The collapse of Ion has left numerous disgruntled creditors and employees with an uncertain future, however, the prospect of a rowdy creditors’ meeting did not come to fruition in Melbourne, with the black suits outnumbering workers 10 to one. See how the Melbourne meeting unfolded below:
Conflicts, proxies and the killing of Ion
Crikey email – 10 December
Australia has one of the most concentrated financial sectors in the world and Crikey has long argued that big banks should not be able to become big fund managers because there is a fundamental conflict of interest between the debt side of the economy and the provision of equity investments.
The Bell Resources case is the best example we can think of but now Ion has come along and demonstrated the point exceedingly well. The Commonwealth Bank has a $100 million loan to Ion and was one of the lenders who pulled the plug in highly controversial circumstances. However, wearing its funds management hat through Colonial, the Commonwealth Bank is also the largest shareholder in Ion with 13.81 per cent or 34.82 million shares.
With the stock last trading at 91c, Colonial has just taken a $30 million hair cut although the size of the final loss will depend on when they bought in. Ion shares were trading at only 30c in June 2000 but hit a high of $3.10 in mid 2002.
This puts the CBA in a very difficult position as their debt and equity exposures were both large. However, the key difference is that the debt was the bank’s own money and the equity was third party funds. Faced with a decision on who to shaft, you can expect a bank to preserve its own balance sheet first and that is precisely what has happened in this instance.
However, we presume the Chinese walls were working well because Colonial did not move to sell down its stake as the bankers weighed up pulling the plug.
Ion shareholders need its big institutional backers to take the banks head on for this apparent act of b*stardry. But how can Colonial, as the only shareholder with more than 5 per cent, do anything when it would effectively be taking on its owner?
Proxy wanted for Ion creditors meeting
The five creditor meetings for Ion Limited and its many subsidiaries at 2pm on Monday are all quite separate – there’s no video link up.
That means the administrators and the banks will all be at the Grant Hyatt in Melbourne. Yet most disgruntled creditors, including employees, will be cold shouldered by the people who know what’s going on, and left to fire questions at junior insolvency practitioners at separate meetings in Albury, Adelaide and Southbank (for the Cootes fuel business).
The Australian Workers Union who represent production line employees of Ion in Adelaide have raised a stink about this arrangement, to no avail.
The Sheet on the killing of Ion
From the excellent banking ezine www.thesheet.com:
A syndicate of banks – of which three of the Australian majors; Commonwealth, National and Westpac are the flighty lenders in this case – notified Ion of an event of default under an infant $340 million multi option facility and refused to extend further credit, with the result that the board of directors had no other option on Monday night other than to seek the appointment of administrator to the company.
The sequence of events leading up to the change of heart by the banks toward Ion starts with the finalisation by the banking syndicate of the $340 million loan in early September 2004, a facility largely negotiated during July and August. As reported yesterday, this syndicate includes the three major banks listed above, as well as BNP Paribas and Mizuho.
Commonwealth Bank also rolled over and extended a separate $100 million loan directly secured over the engine block plant under construction in Altona in Melbourne, and underpinned by a seven year contract to supply engine blocks to General Motors.
Ion’s board also decided to replace the managing director (and company founder) Graeme Salthouse during the period leading up to the negotiations with banks over the loan. The board appointed Roger Flynn in his place. Flynn began work at Ion in mid August, by which time the loan negotiations, and the financial forecasts that supported them, were largely complete.
One condition of Ion’s new club loan was that the banks would appoint an independent engineer to review the costing of Ion’s various capital investment projects. Those projects include the engine block plant at Altona; investment in a new transmission plant in Adelaide and expansion of capacity at the company’s Argent Metals Technology subsidiary in Kentucky, USA.
The banks and Ion received this engineer’s report in November (the identity of the engineering consultancy isn’t known). This report projected capital expenditure requirements about 10 per cent higher than budgeted.
The company’s new management, meanwhile, provided updated financial forecasts which included lower revenue projections to 2007, and thus lower EBITDA forecasts, than provided by Ion to the banks during the loan negotiations. Even so, Ion has secure supply contracts with Ford and Harley Davidson as well as with Holden, with some of those contracts running until 2010.
The two new sets of financial projections are the cause of the banks’ discontent with their customer.
Because of the banks’ unease over the new financial forecasts, the board of directors of Ion quickly developed a plan to sell assets and which, if implemented in line with plan, would have reduced the $340 million syndicated loan to zero in an orderly fashion, and well before the end of 2005.
