Is This The End? If Not, Perhaps It Ought To Be

Sydney Morning Herald

Tuesday February 26, 2008

Michael West

THE banks have rolled the dice but whether they will roll the debt is another matter.

The Allco recovery plan is to get some breathing space from its banks, relist the shares, sprout a bit of motherhood stuff about a new strategic business plan and flog some assets to knock the balance sheet into shape.

It's a failure, if the stock price is any indication. Allco had always relied on bamboozling the market with fancy structures. People, finally, don't believe it any more. Nor should they.

Every Allco spin-off is trading way below the issue price. Why would investors decide to tip in money now, especially now, as the goodwill is zero?

Well, not quite zero yet, according to the Allco accounts. Goodwill is still booked at $1.5 billion, though directors have presaged a writedown.

With the head stock languishing at $1.11 it's a fair bet that the Allco Principals Trust, the very vehicle whose margin calls sent Allco into a tailspin in the first place, might get called again soon.

"Allco Finance Group - Forced restructuring from banks but no guarantees on survival" said the headline from a Macquarie Equities research team on an email sent to fund managers at 12.52pm yesterday.

The email was recalled minutes later. We can only speculate why. It said Allco assets would fetch "significantly less than directors' valuation".

"If there are no buyers or the prices are well below expectation, there is unlikely to be any return for equity holders," it said.

The banks that now control Allco are having a roll of the dice.

"Clients are walking away. Despite Allco noting that there is continued strong demand from their clients, Allco has lost at least one wholesale funds management mandate and could lose more. We are unsure at this stage whether clients consider Allco a worthy counterparty to future deals."

The conclusion from Macquarie? "We are unsure whether it will survive a weaker operating climate."

The market will heed the notes to the accounts, not the marketing guff.

There is also a load of bottom-covering in the interim statement from Allco directors - in fear of lawsuits - and from the auditor KPMG, which saw fit to prepare for the worst by saying its bit about "material uncertainty".

That uncertainty is whether the banks will get their money back from this mess. For shareholders the future is even more materially uncertain.

The banks have clearly told Allco to try to salvage the group by restoring market confidence and raising more equity. They have nothing to lose by this - but shareholders do.

© 2008 Sydney Morning Herald

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