KEY POINTS:
Auckland man Alex Tee has $60,000 tied up in Bridgecorp.
"That money is not for pleasure. I've got to look after my family. It's for my brother's education, it's for medical fees for my parents."
Until a year or two ago, Tee's money was spread across a number
of different finance companies.
"But just for this once - I have no idea why - I put everything in there. That is pretty much all my savings. It's not just for a new car or a bigger house.
"We're talking about real lives that depend on hard-earned savings from the past seven or eight years just for rainy days."
Tee sank his money into Bridgecorp after researching the company on the internet.
"It seemed to be really stable and not very risky".
But after failing to meet interest and principal repayments last week, Bridgecorp was placed in receivership on Monday owing 18,000 investors $500 million. "Now the money's been taken away just like that," says Tee.
While he was oblivious to Bridgecorp's parlous state when he invested, many finance industry insiders were not, as was also the case in the $300 million Provincial Finance failure last year.
Now Tee and other investors are wondering why they were the last to know about Bridgecorp's problems. To anyone with some financial nous who kept up with the news and cared to take a look at publicly available information, there were a number of warning indicators.
Given that Bridgecorp primarily lent to property developers, often in the form of second and third mortgages, it shouldn't have been too much of a surprise to anyone when some of its loans did go bad.
Australian property developer Westpoint, to which it had exposure, collapsed last year and the Fiji coup in December disrupted Fijian-registered company Matapo's Momi luxury resort development, leaving it unable to repay its $49.1 million loan.
As result of the Westpoint collapse, Bridgecorp was banned from raising funds in Australia and its December half accounts showed funding from New Zealand investors, who were by that stage supporting the company's operation on both sides of the Tasman, was dwindling.
"This is not any surprise to anybody who's a participant in the market," says Kapiti Coast financial adviser Chris Lee. Other signs included:
* Bridgecorp's capital has generally been substantially less than most of its peers, particularly those in the property development sector.
* Its gearing was generally much higher than quality finance companies.
* The NZX twice declined to allow it to list on the sharemarket.
* Two years ago Bridgecorp's share price on the Unlisted market gave the company a market capitalisation of less than one year's profit; in other words it was on a price-to-earnings ratio of less than one.
* Lee says last year's loan from St Laurence, for which Bridgecorp used its stake in Dorchester Pacific as collateral, was to make its September quarter interest payments.
* When Bridgecorp was unable to repay that loan out of cash flow, St Laurence sold those shares to recover the money.
"These were signs you didn't need to be a rocket scientist to work out, " says Lee.
But Chris Stone, executive director at McDouall Stuart Securities, which produces an annual report on the sector, doesn't believe the signs were quite so clear-cut.
"The analysis I've done on public information would have identified a slightly higher risk characteristic on Bridgecorp but it was not identifying imminent failure."
That information included the company's December half results which showed funds raised from debentures and capital over the period had fallen to $49.6 million from $88.7 million a year earlier.
Managing director Rod Petricevic has yet to front up to investors and the media with an explanation of what went wrong.
Given the complexity of the company's affairs, receivers John Waller and Colin McCloy of PricewaterhouseCoopers have indicated it will be some time before they have a clear idea of the company's position.
The public relies on a range of industry professionals for services, information and guidance about their investments.
Were they well served in the months leading up to Bridgecorp's demise?
ADVISERS
Stone says inexperienced investors who lack a basic understanding of financial information should be going to an adviser for good impartial advice that is backed up with research.
In turn, "there is a responsibility for any party that earns a fee off recommending investments to make sure they do their homework".
Given the signs of problems Stone and Lee identified, advisers should have been extremely reluctant to put client money into Bridgecorp in recent months.
The company's recently dwindling funds inflows suggests that many were, but clearly others were not.
As with Provincial Finance last year, the days following Bridgecorp's receivership have seen intimations of sleazy behaviour by some finance companies and advisers.
It is rumoured that some finance companies offer advisers extra commission, over and above industry standards, to boost fund inflows, resulting in advisers recommending debentures not on their fundamentals but on the money they will earn from them.
