Re: Octaviar MFS Premium Income Fund PIF
Michael's Elysian Fields Fit for a king
By TIM HUNTER and ROB STOCK - Sunday Star Times::Last updated 05:00 23/08/2009
Elysian Fields, the Gold Coast estate of MFS founder Michael King, had a clubhouse for its polo-playing owner "decked out like something out of Arabia", according to one visitor.
The $A20m property, inland from Surfer's Paradise, was a highly tangible status symbol for King, whose stated ambition was to run one of the top 50 companies in Australia.
For a while, he looked like making it. His business had a market capitalisation of $A2.2 billion in 2007. Now, not even the company's name remains and its remnants gather under the moniker Octaviar.
For New Zealand victims of his hubris the cost has been huge when the whole sorry enterprise collapsed last year the New Zealand company, MFS Pacific Finance, owed investors $454 million. So far secured debenture holders have got back just $57m and the prospect of further recoveries is receding into the distance.
It's New Zealand's biggest finance company failure after Hanover Finance and Bridgecorp, but hugely more complex. This month, after a court ruling in Australia on July 31, the shaky moratorium agreement voted in by Kiwi investors last May looks certain to be replaced by receivership or liquidation.
Financially this is not good news for investors, but there is a silver lining liquidators may finally untangle the web of related party deals and accounting trickery to reveal what, and who, wrought such billion-dollar devastation.
The business began modestly enough. King and business partner Philip Adams were lawyers at McLaughlins Solicitors on the Gold Coast where they established a small funds management business called McLaughlins Financial Services, later spinning the business out of the law firm and acquiring several property management rights, including that of the then-listed MFS Leverage Investment and Securities Trust in 2001. In January 2005, they merged the trust with the funds management business to create MFS Ltd. Thereafter they made a string of acquisitions, including accommodation businesses BreakFree and S8 that were to become the foundation of travel business Stella.
How MFS made money was a mystery to many people, but make money it did. An analyst with ABN Amro Morgans, Belinda Moore, said in 2007: "They are high-calibre people who always exceed their promises. So we are very confident about them."
A former chief executive of S8, Chris Scott, admitted to business magazine BRW: "At first I did not understand MFS so I didn't want to be involved with it. But as I listened to their story and it became more transparent to me, I became more understanding and more comfortable with them."
Ad Feedback The business model appeared similar to that of Macquarie Bank in its focus on being a manager of other people's money, creating a range of investment funds from which it extracted fees. What some observers struggled with, however, was the extent of related party dealing which made it hard to keep track of assets and liabilities as they were shuffled around the group.
This was a major factor in the demise of its New Zealand arm, MFS Pacific Finance, and its related financial advisory firm, Vestar.
Pacific Finance was born from a much smaller finance company taken over in 2003 by MFS, which was keen to expand into New Zealand after stunning growth in Australia. In December 2006 MFS added Vestar, acquired from its Ferrari-driving founder Kelvin Sims, which was already selling debentures from Pacific Finance.
The idea was simple Vestar would channel investor cash into Pacific Finance, which would pass it on to MFS in Australia for use in lending to property developments in Queensland and New South Wales. A 2007 prospectus showed loans of $109m in NSW, $94m in Queensland and $22m in Auckland. Tens of millions of dollars of these loans were bought from, or sold to, other parts of the MFS group. The company also fed money into other MFS channels $22m, for example, was invested in units of funds managed by MFS.
Disclosure of related party transactions, the heart of the financial alchemy in MFS, took up nine pages of the document.
In July 2006 MFS agreed a "put option" deal with Pacific Finance whereby the New Zealand company would have the right to sell any loans more than three months overdue back to the Australian company at face value. The deal also covered investments such as the funds units if the market value fell below the price Pacific Finance had paid.
This arrangement formed a big part of the sales pitch to attract investors to Pacific Finance, who understood that its financial future was literally guaranteed by its huge Australian parent, a guarantee that came at a cost of millions each year.
Pacific Finance boasted: "Notwithstanding the protection provided by the company's prudent lending and investing practices," it had "transferred all credit risk" to its parent by way of the put option agreement.
