The Fincorp collapse AICM national conference presentation

1
The Fincorp collapse(AICM national conference
presentation)

• Alex MuffordPartnerHenry Davis YorkOctober
  2008

2
Outline

• Background Fincorp Group
• Reasons for failure
• Result for creditors

3
Brief history of the Fincorp Group

• 2001 - Fincorp Group launched by Mr Eric
  Krecichwost in Camden as a low-doc lender
• September 2002 - first prospectus issued
• June September 2003 - first development sites
  purchased in Victoria
• October 2003 - second prospectus issued
• November 2003 - Purchase of Bribie Island,
  Queensland and 2 other properties in Victoria

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Brief history of the Fincorp Group

• February 2004 - new prospectus issued
• September 2004 - ASIC issued a stop order
  against the 2004 prospectus
• December 2004 - new prospectus issued
• January 2005 - Fincorp moves into newly built
  premises in Camden, NSW
• May 2005 Restructure of the corporate and
  managerial structure - Eric Krecichwost steps
  aside as MD

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Brief history of the Fincorp Group

• September 2005 - ASIC Enforceable undertaking
  entered into by Fincorp in relation to misleading
  advertising
• December 2005 - opens Melbourne development
  planning and sales office
• January 2006 - new prospectus issued
• March 2006 - signs lease for expensively fitted
  out new head office in Sydney CBD
• March 2006 - ASIC issued an ISO against the 2006
  Prospectus. Concerns raised in relation to the
  Fincorp Groups financial position. EY
  commissioned to provide a report

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Brief history of the Fincorp Group

• March 2006 - Fincorp Diversified Property Fund
  launched
• May 2006 - Fincorp Enhanced Income Fund launched
• May 2006 - EY issued its report and ASIC revokes
  stop order
• May 2006 - Replacement prospectus issued
• July 2006 - Fincorp Diversified Property Fund
  withdrawn from the market
• August 2006 - Fincorp seeks equity/JV parties
• September 2006 to March 2007 - Various interested
  parties conduct DD

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Brief history of the Fincorp Group

• October 2006 to January 2007 - Various directors
  resign
• February 2007 - 2006 Prospectus expires. No new
  debentures
• March 2007 - First Capital provides 3m secured
  loan and granted option to purchase the business
  subject to it completing due diligence
• 19 March 2007 - First Capital informs directors
  that it will not exercise option
• 23 March 2007 / 26 March 2007 Korda Mentha
  appointed by directors as voluntary administrators

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Property portfolio at time of appointment of
administrators

• Purchased Price
• Queensland
• Bribie Island Nov 03 18.7M
• Howard May 05 1.6M
• Mackay Aug 05 7.5M
• Hervey Bay Nov 05 6.2M
• Victoria
• Mernda Mayfield Farm June 03 5.5M
• Corinna Waters, Epping July 03 28.2M
• The Ridge, Doreen Sept 03 22.5M
• Mernda Town Centre Dec 03 15.5M
• Mernda Business Park Dec 03 10.8M
• Warrnambool Homemaker Centre Sep 06 42.5M

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Fincorp Group structure (simplified)
Fincorp Group Holdings
Employees, Trade Creditors
Fincorp Services
2M
100M senior debt
Retail Noteholders200M
loan
loan
Fincorp Investments Ltd
Fincorp Property Entity SPV
Senior secured creditors
180M "First20M "Unsecured
1st mortgage
2nd mortgage
Property
FMIL (Diversified Property Fund)
Repeat for each of 9 development
propertiesTotal purchase cost 120M
Senior secured creditor
Warrnambool Property(40M)
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Reasons for failure

• Limited initial and ongoing equity investment
  -100 reliant on external debt funding
• Flawed funding model long term assets funded by
  short term liabilities (debentures/bank debt)
• Cashflow crisis inability to raise funds by
  issuing further debentures

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Reasons for failure

• Paid too much for some assets
• Failure to develop quickly enough - not
  sufficiently skilled at property development
• High operating costs premises, staff and
  advertising

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Estimated returns to creditors (based on property
purchase prices)

• Assets 160m
• Liabilities
• Senior Secured Creditors 100m 100c/dollar
• First ranking noteholders 180m 30c/dollar
• Unsecured noteholders 20m nil
• Trade creditors 1.5m nil
• Employees 500k unknown

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Achieved returns to creditors (based on Becton/AV
Jennings purchase prices)

• Assets 204m
• Liabilities
• Senior Secured Creditors 100m 100c/dollar
• First ranking noteholders 180m 50-55c/dollar
• Unsecured noteholders 20m nil
• Trade creditors 1.5m nil
• Employees 500k 100c/dollar
• statutory priority

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Key elements of successful outcome

• Support given by senior secured creditors (CBA,
  NAB, Perpetual, Ashe Morgan Winthrop) to allow
  orderly and structured asset realisation
• Corporate overheads quickly wound down to ensure
  no further drain on return to creditors
• Korda Mentha ran a very good disposal process,
  keeping the portfolio together and maintaining
  competitive tension amongst institutional bidders
• Timing is everything may not achieve the same
  result today