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What can we learn from the C+M collapse?

Friday, November 30th 2007, 3:07PM 6 Comments

by Philip Macalister

Well, the first thing is that all those rumours were true! I had often heard that Capital + Merchant were in a vulnerable position and so it is proved to be correct. Why didn't we report that? Well we are in the business of facts, not gossip. One thing that is useful to point out is that C+M probably didn't do itself too many favours in the publicity stakes over recent times. Often when media approached the company for comments and they were refused information. Likewise, the company did a bit of hiding itself and never was too open about its ultimate ownership. A couple of things which are useful to note about this latest failure are that relying on the existence of a wholesale funding line isn't a guarantee of longevity. Wholesale funders tend to set covenants around their support and make sure they have outclauses. Added to this there is talk that some funders are facing as squeeze themselves thanks to the sub-prime crisis in the United States. C+M's issues, at this stage appear to be difficulty in getting Mum and Dad debenture money, even though they had a high media profile through their sponsorship of TV One news. I have noted before that there is a potential flag when companies take on promotional activities out of kilter with their size. It maybe debatable whether C+M definitely fell into this category, but it is worthy of contemplation. Out of this collapse have been renewed calls for compulsory credit ratings. I don't agree with comments from the Consumers' Institute calling for mandatory ratings. As I have said previously mandatory credit ratings are no panacea for the sector. Yes, they are useful, but they are not a panacea. The good news is that, thankfully, I am not hearing too many other rumours about shaky companies, but no doubt there are still some out there which will struggle to survive.
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Comments from our readers

On 3 December 2007 at 7:55 am Barrington Smythe said:
Maybe we can lean that most of the 'rumours' were atually based on facts.

Fact 1: C&M borrowed over $60m from Fortress at over 13% p.a. interest, and this debt ranked ahead of debenture holders, who were being paid 9.5%. Why?

Fact 2: C&M was very highly geared, with a tiny amount of true equity.

Fact 3: C&M paid high commission rates to advisers.

Fact 4: C&M was very reluctant to reveal who actually owned the business.

Fact 5: C&M had very low rankings from Grosvenor and Chris Lee.

Fact 6: C&M had an investment grade rating from PIR. Remember who else PIR rated as investment grade? Yup, Bridgecorp.

Need I go on?

If financial advisers didn't know these facts then what research were they doing? Did they simply rely on what C&M told them, as so many did with Bridgecorp?
On 3 December 2007 at 9:19 am Sean said:
Why is Cymbis website virtually shut down? Cannot download an IS or Prospectus. The phoneline 0800CYMBIS goes to a Grant Thornton answer machine. The only perceived relationship between the two according to Coy office records is Nicholls. Surely not a reason to shut down Cymbis. so is Cymbis the 14th ? What is not being disclosed - major related party lending of bad loans?
On 4 December 2007 at 12:39 pm Sean said:
Cancel the above. they have now allowed access to Cymbis documents. And the phone line no longer goes to a Grant Thornton voicemail.

I note the above posts, which pose some questions as to ownership - are the Companies Office records false ?
What does this say about other linked companies such as Cymbis ?
Why is the MED/SFO not investigating ?
The wording of the front page of the Cymbis debenture prospectus also appears to be quite a contrast to what we are hearing (or have heard) about C+M.
Why has the media gone quiet in the last 2 days ?
On 5 December 2007 at 8:35 pm Barrington Smythe said:
Credit rating agency Fitch Ratings has placed an Australian subsidiary of Capital + Merchant finance on negative watch, but has not yet lowered its ratings.

High-profile finance company C+M was placed in receivership on Thursday by first-ranked creditor Fortress Credit Corp, owing about $190 million to 7000 investors.

C+M's loan book is worth about $200m.

Fitch said on Friday it had put Queensland-based Cymbis Finance Australia (CFAL) on negative watch over its B long and short-term credit ratings, on concern C+M's failure could hurt CFAL.

"Although domiciled in different countries, the owners of CFAL and C+M are linked and there is a degree of operational interaction between the companies," Fitch said.

"Both businesses operate similar business models in which retail deposit funds are primarily lent for relatively high-risk property development purposes."

C+M is the 13th finance company to default in under two years, amid an erosion of confidence in the sector heavily dependent on public investment. Investors are owed about $1.5 billion.

Fitch said it expected to make a decision on Cymbis' ratings once it becomes clear how C+M's failure would affect the company and its investors.

Cymbis had reported assets of $A121m ($NZ140m) at the end of June, and lends primarily for property development projects in Queensland.

"CFAL's ratings reflect its small size, limited trading history and the relatively high risk nature of its core lending activities," Fitch said.

C+M's trustee Perpetual Trust was looking closely at the large number of subsidiary companies.
On 6 December 2007 at 10:26 am David said:
Does anybody know the details of the VESTAR offer to investors to make good Bridgecorp and C+M losses?

Whilst not calling it "compensation" surely VESTAR are nonetheless taking a positive step for the industry – even if primarily motivated by protecting their brand & reputation.

The media coverage of the offer (let’s not call it compensation!!) suggests it will assist clients in practical ways (i.e $$ rather than rhetoric). The ability to make such an offer also reinforces the benefits of dealing with a larger group.

Rest assured I don’t burn a candle for VESTAR - frankly any adviser (or adviser group) deserves to be dog tucker if their fixed interest portfolio is shown to be constructed with self interest rather than client interest to the fore.

Does anyone know which other adviser groups supported C+M on an "Approved Product List" or similar in the last year? They should be named and held to account.

An investing clients suspicion is of course that sometimes products on APL's are a result of override or marketing payments rather than robust and ongoing research. Should that suspicion be proved correct then surely its not a stretch for the promoters of such APL’s to stand behind their recommendations?

Those that do (whether individuals or groups) are to be congratulated. Well done VESTAR. Those that don’t should be seen for what they are – spruikers.
On 3 February 2008 at 12:19 pm The Lone Ranger said:
I congratulate Barrington Smythe on his excellent commentary.
It is naive for financial planners to invest millions of dollars without undertaking indepth forensic research on a company's health,and I might add,on a regular basis.
This is logically carried out by contracting the services of independent chartered accountants to report accordingly.
In regard to David's question,if you looked at Capital & Merchant's website before it was erased,and followed their advise in regard to who to contact if you wanted the services of a financial planner,no matter what area of NZ you lived in,there were only two firms recommended---Vestar and Broadbase.
I have seen no other financial planners recommending Capital & Merchant.
I hope that Vestar can keep their promise,but this will depend on whether MFS can survive.
Commenting is closed



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