"Just recently they [Bridgecorp] wrote to me and other advisers and said if you put client money in Bridgecorp or Compass for three years we'll pay you up to 3 per cent," says Lee.
The industry standard for three years' money is about half that.
Furthermore, Bridgecorp had other ways of providing incentives to advisers.
In the months before the last Rugby World Cup in 2003, Lee says, Bridgecorp ran what amounted to a competition for advisers, offering trips to the quarters, semis and final for those who wrote the most business.
TRUSTEES
Trustees are effectively the front-line regulators for the industry, and will continue to be under the new rules for the sector announced by the Government recently.
They have a set of criteria on which they monitor the company using financial ratios provided regularly by the management. As such they should be among the first to know when a company strikes trouble.
Graham Miller, managing director of Bridgecorp's trustee, Covenant Trustee Company says he's "pretty comfortable with how we handled what happened".
While rumours of Bridgecorp's problems had been circulating for some time, Miller says that Covenant had not been sitting on its hands.
"There's a standard reporting requirement in the trust deed. For how long were we seeking additional information over and above that standard? The answer is for quite some time."
When problems arose with the Fiji loan, Covenant asked auditors to undertake a review to see if its holding value should be retained.
In the end the auditor didn't require further provisioning.
"There was a constant stream of other stuff going on but that was just one example."
THE SECURITIES COMMISSION
In the wake of the collapse of property developer Westpoint, the Australian Securities and Investment Commission banned Bridgecorp's Australian offer documents last year and ordered the company to repay its Australian investors.
Since then the amount owed to investors by Australian subsidiary Bridgecorp Finance has been reduced from about A$150 million ($164 million) to A$24.5 million.
At the time, the New Zealand Securities Commission, whose oversight of the finance company sector is limited to making sure the offer documents and companies' disclosure are compliant, told the Business Herald that it had no issues with Bridgecorp's documents.
Yesterday, the commission's primary markets director Kathryn Rogers was not at liberty to say whether it currently had any issues with the company.
Under the new rules, the Security Commission will also oversee finance company trustees.
RATINGS AGENCIES
Stone says good analysis of finance companies requires processing a huge amount of publicly available information. But even then there are limitations to what is out in the public domain, which is where ratings agencies come in.
"Agencies work on internal information, the sorts of things that are largely invisible to anyone looking from the outside, and that forms a substantial part of their credit ratings."
In fact Bridgecorp had a 3.5 star "investment grade" rating from independent Australian agency Property Investment Research (PIR), whose managing director Richard Cruickshank stood by his firm's appraisal.
"It's a point-in-time rating. We don't know what circumstances have arisen since that may have caused the receiver to be appointed.
"We did proper research but we can't do due diligence and a full audit and we don't sit in their office every day. We rely heavily on information provided by management."
PIR did have Bridgecorp "on watch" for about three months, but there was no way investors could have known that.
Under the new rules, all finance companies will require a credit rating and the Government has indicated it will appoint one or two well-known international agencies, such as Standard & Poor's, to perform that function.
THE MEDIA
The Business Herald and other media were aware of widespread rumours about Bridgecorp's difficulties. But in dealing with an industry that relies so heavily on the confidence of investors and other clients, the media are faced with a tricky balancing act.
On the one hand, sharing information from finance sector insiders with the public about a company's difficulties could prevent them from investing in that company and losing money.
On the other, publicising the difficulties faced by a particular company may spark or worsen an investor rout that tips it into receivership, when it may otherwise have stood a chance of trading its way out of trouble.
The Business Herald last year reported that NZ investors' money was effectively being used to prop up Bridgecorp's Australian operation after the Securities and Investment Commission there prevented it from raising further money, which should have served as a warning sign. We also reported the problems with Bridgecorp's Fijian loan.
Other media reported on the setting up of Compass Capital, which has links with Bridgecorp and was, according to one commentator, a "lifeboat" entity to which some of the company's higher-quality loans were sold, effectively weakening its remaining book.
