Doomsday plan not enough to prevent collapse
Sydney Morning Herald
Saturday March 27, 2010
A FAILURE to eradicate tens of millions of dollars of margin loans over a large chunk of Allco Finance Group shares owned by key executives was described as the "worst decision of my life" by the company's former high-flying chairman David Coe yesterday.In a frank admission about the huge borrowings that contributed to the collapse of AFG, Mr Coe told the Federal Court that he thought by the end of December 2007 he had dealt with the most likely negative outcome facing the geared-up shares.Under a "doomsday scenario", which he outlined to the other beneficiaries of the AFG-owned Allco Principals Trust, Mr Coe said he believed a short-term deal he had put in place would cover the loans if the shares fell in value to $4 and then $2.60.That was against a backdrop in a gradual slide in the share price from August 2007 when the stock was trading at $10.45.It was early August, Mr Coe said, when he and fellow Allco Finance directors were first told that the then $369 million worth of equity had been hocked to bankers to the tune of $285 million.APT, whose main beneficiaries were Mr Coe and three other Allco executives, owned 13 per cent of the company. The court was told earlier this week that any sale of the stock by them would have been seen by the stockmarket as a "very strong vote of no confidence" in AFG.The group was forced to confront a range of financing options to help bail out APT as the falling share price - which slumped to $5.44 on December 19 - required the subsidiary to put up more money and collateral to avoid the banks seizing and selling the stock. Such an outcome would only put further pressure on Allco's shares, causing what John Sheahan, SC, for the company's receiver, Ferrier Hodgson, described as a "vicious downward spiral".To counter those conditions Allco's directors considered in August and then subsequently agreed in late December to lend $50 million to APT, which it used to meet margin calls made against its Allco stock.Mr Coe also persuaded reluctant APT executives to pledge as much as $130 million of extra collateral - primarily more of their shares - and make a $10 million loan to meet additional cash requests by the lenders.APT started using the money immediately as the drop in AFG's share price continued into January. It then fell off a cliff later that month when the stockmarket collapsed.Capping off a week of testimony by former Allco directors and executives on AFG's debt-laden failure in November 2008, Mr Coe said his worst ever decision "was not to have closed out these positions [the margin loans] earlier". "I thought I had covered the worst case [of the scenario] and I hadn't."He said he assumed that there would be a "rational" market reaction to what was happening at the time - including a belief that Allco's shares would not fall below their net asset value - but the January crash had blown right through that.The market crash wiped out the support measures, APT subsequently went into administration and Allco lost the $50 million loan, which was unsecured.The former Allco directors will face further hearings in coming months as the receiver considers various means to attempt to recover money on behalf of the company's banks, including the $50 million loan.
© 2010 Sydney Morning Herald
