The trouble with Allco
The irony is that had Sir Rod Eddington taken less interest in the well-being of Allco and its shareholders, then the protest vote against his re-election to the Rio Tinto board would have never happened.
The recommendation from the influential proxy advisory group, RiskMetrics, that helped swell the big protest vote against Sir Rod Eddington's re-election to the Rio Tinto board is a fascinating document that provides an unusual insight into the two complex and controversial transactions that helped sink the Allco Finance Group.
RiskMetrics recommended shareholders vote against Eddington because of his role as an Allco non-executive director, although the recommendation wasn't quite as unequivocal as it has generally been portrayed.
RiskMetrics outlined a number of reasons in its report as to why shareholders might wish to vote for his re-election, which included his decision to stay on the board of Allco after it experienced difficulties and the fact that he didn't gain and never stood to gain any personal benefit from the transactions.
While Eddington survived comfortably when the UK and Australian entity votes were combined, nearly two-thirds of the votes actually cast at the Sydney meeting opposed his re-election.
Eddington's role in the Allco collapse is of particular relevance, given that he is chairman-elect of ANZ Bank, as well as chairman of the federal government's Infrastructure Australia. His role as a non-executive director of Allco is the only blemish on an otherwise glittering career, but one which the scale of the local Rio vote suggests may weigh on him for some time to come.
The two transactions RiskMetrics investigated in detail were the December 2007 purchase for shares and cash of the Rubicon property funds management group, whose largest shareholders were Allco chairman David Coe and fellow Allco director Gordon Fell, and a $50 million line of credit extended to the Allco Principals Trust, also in December 2007.
Institutional investor aversion to the Rubicon deal – over-priced and struck at the top of the market, albeit that much of the consideration was in the form of Allco shares – was a major factor in the implosion in Allco's share price that triggered market capitalisation clauses in the group's debt covenants and helped it to implode.
It was a bad deal and the fact that it was with related parties made it worse. It was, however, deemed fair and reasonable at the time by the independent expert, Grant Samuel.
The sell-off triggered by the Rubicon deal – and the collapses occurring in global credit and equity markets at the time – caused another set of problems to emerge within the Allco Principals Trust, a vehicle set up to hold and finance some of the Allco shareholdings of the so-called Allco Principals.
The original funding for APT came from an issue to mainly retail investors of preferred securities referred to as PoDs. There were, however, also margin lenders to APT who had superior security to the PoDs holders. The Allco Principals held the ordinary equity in APT.
From about August 2007, according to RiskMetrics, the margin lenders started becoming concerned about the value of the Allco shares that represented the security for their loans. This was at a point where Allco was trying to shift strategy and transform itself into a funds management business.
As part of that strategy it had created a new entity, the Allco Singapore Investment Fund (Allco SIF), and planned to seed it with aviation, rail, shipping and infrastructure assets owned by Allco and APT, separately and jointly.
By December 2007 APT was being threatened by margin calls. The Principals, under pressure from Allco, injected another $110 million of security into APT, mainly Allco shares. The Allco related parties committee, of which Eddington was a member, considered whether to provide APT additional liquidity – the $50 million line of credit/loan – but opted to refer the issue to the main board.
The rationale for supporting APT was apparently that it held many of the assets with which Allco SIF was to be seeded. The board was concerned that, if the Allco share price kept falling and the margin lenders seized the Allco shares, APT's Allco SIF assets would be lost to Allco and the planned Singapore launch, a central element of its funds management strategy, would be derailed.
There also seems to have been some concern about the fate of the PoDs holders, although Allco had no legal obligation to protect them.
The loan was secured by APT's interest in Allco SIF and carried an interest rate of 15 per cent per annum. RiskMetrics says the board readily acknowledged the loan was unattractive but they felt it was necessary to realise the funds management strategy. It says the Allco directors knew the loan would probably be used by APT to reduce the likelihood of margin calls.
The line of credit was actually made to an entity within the APT group, Allco Principals Trust Overseas, so that the assets would be "ring-fenced" from the rest of APT. Allco's security was APT's interest in Allco SIF.
Allco SIF was launched in January last year, with claimed assets – investments in vehicles structured by Allco – of about $660 million and debt of about $230 million.
While Allco SIF isn't in administration, at June 30 the Allco board judged the security for the line of credit to be totally impaired, citing the credit markets for an inability to sell the underlying assets, which presumably had been highly geared within the structured investment vehicles.
While the loan had been characterised in some quarters as an attempt to bail out the Allco Principals and avert their margin calls, and has been described by the voluntary administrator as potentially voidable because of the circumstances, the RiskMetrics analysis paints a far more complex picture and provides a insight into the convoluted nature of the decisions faced by the directors as Allco teetered on the brink.
For non-executive directors reliant on the information provided by the executives, even one as intelligent and experienced as Eddington, making a $50 million loan to an entity to protect hundreds of millions of dollars of equity and the funds management strategy – and a group of retail investors, albeit that there was no obligation to protect them – could be rationalised as a reasonable, albeit unpleasant, decision.
With the benefit of hindsight, of course, it was a dangerous thing for the non-executives to agree to.
The related party committee obviously realised its potential for controversy – because it would assist related parties – by referring it to the full board absent the conflicted Principals. The board took out insurance by insisting the Principals add to the security within APT. As it happened, most of that extra security – the additional Allco shares – ultimately proved worthless when the group collapsed.
The RiskMetrics report also revealed how overwhelming the workload can be in a failing group. In the 12 months to June 30 last year, it says, Eddington attended 61 Allco board and committee meetings!
