By Liam Twigger
It was September 1985. Spring had sprung and St Georges Terrace in Perth was pumping.
The recently-elected Hawke-Keating government had floated the Australian dollar and in one decisive move, hitched the Australian economy to the cut and thrust of the international marketplace. This opened the door to the global financial markets and as a consequence, a tsunami of cash – and banks – were headed our way.
I was working in the treasury of The Bell Group, one of Robert Holmes a Court’s famed investment vehicles. I had counted 17 foreign banks furiously operating on the Terrace and they all had their cheque books wide open.
From Lloyds Bank of London to the Bank of America, each waving their own shingle and desperately competing for the attention of Perth’s entrepreneurial glitterati of the day. The flood of international banks and their seemingly endless spending, particularly at the old Mediterranean Restaurant in Subiaco, spawned a new Western Australian collective noun for bankers.
It was now known as a “wunch” – as in a “wunch of bankers”.
The year-end Christmas parties were legendry and I remember attending one fabulous financial markets event that resulted in myself and a fellow junior burgher getting becalmed on a surf cat in the middle of the Swan River. Perth was still basking in Bondy’s America’s Cup glory and I was in a race from the South Perth foreshore to Barrack Street Jetty and back with about 20 other surf cats and would-be Australia II diehards.
Of course, pride was at stake and all of the banks made sure their teams had some expert sailor on board. Unfortunately, my first mate and I had no prior experience and we had the very rear of the pack well covered, floating motionless half-way across the river, with the rest of the fleet just about to reach the finish line.
Rather than suffer the humiliation of coming last, we turned the surf cat around and I climbed onto one of the twin hulls and started paddling surfboard-style to get us back to the South Perth Foreshore. Funnily enough, we were able to pick up some speed and it wasn’t long before we made it to the finish to the cheers of the crowd and judges.
At first, I thought the rest of the fleet had caught us and we were about to be overlapped, but then we realised we were way out in front. No-one had really been watching the race and our unconventional tack had gone unnoticed.
In fact, the judges and the spectators had been too busy piling into the free booze and we were ultimately awarded line honours! I must admit, I did feel a little guilty for a while, but it wouldn’t be the last time that some fleet-footed locals would outmanoeuvre the international banking fraternity.
The “Big Four” Australian banks had seen the writing on the wall and were not surprised by the decision by Hawke and Keating to offer licenses to foreign banks. They had dominant positions with the main Australian corporate accounts, leaving the new banking hopefuls, who were flush with cash and had money to burn, to seek other opportunities.
Cue the entrance of Australia’s best salesmen and entrepreneurs, who found themselves being feted by some of the world’s biggest banks with enormous cheque books. They were prepared to be innovative on their lending terms – and when I say innovative, I mean really innovative!
But the banks were like “lambs to the slaughter” with the likes of Holmes a Court, Bond, Skase and Spalvins, just to name just a few, finding themselves spoilt for choice with covenant light terms. They made the most of it, too, with a new form of loan security that worked around the concept of a “negative pledge” clause.
In simple terms, this allowed borrowers access to loans on the basis of a “promise” from the borrower that it wouldn’t grant security over its assets to any party. The lenders were essentially unsecured and relied on the borrower’s “promise” (come in Spinner!) that they wouldn’t give any party a preferential security position over their assets.
It was a bit like asking all the banks to hold hands in a ring around a company’s assets and trust that no-one would break ranks or manage to get a preferred position.
As many would remember, the music stopped following the great market crash in October 1987. The share market collapse wiped out the value of equity investments and much of the collateral that made up the pool of assets the banks were relying on. By this time, a number of the Australian banks had joined the lending fray to the local entrepreneurs and also had huge exposures.
Holmes a Court was very quick to realise that the gig was up and the strategy of borrowing money to secure control of conglomerates (read BHP) using equity as security, worked as long as the underlying security held value. He was the original margin loan prototype, but was ahead of the curve in realising that when you owe $2 billion (which would equate to about $10 billion in today’s money), it’s as much a problem for the lenders as it is for the borrowers – especially if they don’t have specific security they can realise.
That is, they are like the proverbial seagulls surrounding a deteriorating chip.
Holmes a Court, in an act of brilliance, solicited and accepted a joint takeover for The Bell Group by Alan Bond’s Bond Corp and the WA State Government Insurance Office in 1988. By 1990, Bond Corp had pillaged the cash balances of The Bell Group and its related entities and was itself drowning with an enormous debt burden. It was for all intents and purposes, insolvent.
The Australian banks recognised their dire predicament and that due to the negative pledge arrangement, they were one step removed from exercising their rights. So, they could hold hands with the rest of the “seagulls”, or come up with a cunning plan to break ranks and find a reason to take security over some of the key assets of The Bell Group ahead of the other unsecured creditors.
Fortunately for them, they – and some 20 international banks – came up with a cunning plan that involved extending credit terms for their facilities if they could take specific security over the The Bell Group’s key assets and rank ahead of the rest of the unsecured creditors. They then kept The Bell Group afloat for another year before a liquidator was appointed.
Using their preferential rights, the preferential creditor pool seized control of several assets, including The West Australian Newspaper, netting $280 million from the subsequent sale.
But the liquidator smelt a rat and launched a legal action against the banks, seeking to unwind the $280 million distribution. It sparked what would become the most expensive litigation in Australian history, with costs well above $200 million.
After much argument, the Australian courts found the Australian banks and their foreign counterparts should not have taken specific security over certain Bell Group assets when they did. Following a raft of appeals, the banks finally agreed to settle, leaving a pool of about $1.75 billion (calculated as the original $280 million plus compounded interest at about 6 per cent for some 30 years) to be distributed to creditors.
Along the way, a gaggle of law firms up and down the Terrace kept themselves afloat for years by picking up pieces of the Bell/Bond legal entrails and a certain saying became well-worn among lawyers who had fallen short of their billing targets for the month – “just bill it to Bell”.
The lesson for the lenders was that you always need to maintain a golden thread between the money you lend and the asset each loan secures. If you break that thread, you’re on a slippery slope to financial oblivion.
While the $1.75 billion settlement might seem excessive, Twigger’s Tales suspects the banks made more than double that amount, with an average return on capital close to 12 per cent over the 30 years.
Hence the quaint Australian vernacular of a wunch of bankers!
Liam Twigger is the deputy chairman of Perth stockbroking, funds management and corporate finance firm Argonaut and he draws from more than 30 years of experience in corporate finance to regale you with his market tales. After starting his career as a professional soccer player in the UK, before working in the 1980s for corporate raiders Robert Holmes a Court and Alan Bond, he moved into investment banking in the 90s when he established Macquarie Bank’s Bullion and Commodities division in WA before establishing PCF Capital, which later merged with Argonaut. While he is an executive director of Argonaut (AFSL 221 476) this column is for information and entertainment purposes only and is not intended to constitute financial advice. The views and opinions contained within are those of the author and do not necessarily represent those of Bulls N’ Bears, this media outlet or Argonaut.
Source: Thanks smh.com