Hmmm ... perhaps MFS/Octaviar was better suited for a 90s experience than Mark Korda anticipated. After all there was scoundrel type behaviour, the creditors weren't banks and King failed to get his windfall capital raise.
Sounds to lay ignorant me that Mr Korda had a fixed mindset and wasn't as flexible in his approach for handling MFS/Octaviar as he needed to be.
From his BusinessSpectator interview of 9 October 2009
AK=Alan Kohler
SB=Stephen Bartholomeusz
"MK: A lot of people ask me what’s the difference from the last crash and I think we’ve had a couple where it’s the early ‘90s and then there were some of the icons in the 2001, but overseas is completely different from the early ‘90s.
For a start, remember that in the early 90s, interest rates were 22 per cent. Property yields at best seven or eight. So you’re always going to have a cash flow problem. Interest rates went up yesterday, but it's completely different. I think you’ve seen the economy is not as bad. There are a number of reasons for that, but obviously the stimulus package has helped that, but the unemployment and consumer confidence is a lot better. In the 90s, we deregulated the financial markets in the mid-80s, so there were lots of people lending in lots of different ways and the State Bank of Victoria ended up in Commonwealth Bank and there was Tricom and all those. There are some non-bank financial institutions around that, there have been collapses, but not like the ‘90s. I think interest rates are probably the fundamental difference and this recession the world is having is actually because the global financial system collapsed. This is staggering, but it has been propped up by the governments.
AK: Staggering that it wasn’t worse than it was?
MK: The 1990 situation was about good, old-fashioned economics and things were not working, people were being fired and all this. This thing is about the global banking system collapsing. You’ve got the investment banks that were geared at 35, 40, 50 to one and all of a sudden everything just sort of stopped. So, I think it’s very different this time around.
AK: Yet a year ago you must have been gearing up for a big increase in business. Obviously you’re not looking forward to the misfortunes of others, but certainly getting ready for a big increase. But it seems to have completely changed and is now different from what you might have expected. Is that the case? [emphasis added]
MK: A very good example is that we have a large real estate and consulting practice. In the last quarter of December 2007, it was probably the slowest, quietest time we’ve had. By the first quarter of 2008, the tipping point was probably Centro in Australia. That went and got into difficulty in December and then by January we were working on MFS and Allco and a few others, all within a week. It’s been busy since then, but we were always careful not to put too many people on – steady as you go. We do a lot of property work. We have about 25 real estate professionals that work for us and that’s keeping us very busy at the moment. [emphasis added]
SB: Is the nature of the work different? Less of the formal insolvency type work and far more of a consulting behind the scenes and advisory-type work?
MK: Yeah. Or when developers or builders have been into trouble we’ve gone in and finished the buildings. We’re just standing in and finishing things off, rather than closing down the site and auctioning them off, so it’s probably a difference from last time as well.
SB: One of the key differences is the banks. They’re in better shape this time round and they’ve behaved differently. Is there an explanation for why they haven’t just gone in and put people like you in charge of some of these companies?
MK: Well, the hardest thing is when you run out of cash, like Timbercorp. Interest rates have come down so much that the cash flow drain is not as much as it was last time. With 22 per cent interest rates, you can’t pay any of your interest. At, say, 4 per cent plus the margins, you’re in the game, so the interest rates falling has probably been the key determinate.
AK: And this time around there seems to be a lot less 'lock-changing;, where you just go in and shut the place down or change the locks. It’s more a voluntary administration and more cooperative situations. [emphasis added]
MK: The banks have got very skilled people. Many of the bankers I deal with have been doing this since 1992 – been there, done that, know the consequences. Again, the banks have also had very good credit risk rating systems that have been brought in since the 90s, so they know their clients better and they had a handle on them, with a depth of experience. There will always be the scoundrels out there and you have to deal with them, but generally I think that experience has been good. [emphasis added] [Poster's note: How does one deal with them? Draw a line in the sand behind "issues"?]
AK: There’s obviously a chance now that interest rates are going to keep going up, four per cent next year, possibly five per cent. Is there a layer of companies that you think will actually tip over if there’s two per cent on interest rates?
MK: Yeah. I think there’s been quite a bit of debt rescheduling in highly-leveraged companies that I think may need to be sorted out, probably in the second half of 2010, 2011 and there’ll always be companies that just get into trouble and run out of cash like a Timbercorp. But we can’t see interest rates in the ten or fifteen per cent-range at the moment, can we?
SB: The equity markets seem to have become the lender of last resorts to companies that are experiencing pressure.
MK: Yeah. There would be quite a few companies that we would say are in distress that have had rescue capital applied now, at obviously very deep discounts to the existing shareholders and it’s caused a lot of angst. But for many banks and for many people around the world, they would be very happy with the rescue capital that’s come through.
AK: Well, in fact, in previous times, that capital probably wouldn’t have arrived at all, at any discount.
MK: So, that’s another significant change to say the ‘90s or the recession in the early 2000s. It’s just staggering how much money became available and so quickly. [emphasis added] [poster's note: not in MFS' case]
SB: Is there a sense that the banks and their advisors, people like you and perhaps maybe the shareholders, the institutions as well, have looked at last time round and said well let’s not start the dominos flowing this time, let’s make sure that we don’t start that vicious spiral?
MK: The cash flow’s held up, you can sort of service your debt, so that’s good. You can service your debt and lower-priced rescue capital around. I don’t think there are any new ways of going broke. Although the one significant thing this time around is complexity. It is staggering the complexity of say an Allco or a Babcock & Brown or a Timbercorp. But I think the world will demand, and get, much less complexity. [emphasis added]
AK: They were much more complex, were they, than I don’t know say Qintex or Adelaide Steamship, Bond Corporation?
MK: I think they were complex, but not even Bond Corporation had 750 companies.
SB: A brewery is a bit different from some of the securitised assets that were inside those groups.
MK: Yeah, you actually owned an asset and you could go and see the beer being brewed rather than sort of I’ve got a share in this company that’s got a share in this company that has a share in this company that has a share in this company. That complexity I think will be unwound, but then no doubt it might come back again."