That sounded great to investors, who, perhaps encouraged by the presence of economist Donal Curtin on Vestar's investment committee, were accepting interest of 9.5% for a 12-month term deposit as it turned out, a paltry return given the risk compared to the 8.5% they could have been drawing from AAA-rated Rabobank.
What wasn't in the sales pitch, however, was that the put option allowed MFS to turn bad loans into good, as if by magic, by transferring them to Pacific Finance.
As at September 2007, Pacific Finance recorded loans of $37m more than two years overdue, but still classed as not impaired because they were covered by the put option. The bulk of these loans were acquired at face value in the previous six months from related parties in Australia.
This was bad enough, but when the MFS group collapsed under the weight of its debts in January 2008, it was the tip of the iceberg.
Not only was MFS effectively guaranteeing Pacific Finance through the put option, it was also publicly committed to providing cash flow to support the finance company's repayments to investors commitments of up to $27m, $32m and $22m, in January, February and March.
But MFS didn't have the money it was also due to repay corporate financier Fortress $189m in February, and was trying to raise money from a float of travel group Stella. On January 18 the Australian sharemarket suddenly realised MFS was much more heavily in debt than was previously thought and the share price went into free-fall.
Interest due to Pacific Finance investors on January 31 went unpaid and MFS, it rapidly became clear, was in no position to make good on the promises it had so expensively sold to Pacific Finance.
By the time investors were ready to vote on a moratorium deal offering an early repayment of $23m, they knew there was a massive black hole in the finance company's loan book. Of $476m of loans and investments, just $122.8m looked recoverable, they were told.
Although directors Jason Maywald and David Anderson signed financial statements in December saying 27% of loans by value had security of a first mortgage over real property, moratorium documents revealed the real picture was just 13%.
Maywald, who joined the firm in December 2006, has not spoken publicly about what happened, other than in veiled terms.
He told the Sunday Star-Times in May last year that there had been some "issues in the origination of the loan book at Octaviar" and "it appears some loans haven't got the position we would have liked".
As it transpired, a common practice was for Pacific Finance to provide top-up mezzanine finance to a property development, taking a second mortgage behind the first lender, a related Australian MFS fund called the Premium Income Fund which had about 10,000 investors.
All their lending was managed centrally by MFS in Australia.
To complete the circle, Premium Income Fund also lent huge sums on an unsecured basis to Pacific Finance, a portion of which funded debenture redemptions for Kiwi investors.
Such tangled relationships mean MFS-related companies have a Gordian Knot of claims against each other and the parent company, further complicated by the claims of third parties such as Fortress.
When the original moratorium deal was voted in last May, it looked like all those parties would agree on an orderly disposal of remaining assets, but hopes of a orderly wind-up have been dashed by court action from one creditor, the Queensland Public Trustee.
It was this that led to a court ruling on July 31 forcing Octaviar into liquidation and triggering an "event of review" in the moratorium deal. Other lawsuits are in train, including a class action against the Premium Income Fund's auditor, KPMG, alleging the fund's loans to Pacific Finance were illegal under related party rules in the Corporations Act and KPMG failed to alert regulators to this fact.
For Pacific Finance investors, there are only two routes to further recoveries. One is enforcement of the put option against Octaviar, the other is a damages claim against Octaviar Administration alleging negligence and mismanagement of the loan book. Both claims are for $461m.
Louise Edwards, CEO of Pacific Finance's trustee Perpetual, says she has asked Maywald, now based in Australia, for further information before deciding whether to appoint a liquidator to the Kiwi company.
"It's a complicated matter," she told the Star-Times last week. "It's not something we want to rush into."
Meanwhile, precious little is left in the Octaviar kitty to fight over. One of its biggest assets listed in December by then-administrator Deloitte was a 35% stake in Stella valued at $A128m. It was sold a few weeks ago for just $A3.5m.
As for King, he still has Elysian Fields, although according to one media report in Australia, its holding company, Canungra Property, is subject to a charge held by a New Zealand firm Pacific Finance