ABC Learning, CBA's Centro brutality, sworn in, pokies, PacBrands and SPP plays

February 18, 2010

Dear Mayne Reporters,

The big news this afternoon is the joint announcements by ABC Learning receiver Chris Honey and deputy Prime Minister Julia Gillard about ABC Learning.

It seems that 55 centres are being closed with 100 job losses, but the Federal Government has stepped up with another $34 million cheque to keep a further 241 "unviable" centres operating.

That leaves 720 Australia centres within the ABC Learning stable that the receiver will try to sell to pay back the $1 billion debt to the secured lenders, assuming their last-minute charge over the assets isn't knocked off by the courts.

It is amazing that shares in the Australian Education Trust, which owns about 500 ABC Learning centres, continue to trade without an update this afternoon, although we did get this reasonable detail on November 27.

I'm in a tricky position to comment too much on the ABC Learning situation. As a member of the creditors' committee (see this Mayne Report), I've signed a confidentiality agreement and we had our first committee meeting on Monday morning.

Similarly, as a councillor at the City of Manningham, we've got 4 ABC Learning centres in the municipality, two of which are not on the "viable" list. Councils will probably end up taking on a large number of additional child care centres in the coming months, but so far we haven't discussed it in the chamber.

Sworn in as Manningham councillor

It's now official. At about 7.10pm last night, your correspondent was formally sworn in as a councillor on Manningham City Council for the next four years. Watch the video here.

Charles Pick, an energetic 25-year-old ALP member and staffer, was sworn in last night as Manningham's youngest ever mayor. We're having some video troubles at the moment but his acceptance speech will be available in the next edition.

The selection of Cr Pick came after much discussion amongst the 9 councillors, six of whom have been elected for the first time. In the end, I reached the firm view that the mayor for the first year should be one of the three incumbents who were returned.

Manningham has also opted for a deputy mayor and Fred Chuah, a justice of the peace, was elected unopposed. Fred is a true elder statesman in the Chinese community with a strong record of community involvement. For instance, he drove the establishment of Victoria's first retirement facility for Chinese residents in Warrandyte, which is part of Manningham. Our municality is one Victoria's most ethnically diverse so it is great that we have a Chinese deputy mayor.

The Pick-Chua team is a good blend of youth and experience in terms of age, along with experience and new perspectives in terms of previous service on council.

Last night's function was a fun event with local MPs, former councillors, some of the 31 unsuccessful candiates, lobby groups and community workers all turning out to find out who will be mayor and which councillors are serving on the various committees.

One highlight came when snake catcher and unsuccessful Mullum Mullum ward candidate Raymond Hoser met the wonderful wife Paula Piccinini and she was able to say: "Ahh yes, Raymond Hoser, the man who cost us our house."

We can all laugh now, but it was a Raymond Hoser press release that I published in 2000 which triggered shock jock Steve Price's defamation writ that led to 15 Supreme Court appearances, a contempt of court civil action and an injunction freezing the sale of our home.

As events turned out, this was the best thing that ever happened to Crikey as revenues soared from $10,000 to $30,000 a month and we moved to more suitable rented accommodation. Steve Price was appointed honorary Crikey marketing director, such was the sympathy and cash flow his actions generated.

And while Hoser's press release about Steve Price and cash for comment was wrong and defamatory, I was the silly duffer who didn't read to the bottom before publishing it and I was the one who then ran a provocative campaign against Price which hugely inflamed the situation. That said, Price is a litigious goose who has sued at least four different people over the years and thought it appropriate to issue Supreme Court proceedings over comments by a colourful snake catcher that were read by less than 100 people and taken down immediately on request.

Suffice to say, I'll be a touch cautious before taking up too many of Hoser's myriad issues with council, but it was fun to laugh about old times last night.

The executive pay debate

It was good to see The 7.30 Report hop into the executive pay debate with a 10-minute story by reporter Greg Hoy last night. RiskMetrics boss Dean Paatsch, Erik Mather from Regnan and your correspondent were used to prosecute the case for legislative change on CEO payouts, but still we're yet to see any movement from the Rudd Government, even though it was Labor Party policy dating back to opposition days.

Toll Holdings CEO Paul Little won't be at all pleased with last night's story but he really should be handing back that $8.5 million payout he collected as part of last year's Asciano demerger.

Hoy used some of the vision from the Toll Holdings AGM that we broadcast in this video a few weeks back.

Video of Xenophon and Tim Costello pokies protest

Senator Nick Xenophon and World Vision's CEO Tim Costello teamed up with Paul Bendat from to score quite a hit with a protest in Melbourne's Bourke Street Mall on Monday morning that generated truckloads of radio and TV coverage.

I couldn't get there as it clashed with an ABC Learning creditors' committee meeting, but we sent our cameras and have produced this video.

