Financial crisis, crashing companies, ABC Learning audio, Tatts, IOOF and AED AGMs

February 2, 2010

Dear Mayne Reporters,

The All Ordinaries index peaked at 6873.2 on November 1 last year. This morning it has officially more than halved as the All Ords plunged another 129 points to 3,354 by 10.20am after financials got crunched again on Wall Street overnight and the Federal Reserve dramatically downgraded growth forecasts and increased unemployment projections.

We are witnessing the greatest destruction of wealth since World War Two and Australia is particularly vulnerable because we are so dependent on foreign debt, commodity prices and the property bubble.

If only the nation had listened to John Howard back in February 1996 when he warned: "We now owe the rest of the world $180 billion. Nothing, my friends, symbolises absolutely and comprehensively more than that disgraceful figure the total failure of Labor's economic management over the last 13 years."

Here are some of the reasons why the Australian market and currency are falling harder and faster than most:

* excessive household debt of more than $1 trillion, underpinned by a crazy housing bubble;

* $620 billion of foreign debt which is rising at $60 billion a year courtesy of the current account deficit;

* an economy overly reliant on property which is loaded up with excessive debt and now crashing;

* a corporate sector which is loaded to the gills with too much debt, especially the infrastructure plays;

* a lack of genuinely successful Australian companies with global operations; and

* Most of the Aussie farm has already been sold off during the good times

Surging state debts a major problem

The other great structural problem with Australia is the huge scale of debt-reliant state governments and their lack of funding options.

Much of the current chaos on the stockmarket surrounds traditional state government assets that were sliced, diced and geared to the eye-balls by overpaid financial engineers riding an unprecedented credit bubble. Unscrambling the disaster zones such as Dalrymple Bay, Brisconnections and the old Alinta assets sitting inside Babcock & Brown Power won't be easy. Even Macquarie Communications Infrastructure Group looks in trouble with too much debt and it owns all the transmission towers for the ABC and SBS.

Action needed on NSW public finances

The Australian's Mike Steketee produced a ludicrous comment piece today claiming that NSW got into trouble because the Carr Government was obsessed with reducing debt after Victoria and South Australia lost their state banks in the early 1990s.

The fact of the matter is that NSW is saddled with more than $31 billion in state debt and the latest mini-budget lifted the 2008-09 forecast new borrowing requirement from $6.8 billion to a record $7.2 billion. So much for jacking up taxes and slashing spending to keep the AAA credit rating. Revenue is falling faster than the remedial measures announced last week.

The claims of a $917 million NSW budget deficit are illusory because it ignores capital spending. The real game in this global credit crisis is cash flow and NSW is losing $20 million a day. It is the most insolvent government institution in the country and now this is spilling over into the real economy and national confidence.

After years of excessively generous public sector wage settlements, NSW has to bite the bullet and admit its economy cannot support the 460,000 public sector workers, especially in sectors such as public transport which are riven with inefficient work practices.

The sad reality of the current global crisis is that everyone - workers, bosses, contractors, suppliers - will have to take a haircut. The big question is whether we are nimble and flexible enough to adjust to the changing global reality that will ultimately result in the world's biggest debt for equity swap after the bursting of an unsustainable credit bubble.

Forget hedge funds, private equity players are the biggest losers

This process will wipe out many of the world's banks and investors. And whilst hedge funds get way too much media coverage, it is actually the private equity funds that will do the worst because their investors are far more heavily geared than most.

Most hedge funds aren't even geared one times, whereas your typical private equity investment vehicle from the boom days is geared to 400% or more.

The private equity management companies will be fine, except for the dramatic reduction in funds under management as their clients flee without their shirts. Looking back on this mess, last year's top-of-the-market IPO by private equity giant Blackstone, backed by the Chinese Government, will probably be seen as the high water mark. These boys were the smartest guys going around as they sold down at the top, something so many others failed to do.

Bank value evaporating and where to for Suncorp?

The global banking industry is arguably worth nothing and has already been bailed out by government through guarantees and direct capital injections and there is a real risk that Australian bank shares could halve in value from here. Heaven knows what sort of shortfall the banks will suffer on the $50 billion debt strewn across the sprawling Babcock & Brown empire, not to mention Centro which still owes about $15 billion and will probably fall over on December 15.

Whilst Macquarie Group is promising to pay a $1.45 dividend on December 19, the projected future dividend payments across our banking sector are completely unsustainable given the wave of bad debt write-offs that are coming.

I bumped into a former Big Four Bank CEO in a cafe recently and he warned that "lending standards got very loose over the last few years".

