Default Alert: for the Krukziener empire

Friday 4th May 2001

DEBT DOUBTS: To claims he has not sold enough units in the $200 million Metropolis development, Andrew Krukziener says he has sold 350 'and that's damn good going in anyone's books'

Outrageous interest rates, wonky swap deals and quickie refinancing - Auckland developer Andrew Krukziener used all the tricks to keep his empire intact, CAMPBELL MCILROY reports

Metropolis' 38 floors were built from debt - and while the Manhattan-style marble skyscraper is still standing, the financial structure behind it is looking shaky.

The man behind the monument, image-conscious Mr Krukziener, as recently as last February was adamant he could pay back the $24 million junk bond issue which funded the development by its deadline of May 20.

Mr Krukziener, well-known for his immaculate three-piece suits and highbrow taste in architecture, breezily told The National Business Review he would be able to repay the bondholders before Christmas last year.

He was angry when his ability to pay was questioned.

But this week the trustee of the bond scheme sent out a letter to investors warning it was unlikely Mr Krukziener would be able to meet that date - they expect him to default.

Mr Krukziener said yesterday he was working with his financial advisers to put together a refinancing package before the May 20 deadline.

"I'm working my hardest to come up with a solution. I've made it a success in the physical sense but sadly the profit level I had hoped for is not there," he said.

Mr Krukziener would not commit himself to when the package would be finalised but sources close to the deal said it would probably be within the next two weeks.

The junk bonds are not the only financial commitment Mr Krukziener has struggled to satisfy - although you would not guess it from his positive PR spin.

In February he announced he had sold Auckland's historic Customhouse building to interests associated with Eric Watson, presenting the deal as a coup.

In fact the sale was to Mr Watson's finance company Elders Finance, which held the second mortgage over the property, and all the proceeds, which market sources put at just under $20 million, went straight back to the financiers.

Government valuations for the Custom St property estimate it is worth $30 million.

Elders executive director Mark Dotchin said the original loan had expired and Elders had agreed to roll it over.

"Obviously we had concerns about the loan. We were keen to see it resolved but technically the loan was not in default," he said.

Mr Dotchin said the proceeds from the sale were used to repay the debt owed to Elders Finance; "I believe the balance went to his bankers."

Mr Krukziener said the Customhouse owed him $13 million and he sold it for $18 million.

"I geared it up to develop some other assets. It worked for me and them because of other loans I had with them and Elders are still happy doing business with me," he said.

Meanwhile, the property industry was this week questioning the level of Mr Krukziener's debt.

One developer said Mr Krukziener simply had not sold enough units in the $200 million Metropolis development and the rest of his investments had been leveraged to fund its development. "All his equity is tied up in the building and until he extracts it he is tied down."

Mr Krukziener said that was absolute nonsense. "I've sold 350 units in the Metropolis and that's damn good going in anyone's books."

The Metropolis' promotional website shows only 21 units still for sale at a total price of $13.2 million - although one of those "apartments" is a entire floor worth $6 million.

ANZ has a first mortgage of $18.3 million and the bond holders are owed $24 million - a total of $42.3 million.

Mr Krukziener said a considerable amount of the ANZ loan had been repaid but would not provide a solid figure.

Last year (NBR, Aug 11) Mr Krukziener confirmed there was a $17 million shortfall even if all the units were sold.

Mr Krukziener said he now intended to sell some of the retail and commercial spaces in Metropolis to settle the debts.

Mr Krukziener has also accepted a number of property trades for Metropolis apartments. Commentators said if the property received in the trade was unable to be sold it would result in obvious cashflow problems.

But Mr Krukziener said he had bought most of the trade properties himself at full price and the proceeds went straight to Metropolis debtors.

One of the swaps was to sell level 35 to former Force Corporation chairman Peter Francis in return for his home on St Heliers Bay Rd.

It appeared to be a bargain for Mr Francis but overpriced for Mr Krukziener - the $2.3 million home was "sold" for $4.2 million according to Valuation New Zealand records.

Mr Krukziener said the trade for Mr Francis' house was only part of the consideration for the sale of level 35 but it was not really public information.

He said it achieved its full value, of not less than $6 million, through the contract that was entered into.

"There were a number of components to the contract, not just the house," he said.

Other developers said Mr Krukziener had a tendency to overestimate the end value of developments which led him to pay too much at the start of project.

Sources close to the No 1 Queen Street deal said Mr Krukziener paid substantially more than any other bidder was offering.

Mr Krukziener confirmed he paid over $44 million for No 1 Queen St and that AMP's valuations at the time were in the neighbourhood of $28 million.

"I had information that was contrary to that AMP valuation which didn't recognise the full potential value of the development. We bought it for $44 million, spent $15 million refurbishing and now it's worth between $80 million and $85 million. To say we paid too much for it is just garbage."

Mr Krukziener said No 1 Queen Street had absolutely no impact on him or the Metropolis from a finance perspective and he always had a minority shareholding in the property of not more than 15%.

Mr Krukziener has since sold his interest in No 1 Queen Street to the Asian investors he originally bought the property with.

Financial experts said the main problem with the Metropolis development was the cost of the debt.

"He's had to refinance the thing several times and the costs associated with that would be in excess of $10 million," one expert said.

Another said his exit strategy, selling down the apartments, evaporated during 2000 in an abysmal market and so the costs kept mounting.

But Mr Krukziener said people said all sorts of things when they didn't have a clue of what they were talking about.

"I'm the one sitting behind the desk with the figures in front of me. I've done 90-odd projects and Metropolis is the most visible. But my track record in developing projects on time and on budget is long and strong. Metropolis was finished on time and under budget but the reality is 2000 was a rotten year and it's the timing of sales that is an issue, not the value."

The junk bond prospectus illustrates just how much the debt was costing.

The subordinated debt facility was provided at an interest rate of 25%, turning the $14.6 million borrowed into $23 million when it was due to be repaid just over two years later - expensive money.

One developer said the key to a successful property development was getting out with your margin intact and all your debts satisfied on time and at minimal cost.

"Andrew simply failed to do that," he said.

Experts predict Mr Krukziener will arrange to pay off some of the $24 million owed on the bond issue, anywhere from $8-16 million, in return for having the balance rolled over at a lower interest rate.

All agreed there were sufficient residual assets to cover the bondholders - it was just a matter of when.

Asked how certain bondholders could be that he would repay them, Mr Krukziener said very certain.

THE KRUKZIENER PORTFOLIO

A search of Quotable Value NZ records shows Andrew Krukziener owns 33 properties in his own name, with other investors or through companies linked to him. His portfolio totals more than $20 million, including in Auckland:

Union House	$13 million^*
26 Mercury Lane	$1.05 million^*
54-60 Ponsonby Rd	$1.7 million^*
15 Peacock St	$1.3 million^*
1 Cross St	$1.4 million^*
25 Dundonald St	$2.2 million^*

* = 1999 government valuation

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