Nine should be in Chapter 11

The vultures have been circling Nine Entertainment for so long their wings are tired, but this morning there'll be a frisson of energy rippling through the flock as they anticipate a meal.

The directors have been incredibly courageous this year, keeping the business out of administration and therefore receivership, throughout a long and frustrating dispute over value between the creditors, but with the accounts due to be signed this month and $2.2 billion in debts due and payable in February, the end is nigh.

Chairman Peter Bush has apparently put a deadline of today on the lenders reaching agreement before he and the board give up and call in the administrators. There is a meeting later this morning to consider a new restructuring idea from him and CEO David Gyngell.

They had hoped the lenders would have reached agreement last month, but the owner of $1.1 billion second tier debt, Goldman Sachs held out, wanting more than the nothing that was on offer from the hedge funds that bought the senior debt from the banks.

It's reported this morning that Bush and Gyngell are proposing a scheme that gives them something, but not equity, and certainly not the 20 per cent they were seeking. The hedge funds, led by Apollo and Oaktree, are adamant that the value of the business equals the value of their senior debt, or less, and that both the second tier debt and the equity are worthless.

No argument on that from the equity owner, the private equity firm CVC Asia Pacific that bought the business from James Packer in 2007 for $1.5 billion in cash plus the $3.6 billion in debt in the business. CVC had lost the lot within 12 months and has been an interested spectator as the debt owners fight over what's left.

Goldman Sachs, which bought the next spot up the queue from the equity, believes it has some value and has been holding out against a restructure that would give the senior debt owners all the equity. It has been a game of brinkmanship that has had the directors on the edge of their duties for 12 months.

Debt of $2.2 billion is due to be repaid in February and, working backwards, crunch time is this month. It seems Peter Bush has nominated today as the day, although there may be a few more days for the lenders to think about the disaster that receivership would visit upon them all.

Insolvency accountants and lawyers would feast on the business, the cricket rights would potentially disappear along with a host of other content deals and the value of the business would deflate.

It's reported this morning that Bush and Gyngell's idea is to give Goldman warrants plus a fee for services rendered, leaving the senior debt owners with all the equity. It seems to me Goldman should take whatever it can get and thank everyone nicely before leaving, but perhaps it knows something that no one else does.

It argues that if Nine were put into receivership by the hedge funds and the assets auctioned someone would pay a decent price for the TV business, just as Bauer from Germany paid a lumpy $525 million for the magazines. But that, I would suggest, is known as "two in the bush”, as opposed to a "bird in the hand”.

But, really, Nine Entertainment should have been in "Chapter 11” long ago.

The previous minister for financial services, Chris Bowen, floated the idea of Australia introducing a US-style insolvency law, including a form of a Chapter 11, in 2010, but nothing seems to have happened since then.

The US law allows directors to seek the protection of the courts while they trade out of difficulty, and there are may great examples of businesses that have been saved from the predations of creditors and receivers that would otherwise have been left as clean carcasses by the side of the road.

In Australia insolvency law is the opposite of America's environment: "trading while insolvent” remains a dreadful risk and the only protection is voluntary administration, which usually triggers instant receivership. It means that too often directors are forced to throw their business to the wolves rather than risk going to jail.

There needs to be a system in Australia where voluntary administration, or even continuing management control, can proceed without triggering a breach of debt covenants and therefore full receivership.

Nine is a classic example of a company where the directors should have been under the protection of the courts this year while they tried to resolve the dispute over value between debt owners and preserve the business intact.

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