He also pointed out that whilst the likes of ABC Learning and Allco Finance Group will attract the headlines, the vast majority of the bad debt write-offs will come in the middle market. "Always does," he said.

Think about the leverage inside the Australia car manufacturing, parts and distribution industry. It will generate huge banks losses in Australia.

Suncorp leads the way for bunkum balance sheets

Charlie Aitken from Southern Cross Equities yesterday called on Suncorp CEO John Mulcahy to fall on his sword. Personally, I reckon there is a chance Suncorp could go the same way as Babcock & Brown because it has a huge exposure to Queensland developers. The chairman of one major listed developer told me recently that Suncorp was the biggest risk of any major Australian financier. However, that doesn't mean anyone should take their cash out of Suncorp because it is 100% guaranteed by the government, even if the shares go to zero.

The Suncorp balance sheet is one of many that bares no resemblance to the new reality. After the stock fell 33c to $6.57 this morning, it is capitalised at about $6.6 billion.

Clearly the net assets of $12.4 billion claimed by the board and auditor Andries Kerblanche from KPMG is illusory and there will need to be big write-offs in the February half year result, especially when it comes to the $7.1 billion of intangibles, much of which relates to the over-priced goodwill on the Promina takeover.

Who would even have thought the whole of Suncorp would one day be worth less than what it paid for Promina? The Queensland ALP will be spitting chips as its Suncorp investment was once worth more than $20 million.

Why all short selling should be banned for another six months

Whilst the likes of Asciano, Transfield, Suncorp, Fairfax Media, Paperlinx, Boral, Fortescue and Pacific Brands battle the perception they might struggle to survive given their excessive debt loads, the biggest issue over the coming three months will be write-downs.

I've asked several auditors this AGM season to justify the huge disparities between book value and market value.

The auditors are in a terrible spot because in many cases, forcing a write down will trigger a breach of banking covenants.

For this reason alone, I reckon all short selling should be banned for another six months. You can't have the aforementioned companies getting shorted to exacerbate price declines whilst auditors, who are increasingly fearful of litigation after being asleep at the wheel on the likes of Centro, ABC Learning and Allco, are negotiating the scale of write-downs.

Shorting of non-financials was re-introduced yesterday, which partly explains why Fairfax Media and Fortescue both plunged. Fairfax is down another 9c to $1.31 this morning and Fortescue plunged another 15c to $1.21.

ASIC should ban all shorting of everything today as the game is now about saving as many of our marque corporate names as possible.

AGM action continues amidst the carnage

The AGM seasons grinds on whilst the financial and economic body count mounts and yesterday we attended three meetings: Tatt's Group, IOOF and AED Oil.

All are in reasonable shape relative to their competitors and AED is looking particularly smart for selling a 60% stake in their Puffin oil field in the Timor Sea to the Chinese Government for $600 million a few months back. MacArthur Coal boss Ken Talbot, Solly Lew in Coles and the Roberts family at Multiplex are three others who timed their cashing up exercises very well.

Whilst the Puffin field is now marginally cash flow negative at current prices, rather than facing a debt crisis, AED has $350 million of cash in the bank to spend exploring around the bountiful Puffin oil zone.

Here are the links to the audio highlights from the AED Oil AGM and the first one in particular was quite interesting because no other western country has allowed the Chinese government to become majority owner and operator of an oil field.

Explain the Chinese takeover of our oil fields

Director margin loans and relationship with Macquarie

Tatts AGM audio highlights

Here are links to the edited audio highlights from the 2008 Tattersalls Group AGM held at Moonee Valley Race Course on November 19. Chairman Harry Boon handled the meeting well, but he and Dick McIlwain both sounded very gloomy about the regulatory outlook:

1. Did we give the Government grounds to rip up our licence?

2. Can a change of government improve things

3. Get kids out of pokies venues

4. Supporting the re-election of outsider-turned-insider Julian Playoust

5. Supporting re-election of 68yo Rich Lister Kevin Seymour

6. Remuneration report: chairman workload, CEO gigs and even a mention of Toll scandal

ABC Learning creditors meeting contributions

Here are the links to our two questions from the Tuesday's ABC Learning creditors committee, plus the receiver's speech:

1. Brief speech by receiver Chris Honey

2. Knocking off the bank charges and administrator's conflicts of interest

3. Give us the true state of the books

We've also updated Tuesday's special edition after the creditors' meeting.

IOOF AGM audio highlights

Here are the links to the audio highlights from yesterday's IOOF AGM, where the whole Perennial battle with GPT was explored along with the rort that allows the salaries of overpaid fund managers to be kept secret:

Question about Perennial and GPT

Disclosure of fund manager pay

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Do ya best, Stephen Mayne

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