Metropolis bondholders feel the pain

By SIMON HENDERY

In the meticulously organised study at his St Heliers home, Ian Johnson is penning another letter venting his frustrations at Andrew Krukziener and Doug Somers-Edgar.

On Monday it will be a year since Metropolis bondholders were due to get back the money they lent to help build the landmark central Auckland tower.

As time passes and the money remains unpaid, it seems there is nothing frustrated bondholders such as 77-year-old Johnson can do than wait, fume and write letters.

"I have had no communication from Metropolis or Money Managers for some considerable time," Johnson's latest letter says.

"I feel that I and many others have been the victims of a confidence trick on the part of both [Metropolis developer] Mr Andrew Krukziener and [Money Managers boss] Mr Doug Somers-Edgar."

Arguably, Johnson, a retired accountant who rose to senior partner level, should have known the risks when he invested $50,000 in late 1998 with Pacific Properties (Metropolis) Limited the company behind the development of the 38-level, $180 million apartment, hotel and retail tower.

The 14 per cent interest rate paid on the investment reflected its "junk bond" status. The prospectus for the issue made it clear that bondholders ranked as unsecured "subordinated" creditors, lined up behind $105 million of bank debt and a further $35 million owed to a finance company.

The Metropolis investment represents a reasonable chunk out of Johnson's $600,000 investment portfolio enough of a bite to cause he and 74-year-old wife Joan to can holidays to see family in Australia while the money's fate remains uncertain.

But for investors like Johnson who rely on interest income from investments the concern as time passes without repayment "is more about what's around the corner".

For fixed-income investors looking into the future, the extra few per cent a junk bond investment can earn is often a lure too strong.

The $21 million Metropolis bonds issue was marketed through franchised financial advice company Money Managers, whose client base of mainly 50-plus investors are looking for strong returns on the nest egg that will support them from retirement to the grave.

As the trustee for the Metropolis bondholders, Tower Trust's Glenn Clark often takes several calls a week from anxious investors.

"They can sometimes be investors with relatively small amounts of money invested but they desperately need that money. It may represent a lot of money to them.

"We find with too many of these people that they have put a very large share of their personal net wealth into one or two of those bonds rather than diversifying their portfolio."

He has heard "heart-wrenching" tales of investors short of money for medical treatment. Others want their money back to take overseas holidays, move house, or pay for grandchildren's education.

All Clark can do is remind investors that the subordinated nature of the bonds means they will not receive their money until mortgage-holder ANZ has been repaid, and this in turn depends on Krukziener's company selling the building's apartment and retail space.

The structure of the bond issue absolves Krukziener of personal liability. In bold lettering the 1998 prospectus states: "Andrew Krukziener does not guarantee repayments of the bonds."

"One of the biggest frustrations we have with Mr Krukziener and the Metropolis development has been the lack of communication with bondholders," Clark says.

"Mr Krukziener promised them a proposal in May last year at the time of the default on repayment of the bonds. We still haven't seen the proposal."

It is generally accepted by Metropolis watchers that if the Auckland property market had continued at its bullish 1999 levels, Krukziener would have had no problem repaying bondholders on time last year.

The problem was that by early 2000, about the time that the America's Cup wound up, the wind went out of the market's sails.

The latest in a series of letters from Clark to the 1700 bondholders, updating them on where they stand, should reach their letterboxes either today or early next week.

"We try to pass on as much information as we can, provided that information isn't going to prejudice the chances of the developer completing the development [and therefore returning money to the bondholders]."

Because its fees are paid out of the investment, the trust also balances the cost of keeping bondholders informed against the expense of doing so.

Although financial advisers endlessly preach the need for investors to diversify their investment portfolio, Clark has heard from investors who have their savings tied up in only one or two property bonds.

Clark has acted as trustee for two other Money Managers-promoted junk bonds which have cost investors money.

Investors who put $7 million into Christchurch's Pacific Properties (Park Terrace) apartment development are expected to get back between 67c and 70c in the dollar on money which was due to be repaid in 2000.

The $8 million Ballantyne bond issue for a Katikati residential and golf course development is expected to return 40c in the dollar.

Money Managers says average returns on all the 26 property bonds it has marketed are above 14 per cent. The company also says it advises clients that exposure to this type of investment should make up only a small part of their overall portfolio.

"[In some cases] bondholders ring up and it's very clear in the conversation that they didn't understand the risk they were taking on [with property bonds]," Clark says.

"They don't disclose whether or not they were advised to take that risk on."

Tower Trust will not reveal the content of its latest letter until it has reached investors, but Krukziener says the prospectus is close to being finalised, although he will not specify when, saying that depends on responses from other parties including the Companies Office and the trustee.

"At the end of the day it's not within my control so there's no point me giving you a timeframe for it," he said yesterday.

The delay had revolved around several accounting and tax treatment issues, and liaising with all the parties involved, he said.

Delays are believed to centre on Krukziener not providing up-to-date or complete accounts asked for by the Companies Office.

Krukziener also said yesterday that he was "very close" to paying off the ANZ mortgage, but again would not be specific.

"The important element is that sales within the building have gone very well and we are down to six apartments out of 345 and two penthouses out of 21.

"We've been selling very well out of the building over the last six months. The first mortgage is getting paid down to very low levels so the return of funds to the bondholders is coming closer."

Contracts to lease or sell Metropolis' remaining retail space and to sell the existing retail spaces were also being finalised.

Bondholders would get "a significant sum of their capital back" but he would not be drawn on whether this would ultimately be the full amount.

"I'm not going to suggest that it won't be 100 cents. I'm not going to suggest that it would be 100 cents.

"The bondholders will do a lot better than had they invested in most of the shares in the New Zealand stock market. The bondholders will get a significant return on capital."

While it will be cold comfort for bondholders, Krukziener's last statement might turn out to be correct, on at least one reading.

Since November 1998 when the bonds were issued, the NZSE-40 capital index has risen 5.5 per cent, although this figure excludes dividend payments.

Sharemarket punters also have an easier time selling up when they want out of a particular investment.