Somers-Edgar exerts control in three-way Metropolis scrap

Friday 22nd June 2001

MONEY MANAGERS: Doug Somers-Edgar may control enough proxies to influence any bailout

BAILOUT REJECTED: Tower Trust turned down Metropolis developer Andrew Krukziener's plan

By Chris Hutching

Trustee Tower Trust's influence has been sidelined in a three-way tussle for control over the latest rescue plan for bondholders in Auckland's Metropolis luxury apartments.

A key issue is the level of fees that will be paid to whichever party administers the bailout and this was one of the reasons that Tower Trust general manager Glenn Clark gave yesterday to reject Metropolis developer Andrew Krukziener's claims that Tower supports his latest bailout offer.

Mr Krukziener's latest proposal requires Companies Office approval of a prospectus and holds out the prospect that bondholders - owed $21 million - will receive back their capital after three years but any interest payments will depend on surpluses achieved on the sale of the remaining 44 apartments.

The three-year lag represents lost money for bondholders who might have earned interest in some other investment.

The level of fixed fees and the percentage payment that Mr Krukziener is seeking have yet to be revealed.

Third player, Money Managers director Doug Somers-Edgar, whose clients have invested in the scheme, possibly controls enough bondholder proxies to influence any proposed bailout.

He wants to ensure an outcome that achieves the highest possible prices for apartment sales but there are arguments behind the scenes about what valuations are realistic in the current depressed apartment market.

Tower Trust has been encouraging Mr Krukziener to take other independent advice apart from Mr Somers-Edgar's.

Tower's main fallback is its ability to place a receiver over the associated Metropolis company to which bondholders have loaned their money but the benefit of such a move is questionable.

And ANZ Banking Group, owed $15.6 million, has first call on any funds.

The other bond that is troubling for Tower and Money Managers is the Christchurch Park Tce property bonds issue where 43 apartments have been sold out of 102 and sale proceeds have been used to reduce BNZ's first mortgage to $7.6 million while bondholders await their turn.

The default on Park Tce occurred because 33 would-be buyers of apartments have failed to settle, prompting recent successful court judgments against eight buyers affecting 15 apartments.

Any money recovered from these actions will go to BNZ.

A court hearing has been set down for February 15, 2002 for a hearing of several defended claims.

Directors of the development company who have promised to underwrite $2 million of sales have come up with $1.6 million so far and there is no fixed time when they have to complete their obligations.

Either way the bondholders of Park Tce will be waiting a long time for their money back.

One of the problems besetting the property bonds highlights the fundamental weakness in the competitive trustee regime in New Zealand which is under review by the Securities Commission.

Trustees powers are limited to administering the wording of any trust deed and they do not hold fiduciary liability for the viability of the investment.

When they are approached by an issuer of bonds they sometimes negotiate better protections for investors but because they are competing with other trustees for the work they come into the picture from a position of weakness and this is clearly the case with the Metropolis bonds which have tenuous security, if any, over assets.

A Securities Commission review is exploring these issues as well as questioning the raison d'etre of trustees. The commission believes closer monitoring of trustees is appropriate.

Trustee Corporation Association chief executive Stephen Eaton espouses his members' views that it is better to have a trustee involved on behalf of investors but says they are not financial advisers.

"If one of the statutory trustees turned down the work then it would probably go to an entity that might not have the financial strength to act on behalf of investors. The real problem is the advisory industry. Even though warnings about high risk might be printed in investment documents the financial advisers know that many people don't read them closely and they must point out verbally the risk that a 14% return implies," Mr Eaton said.

Money Managers said it points out these issues to would-be investors and that the vast majority of such bond issues were successful.

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