Allco: 一个投资者的悲剧

wdmznzd

Allco: an investor's tragedy

Michael West
November 5, 2008 - 7:01AM


It was just a matter of time. Another tranche of bull-market heroes has bitten the dust, victims of leverage and their own greed and ambition.

The Allco boys were pretty special though, some of the smartest guys in the boom, and veritably outdone by their own smarts.

This essential point cannot be underestimated. Here were some of the finest minds and most capable business people about, people who should have been comfortable and professional in evaluating risk.

Blinded, however, by their own dazzling success in a bull market, they entirely jettisoned the basics. Things like catering for the inevitability of a downturn, for the inevitability that interest rates in US would not droop at 2% for ever, that asset prices went down as well as up.

Really basic things got lost in a paradox of structures so labyrinthine as to be impenetrable.

Allco was a quick round trip. It listed in 2001, grew, spun off a constellation of satellites, peaked at over $13 in early 2007, collapsed in early 2008, and is obsolescent ten months later.

The full story will emerge soon enough...and a fair dinkum ripper it will be - you wait - but the most profound thing to take from this destruction of Allco is how markets are so reliably duped by entrepreneurs - by their leverage and jumbled structures - at the end of every cycle.

The human factor should never be divorced from the evaluation of economic activity.

Morality plays

The serial collapse of the financial engineers is a series of morality plays, each one starring talented people brought undone by their fatal flaw.

Whatever you think of Allco's David Coe or Babcock and Brown's Phil Green, of Michael King who founded MFS, of Eddie Groves at ABC Learning, or of the Centro crew, these were all capable men who simply lost sight of risk and reality.

Now they face their own personal tragedies, that is, their fate was of their own making, which is the essence of tragedy in a Shakespearean sense.

Sadly they are taking a lot of people down with them. Babcock's Phil Green, for one, is said to be personally crestfallen at the demise of his company because it has come at such a high cost to those who followed him.

Ironically Green and Coe are long-time rivals. Then there are the bit players: the consultants, directors, lawyers, auditors - all soi-disant experts too - all with specks of blood on their hands. What did they do to protect these assets from blowing up? Zero in almost all cases; there were fees to be had.



Alan Greenspan's ''mea culpa'' is illuminating. The former Fed chairman, once feted as a demigod by financial markets, admitted last week that he got it wrong on leaving markets to their own devices. Indeed. The laissez-faire philosophy of light touch regulation has proven a miserable failure. It set in train a credit crisis which now threatens hardship on every household in the world.

The human factor in markets and the failure of regulators proves yet again that markets are comprised of human beings above models - people who are prone to excess and ambition to the point of recklessness.

Greenspan, in his striving to constantly appease the markets, pulled interest rates back to 1% early this decade (and where they now sit as the Fed pulls on every lever to avert an economic meltdown). Rates were too low for too long and spawned the momentary but dumbfounding success of the likes of Allco.

Macquarie's motza

The Allco boys saw the Macquarie crew making a motza with virtually free credit and promptly mimicked them.

They went further though, quicker, with less in underlying business and more in the way of tortuous interweaving exposures. For those people smart enough to be in the game the prize was access to endless loans from bankers, and seemingly endless fees.

What went wrong was that risk was poorly priced. Simple as that. The supposed experts in risk have been laid bare.

Unfortunately, those who bought their product have fared worse than those in the game. The latter have ripped out their fees and live in very large houses, some presumably slightly ashamed.

Need it be said that David Coe and the Allco boys did not merely con shareholders into believing their story but bankers too, bankers whose core job it was to size up risk. They buggered that up. Now we are all paying higher rates.

And regulators to boot. Along with their oversight of the other masters of origami, the watchmen were asleep at the tiller having blithely granted waiver after waiver from the usual corporate rules - and cast a blind eye to the warning signs. The multitude of vehicles conjured by the money magicians delivered a multitude of fees after all.

Qantas near-miss

And the complicity - borne of the reasoning that ''the boys are smart they must know what they are doing'' - seeped into government. What, after all, would have happened had Allco and Macquarie pulled off their bid for Qantas?



How preposterous it is to think that they inveigled the Government into green-lighting their assault on the national carrier. True, shareholders would have picked up cash at $5.60 a share. Qantas now trades at $2.70. But would it have been hidebound back into taxpayers' hands?

Back then, as is the private equity custom, the consortium of smart guys was to have ripped out all the cash and replaced it with debt, sacked people, generally slashed and burned costs for three years, then tipped the thing, skinned, back into the share market via a suavely PR-ed float with a glossy prospectus and compelling turnaround story.

The $11 billion takeover play was to have been financed with $10 billion in debt - ''covenant lite'' at that. And Allco was to have had the majority equity stake at roughly 30%. Or controlled the majority stake rather, after winning the bid, exploiting the airline as collateral to borrow, then spinning off their equity stake into a special vehicle which would have been called Allco Australia Aviation Fund or some such.

