KordaMentha wants all in the pot for faster Arrium sale

Arrium administrator KordaMentha is seeking a faster sale process by aggregating the assets of the complex company.

Bendigo and Adelaide Bank chair Robert Johanson. Artwork: Sturt Krygsman.

KordaMentha, the voluntary administrator for Arrium, has proposed an all-encompassing plan to enable a faster sale process by aggregating the assets from the 94 different entities making up the company.

The proposal was put to Federal Court judge Jennifer Davies yesterday on procedural issues seeking variations in voting arrangements and the presentation to creditors of a consolidated report of the assets and liabilities.

This is planned to go to the creditors’ meeting early next month to enable the sale process for much of the company to proceed early in the new year.

MolyCop is being sold separately by Deutsche Bank for about $1.5 billion, through a trade sale or a float.

While the company is not in receivership it has cross-claims to the Arrium debt, which highlights one of the problems — and they multiply when applied to some 94 different corporate entities.

Morgan Stanley has the job of selling the other business and has sent out some 89 teaser documents for the sale of about 70 different entities.

The aim is to get the sale process fast-forwarded to get the proceeds into the distribution company as soon as possible.

Given the complexity of the corporate structure, Korda Mentha is seeking to maximise returns through a slightly different ­method.

Pooling is well known in Australia: all the assets and liabilities are put under one roof and creditors are paid out in equal allotments.

In the aggregation model a new entity will be created called the Arrium Distribution Company.

It will collect all the proceeds from the sale and creditors will be paid according to their rankings.

Employees will get 100 per cent of what is owed to them.

The different entities then can be sold without the cross-guarantee liabilities and with suppliers and customers intact as ongoing businesses.

The proceeds will be collected and then handed out according to the set rules, but on a collected basis rather than on each of the 94 different entities in the company.

Arrium has $2.8bn in unsecured debt and total contingent liabilities of around $4bn.

The plan is being sold as the best way to handle complex corporate insolvencies and is more an evolutionary process than revolutionary. Under past deals the administrator would not have the power necessary to deal with different assets and shift debt from one entity to another.

Arnold Bloch Liebler’s Leon Zwier is advising KordaMentha on the deal, which has been presented comprehensively to ASIC.

To market, to market

Amid all the talk about banks behaving badly it is often forgotten the most potent regulatory weapon is competition, and with the big four controlling over 80 per cent of all home loans the room for improvement is immense.

ASIC’s Greg Medcraft is alive to the issue which explains why he bangs the drum about the big bank oligopoly and why his bank bill swap rate court case is based on what he alleges is unconscionable conduct to unsuspecting customers.

APRA’s Wayne Byers has done more than most to improve competition by lifting risk capital ratios to at least 25 per cent but the battleground is still weighted heavily towards the big four.

NAB tomorrow is expected to unveil a profit of around $6.4bn which together with CBA’s $9.5bn profit for the year ended June will mean the big banks’ cash profit will top $30.6bn.

The banks are not going out of business and CBA chief Ian Narev still got to earn $12.3 million last year, or as much as the earnings of 246 of his tellers. But as UBS’s John Mott noted, last year will go down as a tough one for the banks with each of the big four to report negative earnings per share growth for the first time since the GFC.

Slow credit growth, falling net interest margins in a year of record low interest rates, subdued fee income growth and normalising bad and doubtful debt charges are the reasons why the banks will be appropriately glass-half-empty this profit season.

The good news from yesterday’s Bendigo and Adelaide Bank annual meeting was boss Mike Hirst saying credit growth is picking up this year.

The Basel changes due at year’s end are seen as a potential game changer, not to mention, based on CLSA analyst Brian Johnson’s numbers, $29bn in bank capital raisings next year.

The bank regulator has flagged concern at the wide variation in risk weightings between so-called standard and advanced accreditation banks and in the risk weights applied within the advanced category. Standard banks have set weightings while advanced banks can set their own risk weightings.

Even after this year’s moves to a 25 per cent risk weighting, on a $1m housing loan Bendigo and Adelaide Bank has to put away $33,000 in capital and ANZ has to store $21,000.

That is a fair gap which is explained by the fact Bendigo is still waiting on its advance accreditation approval which will mean it can hold less capital.

Bendigo has spent $80m on improving its risk weighting to satisfy the APRA requirements which will hopefully see approval by the end of this financial year.

The differential doesn’t give you the full picture because after the risk weightings were changed the smaller banks maintained their profit levels by following the big guys in raising rates.

Arguably this was a chance to grab market share but from the little guys’ perspective the big guys can write more profitable loans cheaper than they can, which is the same point.

The fact New Zealand banks can deduct dividends on hybrids means the effective tax rate for a big bank is as much as 150 basis points less than for the little guy just operating in Australia.

Then there is the 15 basis point advantage enjoyed by the big guys because they have an implied ratings guarantee from the federal government, so while Bendigo is on an A minus rating the big four are on AA minus.

The theory is if the oligopoly was subject to greater competition it would have to lift its game in customer service and concentrate on better management of wayward insurance claims processors.

Market-based competition should provide the big banks with the financial discipline to stay clear of the snafus which have affected Westpac et al.

APRA is due to release its interpretation of the Basel committee changes in the first half of next year and that regulatory push will hopefully create a more open market.

Peer of banking realm

Rob Johanson has finally seen the light and after 28 years on the board of Bendigo and Adelaide Bank and 10 as chair, finally told shareholders yesterday he would stand down this term.

He was easily elected with 151.3 million votes in favour but a sizeable 26.6 million votes against his reappointment.

Johanson’s late dad, Warwick, was a founder of the bank, being chairman of Sandhurst Trustees which merged with Bendigo Building Society in 1992 to become Bendigo Bank three years later.

There was clearly an element of peerage involved which had convinced the otherwise rational Johanson of his entitlement to serve.

A sheep farmer and investment banker, Johanson is deputy chancellor at Melbourne University and may well have his eye on the top job when and if Elizabeth Alexander steps down.