BrisConnections' escape route

PORTFOLIO POINT: The billion dollar flop has left many investors fearing for the future. But there is a way out.
I wouldn't swap places with James McMurdoch. You may not have heard of McMurdoch, but he's the man at Goldman Sachs JB Were who has been given the unenviable task of sorting out the debacle of BrisConnections, the worst float of 2008. It's not exaggerating to say the future of retail investing in stockmarket listed infrastructure funds is in his hands.

BrisConnections is not suspended, but there is nobody trading in the stock because the stock has slumped from $1 on listing in August to a tenth of a cent today. Worse still, BrisConnections was an “instalment-based” listing with a $1 instalment due next April, and another $1 in April 2010.

And that's just the start of it. Hundreds of investors – including some Eureka Report subscribers – are trapped in the stock. Those who bought huge amounts of stock, often for meagre amounts of cash, are now facing enormous instalment bills.

Eureka Report subscriber Stephen Lando, a Townsville sugar cane farmer, is typical. He invested in 300,000 units at 3¢ each. His upfront costs were $12,000. Now Lando is facing a bill for $600,000 because each of his untradeable 300,000 units carries a liability for another $2. "I simply don't know what to do,” he says, “but I will not be able to pay $600,000, that's for sure.”

Investors, especially investors and traders who moved into the stock in recent weeks before it froze at a tenth of a cent are now being told by BrisConnections that they could face debt collectors at their door if they do not pay up.

The media has been peppered with BrisConnections “hard luck” stories in recent weeks, some much more heart-rending than Lando’s. But most of those stories were about day traders who rushed into BrisConnections without realising it was an instalment plan share.

Lando may be more typical of Eureka Report readers in that he knew and understood the instalment nature of the float; he had previously participated in Macquarie Airports back in 2002.

“I knew BrisConnections was an instalment plan, that's not the issue for me. I just did not know that a billion dollar float could flop so badly. I did not think that the market in the stock would disappear, that you simply would not be able to trade the stock. I hear about these plans for debt collectors, but I can't see a way out.”

But of course there is a way out for BrisConnections and its unlucky investors, and it certainly should not include debt collectors.

After all if these guys could be so “innovative” as to create a structure that pushed the boundaries of geared infrastructure funds to the limit (and, notoriously, shift the ultimate responsibility for project debts on to individual investors), they can figure out a solution.

I asked BrisConnections chairman Trevor Rowe whether there is any prospect of improved terms or a change of heart within the BrisConnections team. Rowe says the PDS fully disclosed the terms of the deal. He also says his company must legally make its “best endeavours” to get the money from investors who don’t pay up, and that includes the use of debt collectors.

But is using debt collectors feasible? Tony Aveling, the chief executive of Collection House, the biggest debt collection agency in Australia, says: “I don't think it is. I just don't think you'd get to collect a lot of money in any exercise to do with BrisConnections."

I think when you see the chief executive of a debt collection agency publicly shooting down the notion of chasing small shareholders and day traders for instalment dues, not to mention his willingness to turn down potential new business before it even comes to his door, it's safe to say the debt collector route is pie in the sky.

So what's going to happen? Well, something has got to crack. The BrisConnections float was underwritten mostly by Deutsche Bank and Macquarie Bank. There is speculation that the two banks are brawling over a solution, which is why Goldman Sachs has been brought in effectively as a mediator.

The facts are that BrisConnections is nothing more than an investment banker’s idea: there are no assets, no cash flow. This is a market failure in the textbook sense and the investment is not going to stage a miraculous revival in the coming weeks: The outstanding instalment dues ensure this will not happen.

So the underwriters are going to be left in control of BrisConnections. The underwriters, Deutsche Bank and Macquarie, will then be faced with having to pressure BrisConnections to hunt down small shareholders for funds owed. This has failed before it begins.

Separately, hundreds – maybe thousands – of small shareholders are left with a stock they would love to get rid of. The underwriters could simply accept to take the stock off their hands at no cost; the project would then have a “clean” shareholder register.

The Brisbane road project still needs to be built. Institutional investors including Queensland Investment Corporation are no doubt willing to invest, or reinvest, on new terms. The embarrassing enterprise can then be privatised '¦ and, who knows '¦ maybe refloated on terms more in tune with 2009 than 2008. It's a way out, and the best one I've heard so far.