Friday, July 13, 2007

A Bridge Too Far (Updated)

Updated again:
Old fast bowlers never die, they just keep on bowling wides.

It appears now the hopes of all the Kiwi Mums and Dads who put their hard earned into Bridgecorp are pinned on the repayment of some $18 mil by Ocker ex fast bowler Craig McDermott.

It's not looking too flash though. Note first, his record as a serial defaulter and second ,the receivers' comment to the effect that once he is identified, the chances of his projects going to the wall are greatly increased.

It looks as though in this sorry saga, play will be called off.

How many readers remember the larricking eighties when any company worth anything had 'corp' tacked onto its name? There was Equitycorp, Bankcorp, Landcorp, Uncle Tom Cobleycorp and All.

During the respectable nineties they all went broke. Well, Landcorp didn't. It was headed by an old friend of mine, Bernard Card - and a mighty fine job he did.

This week the last of the 'corps' became a corpse - high risk property development financier Bridgecorp. What a sorry tale it has turned out to be. Look at some of the issues which thus far don't seem to have penetrated the minds of the Antique Media.

How was a prudent board of directors able to invest a whopping twelve percent of the company's finance book in just one project in an offshore unstable economy beset by political turmoil? What does the Companies Act have to say about such conduct which breaches every common sense rule of financial risk management?

Where was the Securities Commission when this outfit was advertising for Mum's and Dad's investment dollars as recently as a few months ago?

Why were so called ratings agencies giving Bridgecorp high grades when it was clear to those with eyes and ears that all was not well?

What will be the knock on effect of this latest debacle? How much exposure do high flying property investment sales organisations like BlueChip, NZInvest, Merlot and others have to Bridgecorp? How readily will they be able to move their debt to other lenders? How many of their 'sales' will fail because they do not have title yet to the property they have promised to their investors?

What is the real value of projects caught up in the receivership? It is reported that Bridgecorp has 30% of its funds out on first mortgage and 52% on second with a further 18% on third and fourth mortgages.

Adolf has put together the odd property development finance package in his time and the above figures reveal the enormity of the damage. The Bridgecorps of this world provide what is called 'mezzanine funding.' That means they go in behind the banks and pick up the marginal high risk end of a deal which the banks will not wear. Generally one can expect a trading bank to fund 80% of the total cost of a project. That is - land purchase, construction, sales and marketing and anything wlse you can think of and document. The developer might have five percent cash up front and good old Briidgecorp pops up with the remaining fifteen percent.

The reported figures would indicate therefore that Bridgecorp, by way of its second and third mortgages, is propping up some three billion dollars worth of development projects, all of which will now be temporarilly on hold until the receiver is able to assess each loan and figure out whether to allow the project to continue, to foreclose and sell up the project, to refuse to inject further funding previously agreed by Bridgecorp or to throw his hands up in horror.

Three billion is a hell of a big chunk of current property development in New Zealand. Yep, thet's three thousand million dollars.

Adolf thinks the effect of this collapse may well be cataclysmic. Bollard will not need to lift interest rates for some time. Petricevic has just cured the nation's inflation worry for him.

It appears the spider at the centre of the web has been pinged, along with a number of lesser spiders and a number of financial advisers will be speaking intensely with their professional negligence insurers.


Andrei said...

Of course if you are getting higher interest rates you have to accept the higher risk of your investment.


So I hope that not too many people have put all their eggs in Bridge corps basket.

And welcome back to blog world my friends

Adolf Fiinkensein said...

Well Andrei, I understand Bridgecorp's average rate paid to investers is 9.5% The mugs could have got 8.2% currently at ASB on term deposit. The rate commensurate with the real risk would have been nearer to 18% so the punters have been ripped off up front and from behind.

Where is our woeful Securities Commission?

Greg Bourke said...

What higher return for higher risk would that be??
The fat majority of NZ finance companies give a miserly premium over plain vanilla term deposit with ANZ or Rabobank!

It's a total rort. Not only are they not paying appropriate risk premiums it appears they still can't keep a company liquid with their wide margin.

While I have no position in financial companies for the above reason, you have to sympathise with the proverbial 'mum and dad' investor who responded to regular advertising in the Sunday papers and were advised by thier 'financial advisers' to put money in.

Mike Graham said...

you've got an extra 0 in those numbers haven't you Adolf? The numbers in the NZ Herald (if I'm allowed to mention that name here:-) ) indicate approx $500 million owing to term investors.

Whaleoil said...

Welcome back online Adolf. Good other "boutique" lenders go down the gurgler like Nathans Finance which are hopelessly geared like most of their borrowers.

Barnsley Bill said...

normal service resumed. Well done guys.

Bok said...

All I can say is great to see you guys back!!
Long may this site be around in the interest of free speech.

Adolf Fiinkensein said...

Mike Graham

NO I don't think so. At an avereage of 12% exposure to each project with 70% of $500k that's $350k which comprises 12% on nearly $3 bil. Or am I going bonkers?

Adolf Fiinkensein said...

I'd like to see a class action for damages against TVNZ and TV3 brought by Mum and Dad investors on the grounds that the executives who accepted broadcst the blatantly misleading advertising soliciting funds would or should have known their client was bullshitting from start to finish.

Mike Graham said...

ok - I now understand your maths, but don't totally agree with your reasoning (but I'm not a financial advisor).

Why not save the class action for the directors of Bridgecorp, or their Aussie parent coy? If it was so "blatantly misleading" why no warnings from anyone in the industry?

Adolf Fiinkensein said...

Mike Graham

Well yes, of course. Such goes without saying. I would have thought the new Companies Act might almost put some of these guys in jail. SageNZ should have a reliable opinion o this if he is reading us again.

Captain Crab said...

I'm not so sure the Receivors will have much say on whether any of the Projects will continue. As second or third mortgagees Bridgecorp's portion is usually drawn down first (as it is the "equity")then their priority is subordinated as the First Mortgagees start allowing their drawdowns to occur. Also as tail end charlie even if they force a mortgagee sale , all the prior mortgagees need to do is just bid for what is owed to themselves and leave Bridgecorp in the cold. What they would really prefer is for things to be finished, settled and everyone paid. The problem with Momo is cant get Titles which means no one will settle their purchase.

Kent Parker said...

Welcome back guys

What will be the knock on effect of this latest debacle?

This doesn't bode well for financial/shares investments and it may strengthen interest in buying real estate as an investment, further driving up house prices. Ma and Pa investors may see this as being safer while producing a better return than a bank.

Anonymous said...

useful questions/piece adolf..

i've linked ya..


Pommiekiw said...

So what, if anything, will our LabCorp government do about it?