An Australian bank, Westpac, has agreed to take a major loan haircut and not put its client into liquidation. This is not a big deal but it is an amazing story and maybe it heralds a new era in banking.
For as long as I can remember all our banks have found it difficult to manage small clients in trouble and all too often it's just too easy to pull the plug. Westpac has not been immune from this behaviour so let's recognise it when they do the right thing.
The company involved is the listed Oldfields, which started business in 1916 and listed in 1960. In the late 1990s it did all the usual things that can cause corporate trouble – it did not manage its business properly, became highly leveraged and made a silly takeover funded by borrowings. Westpac was owed over $20 million and must have thought most of the money would be lost.
They brought in the KordaMentha management arm 333 and a new chief executive (Chris Giles) was appointed and assets sold. The Westpac debt was reduced to $15 million but it was still too high, given that the book value of shareholders' funds is less than $1 million.
So a debt reduction deal was constructed. If Oldfields can raise $5 million in new equity (or subordinated loans) and uses that money to repay Westpac, the bank will forgive the same amount – $5 million. That takes debt down to $5 million.
There is a small catch. Half the remaining debt ($2.5 million) is a complex security which gives Westpac the right to earn 12 per cent a year if Oldfields shares rise by that percentage. There are early repayment options but it is up to 10-year debt.
Oldfields biggest business is aluminium scaffolding, which it makes in China, plus paint brushes and similar gear and garden sheds.
Oldfields is confident it can raise the equity because of the strong family shareholder base which is supporting the issue. If the equity is raised then the balance sheet will be transformed. It's then up to Giles and his people to further transform the operation.