While talking to advisers at the IFA Conference last week it started to dawn on me one of the reasons why Bridgecorp fell over.

The picture that began forming after the first day is that it was the advisers themselves which triggered the collapse.

Why? Well it appears that in the months prior to the collapse, many advisers started to stop putting money into the firm.

This funds flow drought, combined with borrowers not paying the company, led to the inevitable liquidity crunch. No money in, no money out to make interest payments. (This in itself raises questions about how the company was being run).

While this picture was one which formed quite quickly, it was brought home to me when a gentleman, who shall remain nameless but used finance companies extensively, said, “we brought the company down” (or words to the effect). On enquiry this was the royal we (advisers, not his company).

So in the end, it seems, advisers where the catalyst for the collapse.

That brings me to a point which needs clarification.

A news item in one of the weekend papers quoted the IFA ceo David Hutton as saying not much of the money in the company came from advisers.
This is patent rubbish. Sources inside Bridgecorp say 60-70% of the money raised came through advisers.

Some of the biggest supporters are high profile and senior members of the association. One report (unconfirmed) is that a large firm had up to $50 million in the company; many others had amounts of around the $5 million mark.

The Bridgecorp collapse continues to dominate the news and so it should too.

If there is one thing to come from this collapse it has to be around disclosure. I believe it is imperative the finance companies move to some form of continuous disclosure regime.

In the Provincial collapse it is clear that material changes to the company weren’t disclosed to the market and the same picture is emerging with Bridgecorp.

I am totally aghast that the Securities Commission can suspend a prospectus, but not tell anyone till the company has had a chance to respond.

Yes, the commission maybe acting as the law is written, so the criticism is not with them. Rather it needs to have more power to act and inform the market.

Boy I wouldn’t like to be someone sitting at the commission, having suspended a prospectus and not being able to tell anyone. How could you sleep at night?

The rules are crazy, let’s see them changed.

One of the themes of the mainstream media has been how much have investors lost and when will they see any of their money.

Comments that the full half a billion dollars are lost are silly and irresponsible. I have no idea how much investors get back, but a guess is that it will be a better outcome than other collapses.

Perhaps the biggest concern is around advisers. Many comments I have received indicate that the same advisers who put clients into Provincial also used Bridgecorp. I suspect there are some advisers sweating profusely at the moment as they are experiencing their second failure in a year.

Were any lessons learnt last time?

I was interested to note a comment that all members of the IFA have to disclose commissions received to their clients. Plenty of the plans I have seen paper over this disclosure and also one would have to raise the question that commission disclosure can be a little irrelevant if there is no benchmark to compare against.

There are plenty more questions about some advisers and how they built portfolios which optimised for their commission incomes as much as for investors’ interests.

Stories we have heard go like this. Advisers have created ‘portfolios’ so that a debenture matures every six months and is reinvested, meaning they get a continuous flow of commissions year after year.

There are many stories telling of firms like Bridgecorp and Provincial incentivising advisers to sell their products.

Meanwhile financial planners have typically ignored the NZDX since a new bond offering only pays one commission (0.75% to 1% typically) which may not mature for five years.

If this has been happening then the whole advisory industry will suffer.

REPONSES
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While I agree with the tenor of your blog about the need for continuous disclosure by finance companies (debt issuers), I think you have missed an important point about the suspension of prospectuses. Suspension on the prospectus means that all new deposits are placed into a trust account; I assume the same must apply to rolled over reinvestments. So no new investor is penalised by not knowing about the suspension. Existing investors are in exactly the same position as they would have been if they had known – locked in. No-one actually suffers from the non-notification of a suspension.

The policy reason for the non-notification of a suspension is presumably to allow the issuer either a “right of appeal” or a chance to fix things up. The suspension is limited in time, and ends either with the suspension being lifted or the prospectus cancelled.

A subsequent issue is if the issuer fixes things up and the suspension is withdrawn, is there then an obligation on the Securities Commission or the issuer to notify investors that the prospectus was temporarily suspended, but the breach has now been rectified?
- Murray Weatherston

Well I have to say the collapse of Bridgecorp is no surprise. Rumours have been swirling around the market place for over a year now about its imminent demise.

It’s not a collapse anyone wants to see, and I feel sorry for investors. However there are some useful lessons already.

One is that these rumours have been helped by a couple of factors. Some in the media have dislike for the head of Bridgecorp, Rod Petricevic. I’ve never met the guy so can neither comment nor pass judgment. HOwever it is true he has his enemies.

Secondly, Bridgecorp has done itself no favours with the media. It has refused to do interviews and will only provide written answers to questions.

To my journalist mind this is a very narrow-minded approach to communications and can only fuel negative sentiment.

More recently Bridgecorp has been acting in a highly defensive mode. Here at Good Returns we have been on the receiving end.

A while back the Independent ran a story about how Bridgecorp had hived some loans off to another company.

The main points of the story were correct, however there were a number of errors, apparently minor in nature, which the paper corrected.

We ran a story, of just several pars, saying the Independent had run this story – fact. And to add balance, that Bridgecorp had called in it lawyers over the item – fact.

We didn’t report the substance of the original article, rather reported it had happened. All rather factual and balanced.

The ensuing correspondence from Bridgecorp’s lawyers, Bell Gully, was, in my view threatening and intimidating.

It seemed they were hell bent on closing this story down at any cost.

A number of people I discussed this with suggested that it was signs of a company in trouble.

They were obviously correct.

I wonder if their lawyers got paid or are now just one of, no doubt, many unsecured creditors?

PS: This collapse raises many other questions, such as what impact will it have on the finance company sector, how good are the ratings agencies? Remember one ranker gave Bridgecorp an AAA not that long ago. These are issues we will address, however we would love to hear from readers about their views on the collapse and its impacts. Send your comments to blog@goodreturns.co.nz