Judgment reveals C+M's poor state
Capital + Merchant's legal attempts to stave off receivership have provided a disturbing insight into the poor shape of the business.
Thursday, December 6th 2007, 9:23PM
In his judgement Justice Harrison outlines the state of the business and he repeatedly makes it clear C+M was in a perilous position.
"I am in no doubt that CMF will be unable to remain solvent for much longer. Its prospects are slim, I repeat, of continuing to meet repayment obligations to investors as they fall due over the next few months, while also satisfying commitments to Fortress. Little weight, I repeat also, can be given to its forecast income stream in the same period."
He says the company has been "operating in name but not substance for some months.
In the case counsel for C+M outlined forecasts for the firm's future. However the judge described these as "unrealistic."
"In my judgement, little weight can be given to C+M's future projections."
The judgement also reveals that the finance company's trustee, Perpetual Trust, commissioned Ferrier Hodgson to provide a position paper on the company in October.
Its engagement was to "review current weekly cashflow forecasts to February 1, 2008, key loans due for repayment before that date, and other matters."
The paper was requested following other failures in the finance company sector and falling reinvestment rates. C+M's reinvestment rates were down from 50% a year ago to 10-20%.
The position paper, which is at odds with C+M's submissions, showed that the company faced a short to medium term cash problem.
C+M was close to its drawdown limits with Fortress and had to rely on loan maturities to maintain cashflow.
However, C+M had issues as it capitalised interest on loans and many loans which had reached maturity had to be extended "out of necessity to facilitate either refinancing or sale."
"Of real concern to Ferrier Hodgson was the problematic ability of large borrowers to repay," the judgement says.
In other documents provided to the court, there were more than 60 loans, the larger of which were advanced to related parties, to a total of $250 million."
Judge Harrison says this is a large increase on the March 31 figure of $184 million, and the rise "must be largely attributable to capitalised interest."
On the evidence provided he concluded that borrowers "were failing to generate any or sufficient income to meet current interest liabilities."
Because of this situation the judge concluded that C+M was "operating more in hope than expectation that borrowers will retire outstanding debt from sales or refinancing."
The judgement spends some time addressing the technical issues around the arrangement between C+M and Fortress.
Harrison says the case is complex, particularly with regards to the security documents.
Judge Harrision says C+M management tried to fix the situation, and it had stopped making new loans.
"I acknowledge the genuine efforts of C+M's management in recent months, they appear to have come too late. C+M cannot survive against a combination of loss of public confidence in finance companies, an unfavourable economic climate and perhaps decisively, a poor quality loan portfolio."
Without too much more ado he dismissed C+M's application which allowed Fortress to appoint receivers.
- C+M's principal activity was lending to property developers
- Its loan book was funded from shareholders ($10.5 million), Fortress ($70 million) and debenture stock ($165 million).
- Grant Thornton have been appointed receivers
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