He could have saved himself a lot of time and effort, if perhaps not all the grief and reputational damage, had he done what other Allco directors did and distance himself from the group well before it formally collapsed.
RiskMetrics viewed that decision to stay on and try to keep Allco afloat as a point in his favour. He, of course, may now regret it.
RiskMetrics recommended shareholders vote against Eddington because of his role as an Allco non-executive director, although the recommendation wasn't quite as unequivocal as it has generally been portrayed.
RiskMetrics outlined a number of reasons in its report as to why shareholders might wish to vote for his re-election, which included his decision to stay on the board of Allco after it experienced difficulties and the fact that he didn't gain and never stood to gain any personal benefit from the transactions.
While Eddington survived comfortably when the UK and Australian entity votes were combined, nearly two-thirds of the votes actually cast at the Sydney meeting opposed his re-election.
Eddington's role in the Allco collapse is of particular relevance, given that he is chairman-elect of ANZ Bank, as well as chairman of the federal government's Infrastructure Australia. His role as a non-executive director of Allco is the only blemish on an otherwise glittering career, but one which the scale of the local Rio vote suggests may weigh on him for some time to come.
The two transactions RiskMetrics investigated in detail were the December 2007 purchase for shares and cash of the Rubicon property funds management group, whose largest shareholders were Allco chairman David Coe and fellow Allco director Gordon Fell, and a $50 million line of credit extended to the Allco Principals Trust, also in December 2007.
Institutional investor aversion to the Rubicon deal – over-priced and struck at the top of the market, albeit that much of the consideration was in the form of Allco shares – was a major factor in the implosion in Allco's share price that triggered market capitalisation clauses in the group's debt covenants and helped it to implode.
It was a bad deal and the fact that it was with related parties made it worse. It was, however, deemed fair and reasonable at the time by the independent expert, Grant Samuel.
The sell-off triggered by the Rubicon deal – and the collapses occurring in global credit and equity markets at the time – caused another set of problems to emerge within the Allco Principals Trust, a vehicle set up to hold and finance some of the Allco shareholdings of the so-called Allco Principals.
The original funding for APT came from an issue to mainly retail investors of preferred securities referred to as PoDs. There were, however, also margin lenders to APT who had superior security to the PoDs holders. The Allco Principals held the ordinary equity in APT.
From about August 2007, according to RiskMetrics, the margin lenders started becoming concerned about the value of the Allco shares that represented the security for their loans. This was at a point where Allco was trying to shift strategy and transform itself into a funds management business.
As part of that strategy it had created a new entity, the Allco Singapore Investment Fund (Allco SIF), and planned to seed it with aviation, rail, shipping and infrastructure assets owned by Allco and APT, separately and jointly.
By December 2007 APT was being threatened by margin calls. The Principals, under pressure from Allco, injected another $110 million of security into APT, mainly Allco shares. The Allco related parties committee, of which Eddington was a member, considered whether to provide APT additional liquidity – the $50 million line of credit/loan – but opted to refer the issue to the main board.
The rationale for supporting APT was apparently that it held many of the assets with which Allco SIF was to be seeded. The board was concerned that, if the Allco share price kept falling and the margin lenders seized the Allco shares, APT's Allco SIF assets would be lost to Allco and the planned Singapore launch, a central element of its funds management strategy, would be derailed.
There also seems to have been some concern about the fate of the PoDs holders, although Allco had no legal obligation to protect them.
The loan was secured by APT's interest in Allco SIF and carried an interest rate of 15 per cent per annum. RiskMetrics says the board readily acknowledged the loan was unattractive but they felt it was necessary to realise the funds management strategy. It says the Allco directors knew the loan would probably be used by APT to reduce the likelihood of margin calls.
The line of credit was actually made to an entity within the APT group, Allco Principals Trust Overseas, so that the assets would be "ring-fenced" from the rest of APT. Allco's security was APT's interest in Allco SIF.
Allco SIF was launched in January last year, with claimed assets – investments in vehicles structured by Allco – of about $660 million and debt of about $230 million.
While Allco SIF isn't in administration, at June 30 the Allco board judged the security for the line of credit to be totally impaired, citing the credit markets for an inability to sell the underlying assets, which presumably had been highly geared within the structured investment vehicles.
While the loan had been characterised in some quarters as an attempt to bail out the Allco Principals and avert their margin calls, and has been described by the voluntary administrator as potentially voidable because of the circumstances, the RiskMetrics analysis paints a far more complex picture and provides a insight into the convoluted nature of the decisions faced by the directors as Allco teetered on the brink.
For non-executive directors reliant on the information provided by the executives, even one as intelligent and experienced as Eddington, making a $50 million loan to an entity to protect hundreds of millions of dollars of equity and the funds management strategy – and a group of retail investors, albeit that there was no obligation to protect them – could be rationalised as a reasonable, albeit unpleasant, decision.
With the benefit of hindsight, of course, it was a dangerous thing for the non-executives to agree to.
The related party committee obviously realised its potential for controversy – because it would assist related parties – by referring it to the full board absent the conflicted Principals. The board took out insurance by insisting the Principals add to the security within APT. As it happened, most of that extra security – the additional Allco shares – ultimately proved worthless when the group collapsed.
The RiskMetrics report also revealed how overwhelming the workload can be in a failing group. In the 12 months to June 30 last year, it says, Eddington attended 61 Allco board and committee meetings!
He could have saved himself a lot of time and effort, if perhaps not all the grief and reputational damage, had he done what other Allco directors did and distance himself from the group well before it formally collapsed.
RiskMetrics viewed that decision to stay on and try to keep Allco afloat as a point in his favour. He, of course, may now regret it.
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