By Gareth Vaughan
Safe as houses. It would appear that some banks have been acting under the misguided view that their loans to big corporates, many of them state owned, are just that.
But, leaving aside debate on just how safe housing loans really are and the potential for a drop in house prices, at least when banks write a residential mortgage they have the house as security should things turn to custard.
In contrast recent events, think Solid Energy and Chorus, have highlighted that bank loans to big corporates often aren't secured at all.
With my taxpayer's hat on I'm glad banks don't have security over Solid Energy assets ahead of the taxpayer. But I'm disappointed that in 2013, with the international events of 2008-09 still front of mind, at least one bank seems to believe there was an implied taxpayer guarantee in lending to a State Owned Enterprise.
I'm talking about Bank of Tokyo Mitsubishi.
This is the bank that's going to court later this month to try and prevent a rescue deal, that has been agreed to - potentially reluctantly - by ANZ, BNZ, ASB's parent Commonwealth Bank of Australia (CBA), Westpac and TSB Bank for the beleaguered Solid Energy. The deal will effectively see Bank of Tokyo-Mitsubishi take a $16.3 million haircut on its $80 million loan to the SOE, but will buy Solid Energy time, and who knows, may ultimately save the rest of the Japanese bank's exposure.
Now I'm not a lawyer. But having seen the basic reasoning behind Bank of Tokyo-Mitsubishi's case - which I reported on here - I tend to think the Crown Law advice Finance Minister Bill English disclosed, when he said Bank of Tokyo-Mitsubishi has "only a small chance of succeeding", appears sound.
Bank of Tokyo-Mitsubishi is also one of four banks with around $1 billion, combined, of unsecured loans to Chorus. The others are CBA, HSBC and Westpac Banking Group. Despite last week's Commerce Commission related default warning from Chorus, lenders to this corporate would appear to be on safer ground than those who lent to Solid Energy.
Given the political capital, and taxpayers' money, the Government has sunk into the broadband rollout, it's nigh on impossible to see the Government letting Chorus fall over - if things were to ever get to that point.
But rule 101 of lending money should be that it comes with risk. No matter how small this risk is. It would appear that at least one bank operating in the New Zealand corporate market doesn't accept this, believing should things turn to custard the Government of the day will simply throw taxpayers' money in its (the lender's) direction.
In 2013 that scenario just won't wash.
Why should taxpayers cough up so banks, seemingly lending in a carefree manner, can walk away with their loans intact when the proverbial hits the fan?
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31 Comments
Absolutely 100% correct . Banks are just like any business that carry the risk of debtors not paying or defaulting on their oligations.
Lending is their core business , and assessments of lileky default are doing prior to lending .
This risk assessment is fundamental to Banking , and the clear understanding should be that when a debt is doubtful it should be provided for as an impairment
This is not Ireland where the State was tricked into paying the lenders of funds to Anglo Irish and numerous property developers .
WRT Chorus , do they own the fibre that has been installed or just the old copper wire based infrastructure that was previuosly a Telecom asset?
What was the interest rate on these loans?
Were they brokered with an implied guarantee so as to reduce the interest rate payable, or was the interest rate payble higher to reflect the stand alone nature of the borrower as opposed to an entity with a parent that would bail it out.
As a tradee to an SOE would you price in risk or assume it was government guaranteed?
Was the facility brokered and who implied what?
We live in a complicated world where a lot is implied but very little of it ends up in the contract.
GV: We are not sure about the summary view.
Just because a loan has no registered security attached does not mean the loan was never made, nor obligations exist.
A cleaver lawyer can find many chestnuts in tipping a company over, and as most know once tipped up, all rules change with almost all power in the hands of the then appointed administrator/prov liq.
You could also find that this sort of activity needs be played out so that ones with a grievance with another party can properly get set v that other (often deep pocketted soul) party...
Could we suggest more digging, especially around transaction documents and operation of banking syndicate & others that set the deal....
Henry...funny .I have just been looking at that and some documents are missing or unavailable at present.
http://www.comu.govt.nz/portfolio-entities/sector/energy-utilities/soli…
Is this not the crux of the matter?