You can laugh now, it didn't happen, thanks to a suspicious hedge fund manager who refused to vote his stake at the eleventh-hour because he thought the deal promoters were lying to him when they pleaded they didn't have the numbers to get the requisite 50% to proceed with their bid. He held out for more in the mop up - which never came.

The Allco boys would have kept 5% of Qantas, as little equity as possible themselves in other words, just to keep control of the equity vehicle which in turn was to have controlled the consortium.

Then they would have concocted their typical structure so their airline fund or trust had an external manager which was of course, despite a fancy title...the boys again. Creating an external manager creates a whole new suite of fees.

Those proposed ''covenant lite'' arrangements - all care and no responsibility - would have cost the taxpayer a pretty penny when the airline had to be nationalised again.

Oceans of debt

Allco and its peers are all about ''structuring'' and the optimal way to structure something is naturally to use somebody else's cash to buy an asset, gear it up with oceans of debt, spin off an equity vehicle to rip out a few corporate finance fees and syndication fees and whatever other fees could possibly be tolerated, or disguised.

The structures were always so bamboozling, and deliberately so, as to repel any investigation. And the contracts and obligations to a deal were always structured to achieve minimal recourse to the promoters...the boys again.



And so it is throughout the Allco empire.

Grant Samuel, the very ''independent expert'' which sprinkled holy water on the Qantas deal as fair and reasonable also delivered its blessing to the Rubicon transaction which ended up being the Trojan horse to Allco's fair Troy. Except that, due to its status as one of the most outrageous related-party transactions of the boom, the Rubicon horse was actually full of Trojans, not Greeks.

Again, the boys got too smart and actually attacked themselves, albeit with imported resources; read Allco shareholder funds. David Coe and Rubicon founder Gordon Fell, both Allco directors, gouged tens of millions of dollars in cash from that old deal.

We are probably getting into precarious mixed-classical-metaphors territory here but while the Rubicon transaction exposed Allco's frailties, saw confidence wilt, and latterly cost shareholders a bundle, this glittering citadel of the golden epoch of the paper shuffler was doomed some time before.

The Rubicon, or the point of no return, had been crossed the year before last. Such was the stupefying complexity of the Allco structures, their sheer leverage and veneer of cashflow that it was only a matter of time.

Next-deal-ism

And this goes to the heart of the modus operandi of Allco and its peers. It's all about the next deal. A story here three months ago, arising from a leaked Babcock & Brown email, contained an exquisite anecdote about the group's European operations.

A deal had just been done - no doubt worth tens if not hundreds of millions, the fees had been snipped, the requisite glory won by the gladiatorial dealmakers...then a perplexing problem needed solving.

Now that Babcock had acquired this magnificent asset it needed somebody to run it. After all, asset management was a key plank in the business and assets can't manage themselves.

Clearly nobody in Babcock Europe had been specifically earmarked for the task, or nobody was up for it at least - the next deal beckoned - and the frustrated executive who authored the email noted, wryly, that a receptionist was seconded to the task of asset manager.

When you stop to think about it, these structured financiers are just that, and the business of running a business isn't in their repertoire. Or it's not really their ''go'' because asset managers don't enjoy particularly large bonuses.

Hundreds of other companies on the stock market, whether involved in boring things like retail, construction, resources and manufacturing, are doing well to grow by 10% a year.

Management may lash out with a big takeover bid or even two once every few years. It will duly be judged on the success of that bid thereafter, as it beds the new asset down, integrates the staff, the systems, the various departments, eliminates overlap and marries two cultures.

Not for these boys. They buy something, with somebody else's money every time they get the chance and you never know how it has worked out until years' later because the accounts are perpetually muddied by the retinue of new acquisitions.

Reality unchecked

Prime deal-making conditions don't last forever and these guys, caged in their own success, forgot to show restraint, or simply did not want to front up to reality.

They cut their teeth in the 1990s pulling off sophisticated leasing deals; aircraft and ships mostly. It was all highly esoteric cross-border stuff designed to skive out of tax.

And they had a penchant for investing in their own byzantine structures from the start, a practice which would eventually bring down the whole house of cards.

It was the leverage, related-party transactions and cross-shareholdings which finally spooked the market when a client of the brokerage Tricom shorted Allco and forced the boys to unload 22 million shares held by Allco Principals Trust - one of the many Allco vehicles which also happened to own shares in the parent - into a wobbly market in January this year.

Though the seeds of destruction had been sown, this was the point of no return.

Chasing asset prices down in a shocking market in an effort to deleverage meant the chance of covering the massive debts diminished by the week. But cashflow had been artificially propped up by dealmaking income anyway, non-recurring revenue which dried up in the downturn.

They forgot to build a business, or rather, deals were their business and they forgot to reinvent themselves.

Other titans of leverage will soon trudge along the same path as, now that the banks have got their 2008 profit results out of the way, they will grimace and face up to 2009, ''the year of the writedown''.

mwest@fairfax.com.au

BusinessDay

Devil_Star

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masakiwangjun

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catparrot

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Monica_qian

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catparrot

对对

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