Full recovery from Capital+Merchant not possible

Thursday 31st January 2008

Receivers Richard Simpson and Tim Downes of Grant Thornton say that their initial estimate of the business of Capital + Merchant Finance Limited is that secured debenture holders may recover up to 59% of their investment over time.

In their first report on the state of affairs of Capital + Merchant Finance, the receivers comment: "Realisations from the assets depend on certain events occurring. The outcomes from various events could materially affect the amount Capital + Merchant Finance receives.

"It is clear from our work, however, that there will not be a full recovery to secured debenture holders."

Simpson and Downes were appointed receivers by the first ranking secured creditor, Fortress Credit Corporation (Australia) II Pty Limited. They were also appointed receivers of Capital + Merchant Investments Limited, a related party. The report says that they have been mindful of the need to ensure that all their actions during the receivership are in the best interests of all the company's stakeholders, including the debenture holders.

Backgrounding the receivership, the Grant Thornton report said that due to the failure of various finance companies, new investments and re-investments were adversely impacted, with re-investments falling to 10-20% compared with 50% a year previously. A number of the properties for which Capital + Merchant Finance held securities had been subject to unsuccessful attempts at sale and had diminishing prospects of realisation at the required values on the open market, forcing short to medium term cash problems.

The report notes that following the firm's appointment, the receivers were refused entry to the premises and Capital + Merchant Finance directors sought an injunction to restrain the receivers from taking further steps until a court order was obtained. This occurred on 29 November 2007.

"In his judgement, the judge (Justice Harrison) commented that on a realistic assessment of its financial position, Capital + Merchant Finance should not have been receiving any public money in recent months," said the receivers' report.

The receivers said the company's major asset was its loans and advances, totalling $182.597 million.

The majority of loans were for property development projects in various stages of completion. Interest was accruing and capitalising on most of the loan balances.

"The combined Capital + Merchant Finance and Capital + Merchant Investments loan portfolios have a total concentration of 35% ($90 million) relating to interests of two borrowers, being 19% ($48.4 million) for one borrower and 16% ($41.2 million) for the other borrower."

Grant Thornton's report said that each loan was being individually analysed to determine the appropriate strategy for maximising realisations. But, due to commercial and confidentiality reasons, the receivers were unable to provide specific details in respect of individual loans.

An insurance policy was in place for unrecovered principle in the case of 42 of the company's 55 loans. However, it had not yet been confirmed whether or not there was effective cover in place and specialist advice in this area was being taken.

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