Time to stand up to ComBank's Centro brutality

The financial press have been repeatedly telling the world that the Commonwealth Bank is taking the hardest line with struggling corporate clients at the moment and the victim most often mentioned is Centro, which faces a refinancing deadline on December 15.

The AFR described it as follows today on page 51:

As the deadline looms, speculation has increased that Commonwealth Bank of Australia, which has the largest secured facility to Centro among the Australian syndicate, is proving the most reluctant.

The Australian decribed it as follows today:

Another banking source said Commonwealth had hardened its stance on "troubled companies, including Centro".

What still hasn't been reported anywhere in the financial press is that CBA CEO Ralph Norris opened up about the Centro situation at the AGM on November 13 in Melbourne on the key question of conflicts of interest when one financial institution is a big player on both the debt and equity side of a corporate workout.

You can listen to the audio file, but we've also transcribed it too:

Transcript of Centro exchange from CBA AGM on November 22

Stephen Mayne: There was a piece in The Australian by John Durie on May the 8th saying that Centro had won a last minute reprieve from its banks, after a last minute intervention by Sir Rod Eddington who was chairman of JP Morgan Australasia. It talks about there were late night talks between Sir Rod and CBA boss Ralph Norris.

Now someone who's, I own 750 stocks – tiny holdings, I'm in everything that moves in the market, so I'm in all the Centro stocks. Now in the situation like Centro, the Commonwealth Bank is the largest shareholder. So the Commonwealth Banks sits there with, what, 7 or 8 percent in both Centro Retail and Centro Properties Group, you've smoked $600 million on behalf of your funds management clients in Centro.

Now what I don't understand, is when Sir Rod Eddington rings you late at night to talk about rolling over a billion dollar exposure that we have in Centro - $160 million of which is unsecured, how can you even take the call, when you also know that the Commonwealth Bank on behalf of millions of Australian superannuants have dropped half a billion on the equity side?

So when you take that call, are speaking as a banker trying to recover $1.1 billion? Or are you speaking as the ultimate man in charge of a funds management operation that desperately wants a rollover? That wants to salvage something from the wreck, the wreck in the case of your funds management clients, of $600 million. So how do deal with the supposed Chinese wall, when you're the CEO of the whole show and you're getting these calls from other bankers late at night?

CBA CEO Ralph Norris
: Well Mr Mayne, yes I did take a call from Sir Rod Eddington, and I have to say that my definition of late night and John Durie's, probably is significantly different, because I took that call at 5:25pm. So, therefore I generally find that as being fairly early in my day.

But the reason I took that phone call was, yes, there were issues around documentation. It had nothing to do specifically with, whether or not we should actually be involved in a process. The process was that we were putting in place a memorandum of understanding, and Sir Rod was concerned that we had not signed it. And the reason that we had not signed it was that there were 15 material errors in that 200-page memorandum of understanding. My people were insisting, and I was obviously supporting them, that we would not sign that particular memorandum until those 15 errors had been corrected. I don't understand, how a number of other banks had not come to same conclusion that documentation was flawed.

So that was the reason why the discussion took place. And we certainly made sure that those 15 errors were corrected before we actually signed the document. So it was an issue over a document.

The other matter in regard to our Colonial First State operations, I do not get involved in the picking of stocks or the managing of those particular funds. They are appropriately managed by the management team and under appropriate trustees, and with appropriate trustees. So that is a situation where obviously there is a significant Chinese wall from the point of view of my involvement.

CBA Chairman John Schubert: In fact that wall is a lot more than a Chinese wall, it's a very real one.

Why CBA should show some more sympathy

CBA's huge funds management exposure to Centro was explained in this Crikey story on December 17, 2007 - the day Andrew Scott's debt-fuelled shopping centre empire imploded.

However, the exposure was actually worse than first realised because I wrote that CBA owned 12.95% of Centro Retail (CER) and 6.42% of the parent and manager Centro Properties Group (CNP) when it was actually the other way around.

This means CBA's investments were valued at $618 million in CNP and $208 million in CER on the Thursday before that fateful suspension and subsequent bombshell announcement last December.

The long-suffering superannuants relying on CBA's investment expertise haven't dropped the entire $828 million because CBA started quitting its positions straight away and fell below the 5% substantial shareholder threshhold in CER on January 24 and CNP on September 18.

However, it would be most unfair if CBA was the bank which extinguished any hope for those still sitting on the Centro share registers by not rolling the debt facility on December 15.

CBA board tilt to support Malcolm Turnbull's position

In fact, if CBA does do this, I'm going to run for their board next year on a platform that they stop being the most brutally unsympathetic bank in the distressed Australian market.

Opposition leader Malcolm Turnbull was absolutely right in these comments to the Press Club last month:

"Over the years I have been an advocate of Australia adopting rules which enable and promote corporate reorganisation and rehabilitation having regard to the more successful features of, but not slavishly following, the US Chapter 11 which of course has features which would not be appropriate in an Australian context,” he told the National Press Club.

