Returns to Strategic Finance investors depend on four big loan exposures; Securities Commission review underway

Strategic Finance's about 10,000 secured debenture holders could face a wait of four years for the receivership of the failed property financier to be concluded and even then they may get back as little as 12% of their money.

Strategic receiver and PricewaterhouseCoopers partner John Fisk told interest.co.nz that realising the loan book wasn't an easy task given about 58% of the book is secured through second mortgages on property. The dire state of the property, especially property development, market, was also a problem.

Strategic has a number of loans, among the 87 in its book with a total net value of NZ$229.1 million as of February 28, on bare land development sites. Fisk said the market was "incredibly challenging." It was hard to find buyers in some cases and in others, if there were buyers, it was sometimes hard for them to get funding to do anything.

"If there is cashflow associated with a property then it’s a lot easier to sell than if it’s a piece of development land," Fisk said.

"You have to balance the return you can get for investors against the time value of money. So there’s a limit to how long with some of these situations you can go for, but in some situations where there’s just no market, it’s a case of holding it and waiting to see what can happen," Fisk added.

Fisk said that, based on experiences with other finance company receiverships, the Strategic receivership was likely to be "at least" a three to four year process.

Investors' have so far got back an initial distribution of just 2 cents in the dollar, or NZ$7.4 million in total, which was paid out in September. Fisk said it was hard to say when the next payment would be made, but it was unlikely before 2011.

Fisk's preliminary estimate of gross recoveries to secured debenture investors (who are the secured creditors) from the loan book before costs is between 12% and 35% (or NZ$44.1 million and NZ$128.7 million) of the NZ$367.8 million principal investments owed to them as of March 12 this year. That was when  trustee Perpetual Trust called in the receivers after Strategic failed to generate sufficient loan recoveries for a repayment to investors' that had been due in January, and failed to sway the trustee with suggested alternatives to receivership.

Unsecured creditors, including unsecured depositors' owed NZ$1.45 million and subordinated noteholders owed NZ$21.7 million, are unlikely to get back any money at all.  Included in the NZ$367.8 million owed to secured debenture investors is NZ$76.1 million owed to the Bank of Scotland.

High end of potential returns is 'optimistic', depends on four big loans

In the second receivers' report Fisk and colleague Colin McCloy acknowledge the high range estimate of potential returns reflects "some optimism" in the level of potential recoveries. In particular, they say, this is in respect of Strategic's four biggest loan exposures by net loan book value as of February 28.

"Given that our estimated 'high' range of recoveries from these four loans makes up 56% of the estimated 'high' range of the total loan book, any difficulties in respect of the recovery of these four loans will have a significant adverse impact on the overall level of recoveries."

Fisk would only name one of the four largest exposures, being Rakaia River Holdings, which owns land in Queenstown. Fisk and his colleague Malcolm Hollis were appointed receivers to Rakaia just last week. He said the other three weren't in formal insolvency processes so he didn't want to name them.

The three don't include Auckland's Soho Square or Hilton related projects at Fiji's Denaru. Fisk expects to get nothing back from Strategic's NZ$70 million second mortgage over Soho Square and "expectations aren’t particularly high" on the similar sized Fiji exposure.

The receivers have tried unsuccessfully to sell the loan book in its entirety but said offers fell short of even their low estimates of gross recoveries.

Securities Commission review underway

Meanwhile, Fisk confirmed the Securities Commission, which has stated that it's investigating all failed finance companies, was reviewing Strategic.

"But we’re not in constant contact with them in regards to that."

The receivers say they managed to squeeze gross realisations of about NZ$39.5 million out of the loan book between their March 12 appointment and September 12 but of these, Strategic ultimately got just NZ$4.9 million with the rest paid to prior ranking security holders and/or used to cover direct sale costs.

Strategic, whose CEO was Kerry Finnigan and which counted former All Blacks captain and ex-New Zealand Rugby Union chairman Jock Hobbs among its directors, made most of its loans on a capitalised interest basis, meaning interest accruing was added to the loan balance and received on repayment of the loan, rather than being paid to Strategic on a monthly or quarterly basis.

Of Strategic's 87 loans, about 25 of the borrowers are either in liquidation, receivership or the property owned by the borrower is in the process of, or has been, sold by the first mortgagee exercising its power of sale. The 25 include two Queenstown exposures at Walter Peak and Bob’s Cove.

Strategic froze repayments to investors' in August 2008 blaming tough conditions in the property market. Investors' then voted for a moratorium in December 2008 that aimed to repay them 100% of their principal investments plus interest through asset realisations over five years.