The deal sees the banks, including the Bank of Tokyo-Mitsubishi, being issued with redeemable preference shares in exchange for the retirement of some of their debt. The Bank of Tokyo-Mitsubishi effectively faces a $16.3 million haircut on its $80 million loan.
"Part 14 of the Act is not intended to apply to a complex restructuring of the nature proposed, involving: a debt for equity swap, (and) the change of a creditor's status from that of a creditor to that of a shareholder," the bank's statement of claim says.
Allied Farmers' shareholders must rue the day they accepted a debt for equity swap with Hanover Finance. The shares floated at 20 cents and immediately fell to around 5 cents.
Relinquishing the claims of a creditor/lender in return for equity is a fool's game.
Bank of Tokyo-Mitsubishi's legal challenge of Solid Energy's debt matters has taken an interesting turn:
Chief Justice Helen Winkelmann said English was clearly aware of the Bank of Tokyo's position: "They're concerned that the Bank of Tokyo can challenge a planned solution."
Despite these talks a creditors' meeting held on September 21 voted - against the Bank of Tokyo's wishes - to impose the haircut and creditors' compromise, Dunning said.
Dunning challenged the validity of the compromise.
Such a deal required 75 per cent of votes in favour, and Dunning said this was only achieved by allowing $95m of bonds held by TSB Bank to cast ballots.
TSB's bonds did not suffer a haircut and if the TSB had not been allowed to vote, the Bank of Tokyo would have owned more than 25 per cent of Solid Energy's bank debt and would have been able to veto the deal.
Justice Winkelmann summed up Dunning's argument: "You're saying it was unfair because of gerrymandering." Read more
Well, if the Japanese bank "wins" that in effect says the NZ Govn in effect, us is bankrupt. As surely we'd be forced aka Ireland to take on this as debt (and more of it) than Ireland.
What "fancy" words would you like me to use instead?
"financially inconveniences a bit" ?
I cant think of a more extreme example of "moral hazard"
What would that mean for the PPP agreements that our delightful Nat Govn would like to enter into on our behalf? Banks etc lend at 7%+ for no risk?
regards
Now Im trying to be polite here, if you want to head back to the gutter as NotE complains about despite living in a glass house, OK.
I was looking at the bigger picture. If the japanese bank wins that makes case law I believe, in which case loans to SOE's etc are potentially all covered "free of charge".
regards
Even if the taxpayer was on the hook for the whole 1 billion the claim that that effectively bankrupts us is ludicrous. Paid off over 2 years it is $2.18 per week per person. Might stretch your finances. The rest of us will be fine. For someone who constantly touts his mathematical prowess you don't seem to be too handy with a calculator.
I didnt say that, it seems you cannot read or comprehend anything past about $10, maybe take off your socks?
I said that if the Japanese bank wins it sets case law which could mean that other loans to SOEs or where the Govn had an interest could be seen as us the tax payer being the back stop.
regards
Quite right, it's a complete moral failure. We find ourselves wading through the consequences of moral hazzard, of our own creation, that has destroyed the market mechanism for pricing risk.
For us down under a great part of the challenge is the hazzard pervades the entire western world finance system we are a part of so there is little profit in being the only ones to hold the finance industry culpable.
Hear, hear. Tory politicians do it for their banking sector mates. Socialist politicians do it because they want to be seen scoring points against "capitalism" because they have had to "rescue" it, and because they are too stupid to actually understand real world economics or causes and consequences.
So we have let a free market reign for 30years..
Notwithstanding the limited meaning of 'free' in this context, I would argue we have spent 30 years interferring in and regulating to death vast amounts of marketplace and poor regulation is just as culpable as the marketplace itself.
Yes, my admitted limited understanding is, against the ratepayers (property).
So if a council defaults then the ratepayer has to make amends, even if they in turn go bankrupt in the process.
Happy to be corrected (I hope) if thats an in-correct view as it seems un-realistic.
regards
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