"This has been considered and rejected in years past largely because of pressure from the major banks who want to preserve the maximum leverage as secured lenders.

"This is not an esoteric issue involving bankers, lawyers and accountants. In the course of my life I have seen many businesses, and many more jobs, destroyed by heavy handed receiverships and liquidations.

“All too often senior lenders take the approach of breaking up and selling businesses for whatever they can get, so long as it is enough to cover their debt, with no regard to the interests of unsecured creditors, shareholders and employees."

The big Bell Resources case was all about greedy banks grabbing assets and conducting a fire sale at the expense of other stakeholders, most notably the shareholders. Centro is shaping up as another example, except this time CBA was the biggest shareholder of all and is therefore heavily conflicted.

Brutal rug pulling should jeopardise $11.56 million Norris bonus

As Crikey's honest and ethical Andrew Crook reported on December 3, Ralph Norris is shooting for an $11.56 million bonus if CBA is rated number one for customer service by June 2010.

It's all very well improving service for existing retail customers, but Norris should also be showing a bit of sympathy for his biggest customers when they hit troubled times during the worst credit crisis since the great depression.

After the embarrassments of its ABC Learning fiasco (see this Mayne Report), maybe CBA is looking forward to NAB and ANZ being in the spotlight for huge unsecured exposures if you can believe this recent story by Business Spectator's well-connected banking writer Tony Boyd which included the following:

It is believed that ANZ's $650 million unsecured exposure to Centro has blown out to more than $1 billion because of movements in the dollar and losses from out-of-the-money hedge contracts.

NAB's $285 million exposure to Centro has blown out to about $450 million because of adverse exchange rate movements and out-of-the-money hedges.

It is not clear whether Westpac's $400 million exposure to Centro, which was inherited from St George, has been caught up in the currency disaster. The St George loan is believed to be $250 million secured and $150 million unsecured.

In contrast to the other banks, it is believed that Commonwealth Bank managed to keep its $150 million unsecured exposure to Centro steady by closing out its hedge contracts while they were still in-the-money. This happened in May when the Australian dollar was trading around US94 cents.

The day that Centro goes under will trigger exposure statements by all the major listed Australian banks. Could ANZ really be the first Australian bank to have an unsecured exposure exceeding $1 billion to a collapsed company? No wonder it wants to roll the dice again and keep managing the Centro shopping centre portfolio for cash that, so far at least, continues to perform.

What is harder to understand is CBA's belligerence.

* Disclosure: Stephen Mayne is expecting to be appointed to the Centro Retail board if the banks roll over the debt facilities after 71% of the independent shareholders voted in favour as you can see from this recent Mayne Report edition.

Looking back at Pacific Brands AGM

Branded goods giant Pacific Brands is in trouble with too much debt. Chairman Pat Handley resigned without a proper explanation last month, but it is worth listening back to some of these exchanges we had with Pat about the credit crisis and debt challenges at the AGM in October:

How have sales been in the last month?

Are we suffering any supplier pressure and is the shipping crisis affecting us?

How much pressure are we feeling on the retailing side?

How have we played the currency collapse?

Gunns dumped and playing the share purchase plan game with Sonic, Westpac and QBE

Having dropped more than $100,000 on the sharemarket over the past year, I'm bearishly bunkered down trying to reduce exposures when the market ticks higher.

The last of the $3000 plays was liquidated yesterday when 1500 shares in shameful tree-lopping giant Gunns Ltd were sold at $1.09 a pop after buying in at $1.95 back in August. That crystallised a loss of $1340 including brokerage, but at least it was better than when Gunns shares hit a low of 65c three weeks ago and they've already dropped back to $1.01.

This means the only four-figure exposure remaining in the world's biggest small share portfolio is News Corp, which, under US law, requires a shareholder to own more than $US2000 worth of shares continuously for 12 months if they want to put up a shareholder resolution at the AGM.

The only good news on the portfolio is that we're finally seeing some in-the-money share purchase plans (SPPs) come through.

Sonic Healthcare banked the $5000 cheque yesterday for the $11.60-a-share offer. With the stock currently trading above $13, let's hope this $700-plus profit holds until the shares are issued on December 19.

Insurance giant QBE were included in our SPP shame file last year for doing a $400 million private placement to institutions without following through with an SPP for us retail punters.

The board appears to have learnt the lesson because it recently raised $2 billion through a private placement at $20.50-a-share and the SPP offer arrived in the mail today. With QBE shares currently trading at $24.83, this will deliver a quick profit of about $1000 if the share price holds up through January when the stock is issued.

We'll need plenty more deals like these to claw back the losses of recent months.

That's all for now.

Do ya best, Stephen Mayne

* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.