Fai ... A Fraction Too Much Exposure
Sydney Morning Herald
Monday November 27, 1989
"I just spent six months in a leaky boat, lucky just to keep afloat."
Young Rodney Adler could have chosen a less appropriate theme than Split Enz' jaunty ditty to welcome FAI Insurances' shareholders last Thursday to their first annual general meeting under his stewardship.
Was Young Rodney, a year into tying up a further $450 million of their money in the tottering empires of Alan Bond and Christopher Skase, trying to tell them something?
By Rodney's own admission, the year since his father's death has been a difficult one, a "baptism under fire", as he revealingly dubbed it last Thursday.
The market's attitude towards FAI is most telling. Under Young Rodney, the company has been one of the most active of shares traded on the Australian market. Even by Adler's reckoning, a figure equal to more than 50 per cent of the company's issued stock has been traded since he took the chair, indicating a wholesale realignment of the register after taking out the Adler family's own 40-plus per cent.
The company has not only experienced an alarming profit downturn, but considerable market disaffection as the true legacy of Larry Adler's fiddly dealmaking reveals itself in the bodycount of corporate Australia.
Where FAI under Larry Adler tested the fringes of blue-chipdom, today under Rodney its difficult to find a market analyst who actually follows the stock.
"Frankly, FAI isn't the sort of stock our clients would be interested in,"says an analyst with McCaughan Dyson, admittedly not one of FAI's closest friends at the moment. Research staff at Ord Minnett, Barclays de Zoete Wedd, Bain and Co and other big brokers echo the "too risky" and "difficult to get the true picture" sentiment.
Of most pressing concern to the market is the Bond exposure, all $528 million of it. A month before Young Rodney took over in December last year, FAI was trading around $4.15 and had about $100 million in Bond exposure.
Today, FAI trades at $2.76 and has $523 million of its money in Bond hands and $62 million with Christopher Skase (or rather Qintex liquidator David Crawford).
"I want to know whether Rodney's running an insurance company or a bank,"says a prominent Sydney broker.
While Rodney was beefing up his exposure to these jittery entrepreneurs, he enjoyed some of the most favourable and frequent publicity published about an Australian businessman. Now, with fires burning on several fronts, the honeymoon seems to be over.
"A year ago when I became MD I found myself in a precarious situation. There were some unsecured liabilities (to Bond) that I didn't feel as confident about as Dad would have," Young Rodney told the Herald last week.
"What I did over nine months is convert the (Bond) unsecured portfolio to a secured portfolio and to do that I had to lend him more money. It is far better to sit with $500 million secured than $100 million unsecured. We are much better off this year.
"A year ago I didn't realise they were tottering but even if I did it wouldn't have mattered. He's never missed an interest payment," he said.
FAI's Bond loans all mature before next April but Adler is assured of the security over them.
"I'm not confident he'll be able to pay us back. When he sells the assets he'll be able to pay us back."
FAI lent Bond $US155 million of the $US185 million he paid to buy the run-down St Moritz Hotel overlooking New York's Central Park. Adler says Bond has received firm bids at $US160 million and FAI has first charge over the mortgage.
On Bond's Pacific Copper coal interests, FAI lent Bond $A180 million as a first charge mortgagee. Adler claims FAI has independently valued the properties three times at a "higher figure" and that Bond has firm offers of$200 million and "one closer to $220 million".
Perth's controversial Emu Brewery site is another matter. FAI lent Bond$140 million on a site variously valued at $80 million to $200 million.
Adler says he is "under no illusions" on the Emu Brewery site and is prepared for the worst. "I don't believe any of the valuations. All I know it's a good piece of dirt."
He says three Bond exposures are cross-collateralised; the more Bond gets from the two other asset sales, the more it will average down FAI's exposure to Emu Brewery.
That FAI will end up holding the site is increasingly likely, effectively a debt-to-equity transfer of the property. Under a complex put and call option agreement with Bond, FAI could take over the property as early as December 18
"Look, we will work with them (on Emu Brewery) we don't want to be toppling them. There is daily discussion and negotiation on the deal."
Adler admits other lenders hold charges over Bond assets secured to FAI but is confident FAI will prevail in a carve-up of sale proceeds.
"If some maniac wants to sue you, what can you do?" he says.
The FAI annual report this year boasted that FAI "have tried to bring a high degree of financial integrity and full disclosure to this annual report, beyond the normal statutory requirements.
Noble ideals indeed for the boy who inherited a man's mandate, but what the annual report with purportedly higher-than-required disclosures didn't reveal is that it had written one of the biggest insurance policies in Australian history for Skase and his executives.
Adler refuses to reveal the details of a $5 million deal between FAI and the Qintex management company, purportedly involving FAI's protection of senior Qintex executives against kidnapping and ransom for five months from February 1 this year.
In studying the policy, it is important to chart the chronology of the Skase collapse. The first tangible signs that Qintex was in trouble came early this year when Skase was forced into selling half the Mirage Resorts and couldn't meet his summary television licence fees without bank support.
Young Rodney had risked at least $62 million in unsecured loans and investment equity to Qintex. Was this "premium" a canny method of FAI putting the screws on Skase six months before the public, and his bankers, knew of his plight?
Rodney Adler denies the Skase $5 million was for anything other than an insurance premium.
"There's nothing exciting about it, we're an insurance company and they needed cover," he said
"If it was for something else they got it pretty bloody cheap because we were on risk. It was a legitimate insurance transaction. It's our business. Not a payoff for a loan or anything like that."
Rodney also lost brownie points in not revealing to shareholders at this week's annual meeting that Australian Ratings had downgraded FAI from BBB to a BBB minus rating.
"Quite honestly, their narrative was so favourable about us getting our house in order that I didn't think it was that significant."
The house still needs considerable cleaning. Apart from the Bond and Qintex positions, Rodney's still got a few deals to manoeuvre through, notably the Hooker deal with David Marriner's Fulham Holdings and McCaughan Dyson and the Ariadne imbroglio.
"People are saying yeah, yeah, you've got this exposure but the actual fact is we sold well. The only problem is that Fulham and McCaughans are trying to get out of paying us that $12 million. I'm not happy with the argument that will probably ensue but that's life. We'll go to the courts if we have to.
"We've got the McCaughans contract note in our possession. We get a monthly statement from McCaughans and every month they've included the payment, so I don't know on what basis they are going to get out of it."
"With Ariadne we were at one stage down $150 million but we scraped, schemed, cajoled and hassled our way to where we are not going to lose a cent."
Since balance day FAI has been busy in the foreign exchange markets, buying back $25 million of its $800 million Swiss franc bonds at deep and profitable discounts and converting the unhedged 50 million sterling exposure to $A "at no loss".
"People don't much like Australia overseas and we are making that work to our advantage."
He also sacked 65 people at broker Pembroke Securities, a move he described as "tough, not fair, but that's life."
"Look, I didn't inherit a basket case or a can of worms. I inherited one of the world's best insurance companies that had some very difficult situations in it.
"In six to 12 months we will be a lot cleaner, no negative exposures, no fiddly deals, just straight insurance and backing good solid Australians."
© 1989 Sydney Morning Herald
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