tip off

Allco board purge: hands up who wants to be chairman?

The survival of the struggling Allco Finance Group and its fleet of investment trusts is looking more and more problematic. The stock has plunged another 21c to 66c in morning trade after executive chairman David Coe and fellow executive directors Gordon Fell and David Turnbull quit the board whilst vowing to remain actively involved in management.

Former Telstra chairman Bob Mansfield has only agreed to be acting chair and now the search is on for a cleanskin replacement. That won’t be easy.

Loan refinancings in some of Allco’s listed associated trusts threaten to pull down the whole edifice because of the credit crunch and the fact that they are part of Allco and no one trusts them.

Investors and others still interested in Allco should consider this comment from the principals behind the Peloton group in Britain which has had to liquidate its ABS hedge fund only weeks after it returned an 87% gain for 2007.

In a letter to clients last week they blamed the banks for the decision to liquidate the fund, which had built up a holding of around $US9 billion in high quality subprime mortgages and other assets: ”Credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has compounded our difficulties and made it impossible to meet margin calls.”

The letter was from the co-founders of Peloton Partners, Ron Beller and Geoff Grant in London after they started liquidating their ABS hedge fund, with $US1.8 billion in assets on Friday.

So if this can happen to a well connected and seemingly well-performed hedge fund, which started losing money as markets for mortgages fell sharply in February, what hope has Allco and its various listed satellites have of convincing banks of refinancing its collection of assets, many of which are illiquid or have no accurate pricing?

The list of Allco basket cases is growing and their condition worsens by the week.

Last week Allco announced its Mobius low/no-doc mortgage business (it has one of the worst default rates in the country) has ceased to accept new applications and will “exit and release capital from its investments in financial assets”.

Whilst discussions with potential acquirers or joint venturers have not been completed, Allco has decided to discontinue new investment in this asset class and commence an orderly run-off and sale of the underlying assets of Mobius,” Allco said.

This decision is in line with the announcement that Allco is developing and implementing a restructuring program to conduct an orderly disposal of non-core assets to reduce debt and reposition Allco to focus on its core asset classes of aviation, shipping, rail and real estate.”

Allco Finance Group itself faces a May 1 deadline to refinance a $250 million bridge facility, and it could have to repay another $900 million of senior debt in 90 days, if given notice by a group of banks. The Allco HIT business has already missed deadlines to raise $100 million from a convertible preference share issue to cut its exposure to a New Zealand property lender.

Allco Finance has already lost $72 million in quitting the Consolidated Edison deal in the US.

Three Rubicon property trusts could be forced into fire sales of their assets after they released disastrous forecasts on Friday. The trusts were picked up in the related party deal in December that saw Allco buy the Rubicon group from directors Gordon Fell and David Coe for cash and shares worth $300 million.

Rubicon Japan Trust warned its survival was uncertain because of $106 million in short-term debt due in May, June and July. “While these short-term facilities could be successfully renegotiated and/or refinanced in usual credit market conditions, there is a heightened risk of this not being satisfactorily achieved in the current conditions,” it said in its announcement.

Both Rubicon America and Rubicon Europe contained similar warnings about their business model, saying they were facing difficulties refinancing their commercial real estate loan portfolios.

And investors in PoD Hybrids, marketed by Allco through its Allco HIT satellite, have been told that initial investments of up to $105 are now worth $4.50 at most because of the fall in the Allco share price. In effect all the money, $250 million has gone because of the collapse in Allco Finance’s share price.

Allco’s listed structured finance investor Allco Max posted a $26.7 million loss for the half-year to December 31, based on writing down its portfolio of various loans by $31 million. But it contained the most pressing problem.

It has to find $223 million from new financiers to repay the drawdown under a finance warehouse arrangement with French bank, Société Générale which has decided to withdraw from the Australian securitisation market.

That decision by SocGen has seen several mortgage originators put themselves up for sale or look for new money because they have to repay the French bank hundreds of millions of dollars in loans: “With the consequence that Allco Max’s existing $300 million warehouse facility provided by the ACE Max Warehouse Trust, managed by Société Générale, will not be extended beyond its current renewal date of 30 June 2008. The current balance of the facility is $223 million.”

Allco Max doesn’t need to find a generous soul until the end of the year, but must use its best endeavours to refinance as quickly as possible.

Allco Max is in the process of seeking replacement warehouse funding and has entered into discussions with a number of domestic and international banks for this purpose. However, the current state of global debt markets and negative sentiment towards more structured facilities such as Allco Max make this task a difficult one.

That’s such a familiar line from Allco: it’s like saying “buyer beware”.

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