Dave and Southern Dude, I have edited your comments.

Please keep the following in mind:

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making these comments.

by pythagoras | 22nd Oct 10, 9:38pm 1287736708

Matt in Auck | 22 Oct 10, 9:26pm is nearly correct. In fact, exactly half of NZers have less intelligence than the median :P

by Southern Dude | 23rd Oct 10, 8:37am 1287776256

The directors and consultants houses in Herne Bay Parade,Cremoren Rd Herne Bay, Victoria Ave Remuera and Kohimarama Road could all be sold along with their flash cars

Then sell their cafes, bars and restaurants, their property holdings and their holiday homes.

Or if the Govt was an honest government it would just put the company, it’s directors and consultant and all of their assets and investments in to Statutory Management. There is more reason to do this than with Alan Hubbard – so the Govt has no excuse as to the reasons that this action is required.

Problem with that suggestion is firstly, the Securities Commission can’t recommend that action as Simon Botherway is a former employee of Fitzgerald and Jackson at Salisbury Securities ( which morphed into Strategic ). Secondly John Key won’t be keen on reducing his future high profile photo opportunities at the RWC 2011 as Jock Hobbs wants his Chair of NZRU back before the Cup. Thirdly there is more hidden behind the doors and the Govt won’t want that coming out.

So much for NZ being the least corrupt country in the world – yeah right !!

by Matt in Auck | 24th Oct 10, 9:36pm 1287909373

There is plenty of quasi-corruption in the NZ. Its just that it is more of the wink and nudge mate thing rather than necessarily money directly changing hands. Its corruption in a roundabout way

"the Real criminals of the world are not those in prison but those who steal the wealth of the world"

G Clail

by Fred | 24th Oct 10, 8:03pm 1287903830

"The problem was that the recession which caused a drop in property values"

Blame the recession yep otherwise it would still be OK. Don't just blame these guys, they may have been smarter, or just lucky, but they are like a few that got up on their surfboards to ride the crest of the wave. What caused the wave? Everyone was in on it in some way or another. Who stopped to think why a house built in 1965 for $2-3K should be worth $350K, with maybe a new kitchen and bathroom. Who was the mug that didn't draw on the "equity" in some way. To whose advantage was that really. What about the government and the banking system. A bemused Cullen not really knowing whay why the Government was running a surplus. The Government too has cashed in on the flush of money printing oblivious of the fact that the Govt's policies (a central bank that mandates an inflation rate = to an OCR . . . it adds up over the years) were all the while debasing the currency and leading to an explosion of private debt backed by "investment" in housing.

Everyone has "cashed in" in some way or another.

The recession didn't cause the drop in property values, it's the fact that some mug paid more for it than it was was worth, but it's OK because everyone was doing it. The system demands it.

by Southern Dude | 26th Oct 10, 8:30am 1288035019

SOHO

The recent announcement that Fortress is allowed to buy Soho in Ponsonby for $20m is another example of Strategic incompetence which Kerry Finnigan and Jock Hobbs need to be held accounatble for.

How did Startegic allow Fortress to take the first mortgage for only $20M which now means that Startegic will lose their entire $70M loan value. Obviously Srategic borrowed off Fortress to keep the compnay afloat but in doing so gave away their security position. The board should be held accountable for that.

Now Fortress can develop the property and it will be viable when it only cost them $20M

How did Strategic value it up at $90M in the first place - the market hasn't dipped that much. The receivers and liquidators need to investigate this deal and others like it in the portfolio. Sue the valuers and the directors personally if they have been negligent.

I suppose the next surprise is that Fortress engage Triumph Capital ( Fitzgerald and Lindale ) to manage the project and they either have an option to buy it off Fortress or they get a profit shre on the development. Nothing would surprise me on this front.

Bernard and Gareth - why don't you investigate and at least have these guys on record on this subject ( ie the liquidators, Fortress and Triumph Capital ) .

by David George | 26th Oct 10, 10:40am 1288042810

More good points Dude.

How was it that loans that were advertised to investors as being secured on a first mortgage basis were able to be converted to second mortgage status by the Strategic directors?

Fortress ends up holding the first mortgage for - literally - pennies in the dollar. $20m for a "$90m" property.

"Nothing would surprise me", I'm starting to come to this as well. It's a bit like the ongoing mortgage fraud in the US, once the whole basis of property and contract law no longer applies what have you got?

by Southern Dude | 26th Oct 10, 10:30am 1288042234

Strategic lost 77% of the value on Soho

That is not just because of market conditions or the recession. That is due to either Strategic or the devloper ramping up the value and extracting fees and profit out of the deal befiore the actual deal happened - ie they valued the transaction backwards from the completed value back to the then current position.

Soho was never worth $90M.