Winners and Losers

This year there has been plenty to learn from the security status of an investment.  The “biggest dog of a New Zealand investment” award would have to go to Feltex.  There have been four winners over this debacle.  The winners were, and there is no prize for guessing this one, the private equity group that sold out of Feltex in the IPO.  The runner up would be Godfrey Hirst who bought the business from the receiver; the receivers who were always going to get paid their fee, and finally the ANZ Bank who have managed to exit their loan without it costing them dearly. 

The big losers of course were the shareholders, the Feltex suppliers who have lost close to $40M and the staff.  Many of the staff will end up losing their jobs.  They have lost most of their redundancy entitlements.  Most have also had significant cuts in their pay.  We know of cases where the worker was given a new employment contract on a Friday afternoon, and it had to be returned, signed, the following Monday.  And of course there was about a 15% pay cut.

Investment decisions need to be made in a rationale manner.  In this Feltex example, the business could have been saved a long time ago, if the directors had accepted the original Godfrey Hirst offer of around sixty cents per share.  This would have kept the bank happy, suppliers happy as well as the workers.  Sure the shareholders would still have made a loss on their investment if they had purchased in the IPO a year earlier.  Because Godfrey Hirst have purchased from the receiver, they can easily restructure the business making it more likely to succeed.  Their savings will be huge by comparison to what they would have been if they had purchased in what was to be a takeover.

There have also been other investment dogs, with three finance companies having gone into receivership.  How successful the receivership process is will make a huge impact on how much capital gets paid back to investors.  There is also a lesson to be learnt about the priority of investment repayments, when investments go sour.  Take for example Provincial Finance.  The shareholders will lose all their capital, and it is highly likely that the redeemable preference shareholders or capital note holders will lose theirs.  But the secured debenture holders may receive all or close to all of the capital back on their investment.  They may even receive some interest. 

Investors in the other two failed finance companies are unlikely to be as well off as the Provincial Finance investors.  A receiver in this situation was called in early by the Trustee, and it appears to have been just in time.  This is in contrast with the delays taken by another trustee company in calling in the receivers for the other two finance companies.  These investors will recover a reasonable portion of their secured debenture investments.

Contrast this with how the Feltex shareholders were treated.  At the end of the day, it was the bankers who held the best security that recovered most of their monies.  They were also the ones who effectively controlled the financial destiny of the workers whose jobs will be lost, the reduced redundancy payments, the forced lower wages, the total loss of monies by the shareholders, and the lack of payments to suppliers etc.  The real cost to the ANZ may well be that those who were adversely affected and banked at the ANZ may well decide to change banks.  Today’s winner could well become tomorrow’s loser.