The first stage of that plan called for the sale of the liquid fuel distribution business, or the old Cootes fuel transport business acquired by Ion in early 2001. The second stage called for the sale of the wheel castings subsidiary in Auckland. The third stage called for a trade sale or, more likely, an initial public offer, of the Argent Metals business.
Ion’s board quickly reached agreement to sell the liquid fuel distribution business to Castle Harlan Australian Mezzanine Partners, at a price reported in the Financial Review earlier this week to be in the vicinity of $190 million. However, to complete the sale, Ion’s board needed to provide various warranties, including warranties in relation to the solvency of the business.
Ion’s bankers were unwilling to back the board’s plan for a work out, and the directors were obviously unwilling to trade while insolvent, and so called in administrators. The banks maintained their refusal to support the company even in light of advice from Ion and its advisers that any administrator would be unable to sell assets such as Cootes on terms anywhere near as favorable as those negotiated by the board.
Commonwealth, National and Westpac are all blamed equally by the rumour mill for getting cold feet. The two foreign banks in the syndicate, BNP and Mizuho, are said to have wanted to participate in a work out with the company. That’s a twist on the usual formula with fractured banking syndicates, where the template is that it is foreign banks with small positions that want to get out, and the majors herd them into line.
The administrators, Colin Nicol and Peter Anderson of McGrath Nicol and Partners, agreed to sell the liquid fuel business to CHAMP on Wednesday for $151 million, or around $40 million less than than CHAMP was willing to pay last week.
Finally, the most likely scenario is a return of 100 cents in the dollar to the financiers and other unsecured creditors, depending on how much Nicol and Anderson burn off in the costs of administration. The expected settlement of all credit claims only reinforces the mystery as to why the same bank credit committees that regarded Ion as an acceptable credit in late August didn’t do so in early December.
Crikey at the Ion creditors meeting
Crikey email – 13 December
Crikey’s Kate Jackson went to the major Ion creditors meeting at the Grand Hyatt this afternoon and has relayed the key details over the phone for this edition.
All this talk of fire and brimstone did not materialise as administrator Colin Nicol deluged the 100 or so creditors at the meeting with about 75 minutes of presentations and procedural voting. There were blue, yellow, pink, orange and red cards being waved around to cope with the fact five different creditor meetings were happening simultaneously around the country.
There were only three questions from the floor and all were of a technical nature.
None of the unions bothered to show up or speak which probably reflects the fact they have more than got their way.
Firstly, all the businesses will continue to operate.
Secondly, full employee entitlements, estimated to be $80 million (including redundancy) will rank ahead of all other creditors, including the banks, with an estimated collective debt of $330 million. Trade creditors, with a claim of $90 million and other creditors, with a claim of $50 million, make up the total $550 million in credit claims.
Thirdly, AWU Victorian boss Bill Shorten was welcomed onto the nine member creditors committee, which will have all the power in dealing with the administrator.
Other members of the committee elected in Melbourne today included representatives from the major banks, CBA, Westpac, NAB, BNP and Mizuho and Comalco, which is wholly owned by those union busters at Rio Tinto.
This means the banks will have the majority of votes on the committee, a different situation to Ansett where Greg Combet and the ACTU orchestrated the dumping of PwC as administrators in favour of the two Marks from the now defunct Arthur Andersen which proceeded to allow the unions way too much influence on the creditor committees.
Colin Nicol held a 5 minute door stop press conference with a dozen media after today’s main creditors meeting and really sheeted everything home to the capital expenditure blowout at the new engine block plant in Altona.
Silly Ion committed to a plant that needed to produced 350,000 units a year but Holden only signed up for 200,000.
Whilst the rest of Ion’s operations appear safe, Nicol was talking up a new investor for this plant or that old favourite of a state government bail out.
He also said he did not believe there had been any breaches of the Corporations Law that would warrant legal action.
Then again, how many times can you remember a board calling in an administrator for a cosy unofficial look at the books a few days before giving them the big gig?
Interestingly Nicol told the meeting McGrath Nicol & Partners would be discounting their usual rates by 15 per cent for the Ion administration.
Ion chairman John Pizzey is a very big man, having made it to number two at the global aluminium giant Alcoa. He’s the ultimate Melbourne boy made good and it would be a brave administrator who went after his assets.
Let’s compile a list of receivers and administrators who did or didn’t go after the directors or auditors after a “shock” collapse. Send your entries to [email protected] crikey.com.au.