The Untimely Demise Of Mfs Pacific Finance Limited

The Untimely Demise Of Mfs Pacific Finance Limited



The Untimely Demise of​ MFS Pacific Finance Limited


Amongst the numerous investment funds and financial institutions falling victim to​ the global credit crunch, one that surely need not and should not have succumbed was New Zealand-based MFS Pacific Finance Limited.

Starting life in​ New Zealand in​ 1999 as​ a​ subsidiary of​ ASX-listed MFS Limited (now known as​ Octaviar Limited), an​ early venture saw the Company take over the name and management of​ several underperforming Waltus property funds, later followed by an​ offer of​ Debenture Stock and Unsecured Notes to​ the New Zealand public through a​ registered prospectus. From the outset the Company made clear that funds raised were primarily destined for lending in​ the broadly diversified Australian property market, with the same interest rates offered in​ either AUD or​ NZD reflecting a​ significant proportion of​ second or​ even third mortgage lending. Figures to​ 30 September 2018 show one third of​ such lending as​ lying behind first mortgage advances from MFS Limited's own flagship Premium Income Fund, indicating a​ common interest between mortgagees. Cash raised in​ NZD but lent as​ AUD was hedged back to​ the New Zealand currency.

Over the next few years, MFS Pacific worked diligently to​ establish itself within the mainstream New Zealand finance company sector with restructuring in​ early 2018 placing MFS Pacific Finance under NZX listed MFS New Zealand Limited (38 of​ total assets as​ a​ fee in​ exchange, the Put Option became commercially as​ well as​ legally based.

This formal agreement effectively gave MFS Pacific Finance investors legal recourse to​ the full financial resources of​ MFS Limited, in​ support of​ both Secured Debenture Stock and Unsecured Notes. By mid 2018 the level of​ parent MFS Limited shareholder funds had reached a​ massive A$1.5 billion. No wonder the relatively generous fixed interest rates on offer of​ 9.25 unsecured, attracted widespread support.

MFS Pacific Finance became a​ significant partner and supporter of​ financial events around New Zealand, being on hand at​ major seminars and conferences. Company briefings were open and frank, personnel appeared well informed and competent.

The company seemed to​ take constructive criticisms on board - such as​ early disposal of​ the maligned Waltus name. Details of​ security type, missing from early communications, were added to​ later prospectuses. Early attempts to​ evaluate the Company's liquidity were originally answered by production of​ a​ complicated combined line and bar chart purporting to​ show an​ excess of​ assets over liabilities spread over time but, which to​ this observer at​ least, seemed to​ indicate the opposite. However, later financial statements displayed the assets and liabilities maturity profile in​ the standard tabular format common in​ New Zealand registered prospectuses with an​ overall receivables excess over liabilities of​ about 2.6 from October 2018 to​ A$4 in​ early January 2018 but this was generally in​ line with the broad ASX losses over the same interval, so little justification for the ensuing rout can be found here. Markets don't just suddenly react savagely to​ news that has already been widely known for months.

Further confusion seems to​ have been generated by suitor City Pacific first showing interest in​ merging with or​ acquiring certain financial assets from MFS Limited, then withdrawing, then showing renewed interest, only to​ withdraw again. City Pacific appears to​ have problems of​ its own.

Also, and although flagged in​ general terms earlier, a​ Board proposal in​ early January to​ address debt by raising A$550 million from shareholders while splitting the company in​ two must have contributed to​ dissatisfaction, it​ does not fully explain the sudden share price collapse.

No, what really hit out of​ left field in​ mid January - vital information unknown previously to​ the market - was that large shareholders, including Directors, were facing margin calls on shares effectively purchased on deposit, margin calls they were unable to​ meet. This news appears to​ have unnerved other substantial holders who quickly joined a​ rush for the exits. as​ every highly leveraged property owner knows, a​ modest fall in​ the market can wipe out ones equity. Margin traders of​ shares face the same fate but here the financier, or​ margin lender, usually demands immediate payment to​ make good any of​ the finance provider's losses. Failure to​ meet such demand may result in​ immediate sale or​ confiscation of​ the leveraged security to​ limit losses, this being the norm rather than the exception. The decline of​ MFS Limited shares over several months, in​ line with market sentiment, was obviously sufficient to​ trigger margin calls. Dumping of​ huge volumes on the market, including notifiable directors' holdings, did the rest.

CEO Michael King's conference call on 18 January, following two days of​ trading halt, was intended to​ present the separation and cash raising issues but instead oversaw a​ massive volume of​ trades, approaching 120 million shares compared to​ normal volumes between one and five million, and a​ 69 sale of​ Stella Group for A$1.3 billion equivalent, effectively values that arm at​ just over $2 billion, compared to​ A$2.5 billion evaluated by analysts earlier. Hence total shareholders' funds could take a​ half billion dollar hit from that one item alone. Nevertheless and even if​ remaining assets were all to​ be written down by 50 p.a. interest to​ debenture holders over the next 20 months.



Lessons

Unfortunately MFS Pacific Finance is​ beyond rescue as​ an​ operating unit in​ its original form and its passing is​ a​ genuine loss to​ the New Zealand finance company sector. in​ addition to​ offering investors currency diversification, MFS Pacific carried the potential to​ set a​ new benchmark of​ financial support for finance company borrowings through the "Put Option". to​ date no other parent/subsidiary relationship of​ companies listed on the New Zealand Debentures Exchange has instigated a​ similar enforceable guarantee. Perhaps the new "Global Credit Crunch" reality will empower investors to​ demand just that.

In addition, as​ more intricate trading mechanisms such as​ margin trading, stock borrowing and short selling evolve, it​ becomes clear that disclosure of​ such potentially dangerous practices must become a​ mandatory requirement imposed by stock exchanges or​ legislation if​ markets are to​ be open and informed. Private investors have quite enough risks to​ contend with, without the secret avarice of​ their own company's directors and executives exposing them to​ even more.

But while the mandatory objective may prove an​ optimistic goal in​ the short term, ordinary shareholders and fixed interest investors alike can take their own action immediately, wasting no time in​ sending the "totally unacceptable" message loud and clear to​ directors and executives where margin trading is​ concerned.




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