Back to the future

Allco Finance Group was mid-way through a transition from its roots as a privately-owned cross-border leasing business to the Macquarie Bank model of specialist funds management and investment banking when the sub-prime credit crisis overwhelmed it. With the forbearance of the banks, it is now trying to track back towards what it once was.

The problem for Allco was that when the sub-prime tsunami hit, it was over-extended and over-leveraged.

It had agreed, in partnership with Industry Funds Services, to buy a portfolio of 29 power stations in the US from Con Edison for $US1.5 billion. Its share of the funding was $US287.3 million of equity and $US440 million of debt.

It had also just acquired, controversially, the debt-laden Rubicon property group for $300 million last year. That deal, given that most of the equity in Rubicon Asset Management was held by Allco directors, triggered a market backlash and undermined confidence, even as the impact of the sub-prime crisis escalated and destabilised equity markets.

Its financial services businesses, with a focus on origination and securitisation of financial assets, including mortgages, was effectively shut down by the global withdrawal of funding for asset-backed securities.

So, Allco entered the crisis period highly exposed, pursuing a rapid growth strategy with an immature business model predicated on continuing flows of investor funds to maintain its business momentum. Those funds dried up overnight.

As David Coe explained today, the rapid and unexpected changes in equity and debt market conditions had a severe impact on the operations, financial position and outlook for Allco, just as it was approaching deadlines for repayment of refinancing of maturing debt facilities and meeting major commitments, like the Con Edison deal.

"We did not anticipate all these things occurring simultaneously," Coe said. Allco was immediately enveloped in a liquidity crisis with its escape routes cut off by the extent of the loss of investor confidence in the opaque and complex – and over-leveraged – group.

The dramatic fall in Allco's share price, exacerbated by margin calls on Coe and his fellow principals through the funding vehicle for their holdings, the Allco Principals Trust, provided a trigger for Allco's banks to intervene. While Coe says there had been no breach of covenants and Allco had met interest payments, the implosion in its market capitalisation left it at the mercy of its lenders.

The group has recourse debt of about $1.2 billion, with a $250 million bridging loan due on May 1 and "a potential requirement" that another $900 million if senior debt could be called within 90 days. Not surprisingly, Allco has had ''constructive discussions'' with its banks.

The game plan is simple. Allco has extricated itself from the Con Edison deal and its funding obligations by selling its interests to Industry Funds Management, losing $72.1 million in the process. It will now focus on selling ''non-core'' assets and exiting from capital-intensive infrastructure businesses and its financial assets businesses. It is in ''active'' discussion with potential buyers of the non-core assets.

It will retreat to its old core of financing aviation, shipping, rail and real estate, which produced reasonably solid results for the December half. It has kept open the option of looking for new capital. In the meantime it won't be paying dividends.

The banks have been pragmatic, as they have been at Centro. Formal administration in the current credit-constrained environment would produce a wipe-out for investors and creditors alike. A bank-imposed fire-sale would probably produce the same result. Like Centro, Allco needs time to conduct an orderly sale of its non-core assets and to organise an orderly wind-down of its financial assets businesses. Allco says it anticipates reducing debt to acceptable levels by June next year.

Allco's directors obviously believe that there is a path to stability and, with some tolerance from the banks, that they can meet their obligations because they have signed the group's statutory accounts.