Crumbs for Strategic Finance secured debenture holders as investigation into collapse stretches towards 4th year

By Gareth Vaughan

Investors in Strategic Finance are in line for a payout of up to 5 cents in the dollar next month, on top of the 2c they've got so far, as a regulator's investigation into the failed property lender approaches its three year mark.

The probe into Strategic's demise, which has left about 10,000 secured debentureholders facing returns of as little as 12% on the NZ$367.8 million worth of principal investment owed to them, is now in the hands of the Financial Markets Authority (FMA), which replaced the Securities Commission in May. Strategic has also been the subject of "a number" of complaints to the Serious Fraud Office (SFO).

Strategic receivers John Fisk and Colin McCloy of PricewaterhouseCoopers say they now have sufficient money on hand for a second distribution of 2c in the dollar following the initial 2c (or NZ$7.4 million) distribution last September, to secured debenture holders. However, if a possible sale of a property securing a loan to Strategic under a first ranking security agreement goes ahead, the distribution could increase to as much as 5c in the dollar.

"We expect to know the outcome of the sale of the property by 28 July 2011 and accordingly, we intend to delay confirming the exact timing and amount of the second distribution until the end of July 2011," Fisk said. "The timing of the distribution will be in early August 2011."

Return of 12% to 26% predicted

Nonetheless, Fisk and McCloy say Strategic's secured debenture holders  - including the Bank of Scotland which is owed NZ$76 million - could get back as little as 12%, or NZ$44.1 million of the NZ$367.8 million principal investment owed to them when trustee Perpetual Trust pulled the plug on March 12 last year. At best, the receivers estimate they'll get 26%, or about NZ$95.6 million. See the latest receiver's report here.

Among the projects Strategic provided financing for were Ponsonby's Soho Square development, the Sentinel Tower project in Takapuna and the Fiji Hilton. Strategic's CEO was Kerry Finnigan and former All Blacks captain and ex-New Zealand Rugby Union chairman Jock Hobbs was a director.

Securities Commission investigation began in August 2008; Liquidator & receiver also probing; SFO siting on sideline

As part of its series of investigations into all failed finance companies, the Securities Commission began probing Strategic in August 2008. That's when the company, blaming tough conditions in the property market, froze repayments to investors who subsequently approved a moratorium in December 2008 that aimed to repay them 100% of their principal investments plus interest through asset realisations over five years.

An FMA spokeswoman told interest.co.nz that although the investigation into Strategic's failure was continuing, she couldn't say when it might be concluded. Corporate Finance, the company's liquidator which was appointed last July, is itself investigating several of Strategic's transactions from a period dating back as far as two year's before the liquidator's appointment and says it hopes to conclude this probe within about three months. A spokeswoman for Corporate Finance said there was a "vast quantity" of documentation to review and the investigation was taking longer than initially expected.

And receiver PricewaterhouseCoopers, which has assisted the Securities Commission with its investigation, says it has probed "several" Strategic transactions dating from December 2007 to August 2008 and referred the findings to its lawyers with no decision yet made on what, if any, action is taken.

Meanwhile, a SFO spokeswoman said "a number" of complaints about Strategic had been received. They had either been assessed as failing to disclose any grounds for further investigation, or as being "more appropriately progressed" by other agencies.

"This has included the referral of some issues by the SFO to the FMA," the SFO spokeswoman said. "The SFO is continuing to work closely with the FMA in relation to those issues, and, if the ongoing FMA investigation discloses evidence relevant to the SFO, it will be assessed for formal investigation."

Finnigan told interest.co.nz last year that he didn't expect to face any charges stemming from Strategic's demise. “We don’t think we’ve done anything wrong,” Finnigan said.

“We think we tried to deliver a good outcome for investors in a very trying and difficult time,” Finnigan added. “Unfortunately we weren’t successful."

Nothing for unsecured creditors 

Strategic's 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.

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 last year, and failed to sway the trustee with suggested alternatives to receivership.

Like many of its fellow failed property financiers such as Bridgecorp and Hanover Finance, Strategic made many 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. The Reserve Bank and Ministry of Economic Development recently said they want companies to start disclosing detail on the loans they write which capitalise interest. See more here.

Lots of second ranking mortgages

Strategic's major asset was its property loan book, which consisted of 87 loans with a total net book value of NZ$229.1 million at the time of the receiver's appointment. About NZ$96.8 million, or 42%, of this was secured through a mortgage with a first ranking priority over the property. And about NZ$131.4 million, or 58%, was secured through a second ranking mortgage with prior ranking debts positioned ahead of Strategic's claims in the creditors' queue worth NZ$544.4 million. Many of Strategic's mortgages were over development land.

There were also some loans secured by third ranking mortgages, although most of these were provisioned for. Of the 87 loans, PricewaterhouseCoopers said in its first receiver's report that about 25 of the borrowers were either in liquidation or receivership or the property owned by the borrower was being, or had been, sold by the mortgagee exercising its power of sale.

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