Allco Lite The Only Road To Survival, Away From The Delusions Of Grandeur

The Age

Tuesday February 26, 2008

Malcolm Maiden

The banks are still there, capable of driving a stake through the company's heart.

ALLCO is doomed in its current form. If it does not recreate itself as Allco Lite - the smaller, leaner purchaser and packager of transport assets that it was before the sharemarket boomed, and delusions of grandeur set in - Allco's banks will drive a stake through its heart, by demanding repayment of the money they have lent to the group on an accelerated, company-killing timetable.

They have not done so, even though they have been able to force the issue since January 9, when Allco's market capitalisation dipped below $2 billion, because killing Allco would also kill their chances of retrieving all they have lent.

The plan Allco is putting to them doesn't guarantee a better outcome, but it probably can't hurt, and it might help.

The savage discounting of Allco's share price yesterday need not be seen as a thumbs-down for the plan itself, because when Allco suspended its shares on February 11, the dimensions of the problems the company faced were not known.

They emerged after, as the group's scheduled December-half profit release was twice delayed, and it emerged that Allco's failure to sell assets out of its balance sheet into a new infrastructure fund had created a cash-flow crisis that could be solved only by asset sales and negotiations with bankers. In that respect, yesterday's share price slide was a catch-up.

Whether even Allco's new, slashed market valuation makes sense depends on many things.

Allco has to produce a definitive plan for the sale of infrastructure assets and financial assets, to take the company back to its historical strength - the purchase, management and packaging of aircraft, ships, and trains and rolling stock.

According to the first draft of the plan, which the banks have sighted, that will leave Allco with 75% of its previous revenue, and enough cash from asset sales to reduce debt.

Allco chief executive David Clarke seemed to suggest yesterday that Allco was getting out of the asset origination and bundling game, but it is not. In the businesses that are retained, Allco will continue to do what it did before: buy assets, and then sell them to wholesale investors, usually in specialised funds, re-injecting cash into the balance sheet in the process.

The mix between asset origination and income from the management of the funds will change, with funds management income rising in weight.

But the business model is being trimmed and simplified, not abandoned - and one of the challenges in front of Allco is to convince the banks that professional investors still trust the company (and asset originators more generally).

Once the plan is fleshed out, Allco must secure a new funding deal with its banks, including CBA and St George, that will allow continuing debt service (Allco has not missed any debt service payments so far), and principal repayment no earlier than next year.

Although the banks have so far only seen an outline of the recovery plan, they have at least given the board enough encouragement to sign off on the December-half accounts. And if it gets its new debt deal, Allco must then sell its assets. Losses are likely, with Allco acknowledging yesterday that assets previously bought for prices that generated $1.3 billion of goodwill were now "materially impaired".

The downsizing will involve Allco giving the pink slip to about half its 620 employees - and along the way the board will reconfigure to create a majority of independents, most probably through executive director departures. David Coe is expected to remain as chairman, but will lose the executive chairman title, and the role.

There will be headwinds as Allco tries to reconfigure. The group acknowledged, for example, yesterday that it lost investor support after Christmas as the market turned down, and its shares fell amid short selling and margin calls that hit a leveraged component of the interwoven controlling stake in Allco held by Coe and associates, including Chris West and Nick Bain.

The threat of more margin calls is real after yesterday's share price slide. Coe and his associates have not yet negotiated a standstill agreement with banks that have provided margin loans.

But Allco is telling the banks that its reconstruction plan is independent of the Allco shareholders. This could signal a belief that the Coe group will be able to meet any margin calls and avoid forced sales.

But it also reflects the fact that the worst impact of the short selling and margin calls is accounted for, with Allco revealing yesterday that debt negotiations involve not only a $250 million line that matures on May 1, but a $900 million facility that was not due until September next year.

Both loan facilities included an agreement that if Allco's market capitalisation fell below $2 billion, the banks had the right to renegotiate, and, if new terms were not agreed, to demand repayment within three months.

Allco's market value first dipped below $2 billion on December 18, but recovered. It slipped below $2 billion again on January 19, and remained there. Clarke said yesterday that the group took legal advice and was confident it had no obligation to inform the market earlier, because no demand for repayment was made.

Clarke added that the banks had still made no demand for early payment of the $900 million facility and were working constructively with Allco on a debt rescheduling deal.

However, Allco shareholders (and perhaps the market regulators) may test the advice Allco received. The possibility that the group's recovery plan will be further complicated by legal action alleging inadequate disclosure cannot be discounted.

© 2008 The Age

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