Receivership successes compared with moratoriums

With the recently announced failures of finance company moratoriums (OPI Pacific, Boston Finance and Hanover Finance) there has understandably been much questioning of the wisdom of investors’ decisions to vote for the moratoriums in the first instance, as opposed to voting for the receivership option.

In the lead up to the meetings at which the respective finance company moratoriums were approved, various statements by the companies’ directors and advisors were published. Typically these would infer that the costs of receivership would be high and that the Receivers would effectively put all assets “on the block” upon being appointed, resulting in a considerable loss in value.

These statements typically carried with them the inference that existing directors and management knew what they were doing and could be trusted to deliver a much better outcome than any Receiver could hope to achieve. Given the misconception that the typical “mum and dad” investor has of Receivers (typically that Receivers are uncaring and ruthless, motivated only by fees), it’s no wonder that once the moratorium votes were counted, the Directors and management stayed in control. Recent events have shown that rationale to be flawed, for several reasons.

Receivers have a statutory responsibility to achieve the best return they reasonably can for the benefit of all a company’s creditors, not just the party which appoints them. For this reason a Receiver destroys value at his peril. As in the case of any market, the skills and experience of different Receivers can vary greatly. Every asset of a company in receivership is different and in order to achieve an optimum return from the realisation of each asset, a Receiver needs to quickly decide on the best strategy for achieving this objective.

An obvious example of an optimum receivership outcome was an assignment in which I traded a well known manufacturing company out of receivership over a two year period, fully repaying all three secured creditors and all unsecured creditors while doubling staff numbers in the process. The decision to trade on was made following a full assessment of this particular company’s strategic options. In this case, clearly no value was destroyed, in fact, quite the opposite.

This is just one example. Three others, all of which were settled on the same day, clearly illustrate the benefits of a skilled Receiver. The first case was an hotel in Queenstown which had been trading on under the control of the Grant Thornton Receivers for some 10 months. Following a heavily promoted sale campaign back in April-May 2009 the Receivers withdrew the hotel from the market as none of the offers received, met the required benchmark sale price agreed between the Receivers and their appointer.

This benchmark had been set following an independent assessment commissioned by the Receivers, which set out the costs versus benefits likely to arise from the Receivers maintaining ownership of the hotel for an extended period of time during which the market for hotel sales might improve. Subsequently negotiations recommenced with one of the interested parties. An agreement was reached at the benchmark price, which was substantially more than the purchasing party had offered during the sale campaign. It should be noted that the benchmark price was also well in excess of the hotel’s market valuation at the time of the sale.

An Auckland bloodstock property was subject to a comprehensive three month local and international sale campaign. In order to present the property in optimum condition during the sale campaign period (at a time of wet weather) the Receivers decided to maintain the large number of company horses on an associated property, which was not part of the receivership. This was a cost/benefit decision designed to achieve the best overall outcome for the company’s creditors. At the end of the campaign, in spite of the soft real estate and bloodstock market, the Receivers achieved a sale price in excess of valuation following a week of negotiations with the buyer, a party identified by the Receivers, prior to the campaign, as the likely buyer of the property.

The nature of the Christchurch flight simulation business meant that any value was heavily reliant on the intellectual property held by certain parties. The Receivers became aware of this from consultations with their appointer and the directors prior to the commencement of the receivership. Consequently, a sale of the business to the parties controlling the intellectual property was completed within days of the Receivers being appointed, thereby keeping receivership costs to a minimum and maximising returns from the business’ sale.

Sure, Receivers charge a fee for the work that they do but the appointment of a skilled, objective and independent Receiver should not “destroy value”. In fact, quite the opposite.

Further enquiries, please contact:

Tim Downes
T+64 (0)9 308 2989
E tdownes@gtak.co.nz