ANZ had worries about Feltex debt

Former Feltex Carpets chairman Tim Saunders outside the Auckland District Court yesterday. Photo / Dean Purcell

A former ANZ executive has told the Auckland District Court that the bank had serious concerns about the state of Feltex Carpets' finances in 2005.

Five directors of the failed carpet-maker - Tim Saunders, John Feeney, Peter David Hunter, Peter Thomas and John Hagen - appeared in court yesterday on the first day of a defended hearing. Each director is charged with two breaches of the Financial Reporting Act. They have pleaded not guilty. Each faces fines of up to $100,000.

The charges, laid by the Companies Office, allege the company's half-year accounts to December 2005 did not disclose that it was in breach of its loan agreement with ANZ. After floating in 2004 and raising $254 million, Feltex went in to receivership in 2006.

Former ANZ senior executive Peter Holland told the court the bank was very concerned Feltex would default on its facility during 2005 and also questioned whether another loan of A$10 million should be approved for the closure of the company's yarn plant in Melbourne.

The plant was closed to save costs.

"The company's risk grade was constantly on review. The exposure of the bank was more than $100 million. It [Feltex] was getting a lot of attention," Holland said.

He added that the company suffered from liquidity restrictions during 2006, which "in short meant they were running out of money".

The bank was concerned about lending it more money as its performance was under pressure.

Holland said the bank was worried that if the company became insolvent it would not recoup the A$10 million, as "the last $10 million is always the hardest to get back".

Holland said the suggestion of closing the plant was a "pretty big step" for Feltex.

ANZ had a grading system for distressed or problem loans rated from grade 1 (the lowest) to grade 10.

Once a borrower reached grade 7 or 8 the likelihood of a possible default was increased, he said.

Grade 10 usually meant the company was under some sort of administration or insolvency. The threshold was about A$5 million and there was no maximum.

"There was no ceiling to the amounts we were involved in," Holland said.

When Feltex was transferred in 2005 to Holland's department, which dealt with problem loans, it was a grade 4. It was later graded down to a grade 4-. Holland said at the time he worked for ANZ, from 2001 to 2008, the bank was Feltex's main lender. The bank took loan defaults and the prospect of loan defaults very seriously.

"It's very serious for the bank but it is also very serious for the company."

He said the departure of Feltex's chief executive Sam Magill in 2005 raised further concern about the management of the company.

Prosecutor Brian Dickey said ANZ's loans to the company were "important and crucial to the case".

He said ANZ was Feltex's fundamental financial backer. Dickey said it was important for large companies such as Feltex to accurately report its financial position to the market as the public relied on the information.

The directors face two charges each under the FRA for allegedly failing to disclose proper financial records for the six-month period ending December 31, 2005. The Crown alleges Feltex breached its banking covenant to ANZ for the six-month period ending December 31, 2005.

The hearing continues tomorrow.