Behind the Allco scuttling
Allco's directors were happy to work closely with its lenders to salvage value from the operation, but once it became clear that they were no longer working for its shareholders the risk became too much to bear.
The appointment of voluntary receivers to Allco Finance Group is being interpreted as a change of stance by lenders in dealing with distressed corporates. In fact, it looks more like it was the directors of the struggling group who gave up the fight to keep it alive. That's a new and potentially significant development in the evolving nature of the fallout from the credit crisis.
Ever since the credit crisis emerged Allco has been kept afloat purely because its lenders adopted a very pragmatic and supportive stance, realising that they were likely to lose more money by putting Allco under than by keeping it alive.
Allco's complexity, and the sensitivity of its value to continuing deal flows and therefore its reliance on its key executives and their contacts in the aviation, shipping and rail leasing markets they had built up over decades, provided it with some protection from precipitous action by its lenders and some hope that value could be salvaged for shareholders.
The banks' confidence in the group was also buttressed by the fact that its chief executive, David Clarke, was quite new. He wasn't responsible for the decisions that brought Allco to the brink. He and his team were delivering on their commitment to reducing debt while maintaining the core businesses. Clarke had reduced borrowings by more than $500 million.
Throughout this year, however, Allco's fate was very finely balanced. It had committed to reducing its senior debt facility from $700 million to $400 million by June next year through further asset sales. Until Lehman Brothers collapsed it was confident of doing so. The disruptions in credit and asset markets after Lehman's collapse, however, made it improbable that Allco could get those asset sales away at prices that helped its position.
In September, in an interview with Business Spectator (KGB Interrogation: David Clarke, September 5) Clarke made it clear the Allco directors were extremely conscious of the personal risks they were taking by continuing to trade and that the critical issues for the directors were that the asset sales in the pipeline continued to be executed and that the group retained the support of the lenders. If the risks increased beyond what the directors felt was acceptable, "then we won't run that risk anymore," he said.
That issue of personal risk came into sharp focus at the weekend. Because Allco has been in the hands of its banks all year its cash was consistently swept from its accounts by the lenders. When it needed cash for its day-to-day operations, the directors would draw down on the facilities. To do that they needed to sign a certificate attesting to their ability to repay.
The dilemma for the directors in the post-Lehman environment was that if asset sales were more difficult or only doable at absolutely distressed values, and there was little if any ability to raise new third-party money for transactions that would grow its funds under management and enable it to pursue its new business model, by remaining in place they were effectively working purely for the banks – there wouldn't be any equity left in the group once the asset sales were concluded.
The banking group remained supportive but some were more supportive than others. Allco had asked whether the banks were prepared to agree to a new debt amortisation schedule that would buy more time. The request wasn't rejected but neither was there a formal deal on the table from the entire lending group when the directors met at the weekend and considered whether they should draw on the facilities and put their signatures to a new certificate.
If the directors came to the conclusion that they were de facto liquidators, working purely to reduce the exposures of the senior lenders, then it would have been pointless to continue to expose themselves to the liabilities associated with continuing to trade.
Allco may have been solvent with the banks' support but they would have been very conscious that they were trading within an insolvency context, putting their own assets at risk without any reasonable prospect that their efforts would benefit shareholders or subordinated creditors.
Under the circumstances, the directors' decision to call in the administrators was rational. It would also be disquieting for the banks.
There are a number of large and complex groups that have been kept alive only through the forbearance of banks that know from their experiences in the 1990s that they have a better chance of salvaging loans by providing life support and retaining key management than by sending in a liquidator.
If other boards and senior managements of troubled organisations reached the same conclusion as the Allco board – that there was no prospect of salvaging value for shareholders and therefore they were exposing themselves to personal liability for no good reason – there could be a spate of corporate failures, a surge in bank loan losses and a lot of distressed assets over-hanging already extremely fragile markets.
Ever since the credit crisis emerged Allco has been kept afloat purely because its lenders adopted a very pragmatic and supportive stance, realising that they were likely to lose more money by putting Allco under than by keeping it alive.
Allco's complexity, and the sensitivity of its value to continuing deal flows and therefore its reliance on its key executives and their contacts in the aviation, shipping and rail leasing markets they had built up over decades, provided it with some protection from precipitous action by its lenders and some hope that value could be salvaged for shareholders.
The banks' confidence in the group was also buttressed by the fact that its chief executive, David Clarke, was quite new. He wasn't responsible for the decisions that brought Allco to the brink. He and his team were delivering on their commitment to reducing debt while maintaining the core businesses. Clarke had reduced borrowings by more than $500 million.
Throughout this year, however, Allco's fate was very finely balanced. It had committed to reducing its senior debt facility from $700 million to $400 million by June next year through further asset sales. Until Lehman Brothers collapsed it was confident of doing so. The disruptions in credit and asset markets after Lehman's collapse, however, made it improbable that Allco could get those asset sales away at prices that helped its position.
In September, in an interview with Business Spectator (KGB Interrogation: David Clarke, September 5) Clarke made it clear the Allco directors were extremely conscious of the personal risks they were taking by continuing to trade and that the critical issues for the directors were that the asset sales in the pipeline continued to be executed and that the group retained the support of the lenders. If the risks increased beyond what the directors felt was acceptable, "then we won't run that risk anymore," he said.
That issue of personal risk came into sharp focus at the weekend. Because Allco has been in the hands of its banks all year its cash was consistently swept from its accounts by the lenders. When it needed cash for its day-to-day operations, the directors would draw down on the facilities. To do that they needed to sign a certificate attesting to their ability to repay.
The dilemma for the directors in the post-Lehman environment was that if asset sales were more difficult or only doable at absolutely distressed values, and there was little if any ability to raise new third-party money for transactions that would grow its funds under management and enable it to pursue its new business model, by remaining in place they were effectively working purely for the banks – there wouldn't be any equity left in the group once the asset sales were concluded.
The banking group remained supportive but some were more supportive than others. Allco had asked whether the banks were prepared to agree to a new debt amortisation schedule that would buy more time. The request wasn't rejected but neither was there a formal deal on the table from the entire lending group when the directors met at the weekend and considered whether they should draw on the facilities and put their signatures to a new certificate.
If the directors came to the conclusion that they were de facto liquidators, working purely to reduce the exposures of the senior lenders, then it would have been pointless to continue to expose themselves to the liabilities associated with continuing to trade.
Allco may have been solvent with the banks' support but they would have been very conscious that they were trading within an insolvency context, putting their own assets at risk without any reasonable prospect that their efforts would benefit shareholders or subordinated creditors.
Under the circumstances, the directors' decision to call in the administrators was rational. It would also be disquieting for the banks.
There are a number of large and complex groups that have been kept alive only through the forbearance of banks that know from their experiences in the 1990s that they have a better chance of salvaging loans by providing life support and retaining key management than by sending in a liquidator.
If other boards and senior managements of troubled organisations reached the same conclusion as the Allco board – that there was no prospect of salvaging value for shareholders and therefore they were exposing themselves to personal liability for no good reason – there could be a spate of corporate failures, a surge in bank loan losses and a lot of distressed assets over-hanging already extremely fragile markets.
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