KEY POINTS:
The major lesson from the collapse of Bridgecorp is that you should never, never, never put all your eggs in one basket.
This advice has been repeated again and again in investment books, newsletters and newspaper columns yet a large number of the 18,000 Bridgecorp investors had most of their savings in the failed company.
Bridgecorp should have been treated with extreme caution because of the track record of managing director Rod Petricevic, its exposure to the high-risk end of the property sector and well-publicised problems in Australia and Fiji.
Petricevic started his career with Michael Fay and David Richwhite at the ill-fated Securitibank in the early 1970s. The three colleagues left Securitibank in the mid-1970s before it collapsed and formed the merchant bank Magnum Investments. They were young men about Auckland in the late 1970s from both a business and a social point of view.
The three split up in 1980 with Petricevic forming the high-risk merchant bank Euro-National and the other two establishing Fay, Richwhite & Co. Outside investors have lost money in virtually every company the three former colleagues have been involved in.
Euro-National was listed on the NZX in August 1985 and its share price surged from $1.90 to a high of $8.20 in 1986. It slumped to just 8c after the 1987 crash because of a complex entanglement with three other failed companies: Judge Corp, Kupe and Renouf Corp.
Euro-National changed its name to CDL Hotels in 1992 and is now the highly successful Millennium & Copthorne Hotels.
Meanwhile, Petricevic was looking to develop a foothold in the finance company sector. He found this through a company called Bridgecorp Holdings. Bridgecorp was originally listed as Bridgevale Mining, then changed its name in 1987, took a controlling interest in the Toy Warehouse and was delisted in August 1992 after the underperforming toy operations were sold.
Petricevic effectively took control of Bridgecorp after it was delisted and Bruce Davidson, who was chairman of the company in its listed days, has remained in that position. Petricevic has tried a number of times to relist Bridgecorp but he has been rejected by the NZX. This reflects the cautious view that the established investment community has had of Petricevic and Bridgecorp as the NZX has been fairly keen to encourage new listings.
In June 2002 Bridgecorp Holdings was deregistered in New Zealand and moved to Australia.
Two years later Bridgecorp Holdings' shares started trading on the New Zealand-based Unlisted trading facility at 20c. They reached a high of 55c in mid-2005 but 12 months ago they were worth only 35c.
There has to be something wrong with a finance company when equity investors are only willing to purchase its parent company shares at a significant discount to net asset backing.
In March 2006 the group started reporting the results of Bridgecorp Limited, the New Zealand company that collapsed this week, to Unlisted when it was the shares of Bridgecorp Holdings, the parent company in Australia, that were trading on the platform.
This was an extraordinary development and Bridgecorp Holdings has not released any financial results to Unlisted since November 2005. This is a sign of extremely poor corporate governance and reflects badly on the level of disclosure available to investors who buy and sell shares on Unlisted.
Bridgecorp Holdings' share price opened this year at only 15c and fell to 10c in mid-May where it remained until it was suspended this week. The parent company's share price, and poor disclosure to equity investors, should have given New Zealand fixed interest investors and their advisers a clear indication that the group had problems.
The other sign of distress was its problems with the Australian watchdog, the Australian Securities and Investment Commission.
In February 2006 ASIC suspended the distribution of prospectuses by Bridgecorp Finance, the Australian operating arm of the group, because of technical issues. Why was this dispute not resolved if the suspension was due to technical issues only?
It was decided that Bridgecorp Finance would not make any new advances and its loan book would be wound down. As part of this arrangement the New Zealand borrowing company advanced A$15 million ($16.4 million) to Bridgecorp Finance in the form of an unsecured loan. The nature of the loan indicated that it was unlikely to be repaid.
In addition the New Zealand company acquired A$70.5 million of loans from the Australian company of which only A$38 million was repaid by February 28. Two of the loans acquired were in default although the dollar value of these has not been disclosed.
Finally there is the Momi Bay development in Fiji, which is clearly explained in the latest prospectus.
Bridgecorp has a $49.1 million exposure to this project, representing 8 per cent of its total assets, which came to a standstill after the Fiji military coup in December 2006. The developer has pre-sale commitments of $85 million but none of this may be realised unless the political situation in Fiji stabilises.
Bridgecorp's low share price, its well publicised problems in Australia and the huge potential loss in Fiji sounded loud warning bells but most investors and advisers ignored them. This is consistent with the recent RaboPlus/TNS survey, which found that New Zealand investors are mainly concerned with interest rates and pay little regard to risk when investing.
This is incredibly naive as finance companies are almost totally unregulated, whereas trading banks are subject to strict registration obligations and scrutiny by the Reserve Bank, including a requirement to have a credit rating.
Finance companies operate under a disclosure regime, the only conditions being they must have a trust deed and issue a prospectus and investment statement.
The objective of a disclosure regime is for investors to read and study prospectuses and investment statements. Individuals and their advisers are expected to form their own opinion about the performance and risk of finance companies. Finance companies do not need to have a credit rating although this requirement is planned to be introduced in 2010.
The biggest problem with this disclosure regime is that finance companies are allowed to use exaggerated and unrealistic wording in their advertising that gives investors a false sense of security. This is totally unsatisfactory, particularly when advertisements for sharemarket IPOs cannot embellish the merits of the offering.
The clear message to fixed-interest investors is that they should keep their money in a large trading bank unless they are willing to study prospectuses, have a clear understanding where finance companies are lending their money or have an independent adviser who is not influenced by commission fees received from borrowers.
Having said that, the majority of finance companies, particularly the larger and long-established ones, are very well run and investor deposits are secure.
Finance company investors will sleep well at night if they adopt a number of simple guidelines. These include:
* Never put all your money with one finance company
* Never invest in a security without reading the prospectus (a high credit rating by a major international agency will be sufficient when this requirement is introduced).
* Make sure you are comfortable with the quality, expertise and track record of directors and management
* Avoid borrowers that have large related party loans
* Have a bias towards finance companies with strong parent companies or those that are listed on the NZX and have institutional shareholders.
Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
- bgaynor@milfordasset.com
