In Story Of Panic, Clients Who Hoped For A Lift Might Have Been Taken For A Ride

The Age

Friday April 11, 2008

Michael West

It comes down to disclosure in the Merrill Lynch and ANZ jumbo loan model.

MERRILL Lynch has done it again.

At least one other high-risk margin lender, backed by Merrill, has got the wobbles and is attracting some scrutiny from the regulators amid the fallout from the Opes Prime debacle.

This time, it is Sydney-based Lift Capital. But there is no need to panic. No sign here of shenanigans; it's simply that clients who give business to Lift and other stockbrokers like it are pulling back their counterparty risk thanks to Opes.

Like Opes, Lift lends money to clients to buy speculative stocks outside the ASX Top 300. It also encourages clients to borrow against their property to buy shares. Unlike Opes, there's no suggestion of irregularities, just that the model is on the nose. Lift might have to sell its loan book.

According to the documentation, its clients appear to pledge their securities to Lift and Lift has the right to repledge them to other parties - in this case, Merrill.

Lift principals have been unavailable for two days and Merrill is ducking for cover.

It's not good news for the US bank, which was probably hoping for good publicity yesterday.

Its credit markets team has pulled off the first debt raising from an Australian REIT in the US credit markets since the meltdown last year.

With Deutsche and Citigroup, the bank has raised $US1.1 billion ($A1.17 billion) for Frank Lowy's Westfield Group through a 10-year note.

But that's hardly the story. The story is panic. Cool heads with a bit of lazy cash will clean up in this climate.

Although Merrill was able to exit most of its position in Opes shortly after ANZ called in the receivers late last month, blame ANZ, and salvage most of its $400 million loan in the process by thumping Opes' securities into the market quickly, observers are asking what was it doing in the first place?

Some of the bank's funding to the margin lending community is believed to have been struck at just 42 basis points over the swap rate (ANZ later pushed it up to 75 basis points - still peculiarly low).

They must have taken the view that this was relatively low-risk lending - despite the high-risk nature of the underlying stocks - because they could simply flog the stuff into the market at any time under the securities lending agreement they had struck with Opes.

One source said its exposure to Lift was around $650 million of loans on $800 million worth of stock. There was a margin call from Merrill Lynch on Lift or an associate, the source said, and an intermediary was looking to raise $50 million to fund the call.

According to an excerpt from a Lift product disclosure statement, the lender appears to have marketed to its clients to gear up their superannuation.

"Encompassing a suite of products and services, the SuperLIFT facility is a flexible, comprehensive platform designed specifically to provide leverage for superannuation entities including DIY or self-managed super funds and small APRA funds."

It is believed the regulators are investigating any margin lender that uses this high-risk model.

Melbourne-based Chimaera Capital is another.

Chimaera lends on just about any stock in the All Ordinaries Index and lends stock out for shorting as well.

Although there is nothing inherently wrong with the Merrill and ANZ jumbo loan model used by Opes and others, the relevant issue comes down to disclosure as usual.

That is, whether investors were sufficiently made aware of the risks, particularly unsophisticated investors who had been switched into one of these companies by their stockbroker without being told that they could lose the lot and that they did not hold title over their securities.

In the case of Chimaera, it is not known whether this pledging occurred.

Chimaera principals have been uncontactable for two days.

The Kiwis are not having it any better

THINGS are worse over the gap. The bulk of New Zealand retirees savings are lodged with finance companies in deben-tures and the like. Some 17 have blown up over the past two years and the pace of deterioration is such that the most sensible course of action would be for the industry to get together, freeze redemptions, come up with a plan to consolidate the sector and bring in foreign capital.

Should they consolidate, the foreign capital will come. If not, the downward spiral of confi-dence will claim its victims piecemeal. Liquidity is the issue there, not the underlying assets.

The latest bad news is that a leading finance company, Lombard, has gone into receivership. It had just put a moratorium on redemptions and had a good chance of recapitalisation.

Still, its board of trustees arrived at 5pm yesterday with receivers from Pricewaterhouse-Coopers - no consultation whatsoever with Lombard or its unit holders.

Lombard had already called in insolvency consultant Korda-Mentha, who was supportive of the moratorium. With the trustees placing the fund into receivership, the debenture holders do not get to vote, nor do KordaMentha or Lombard get a chance to put their proposal. BusinessDay believes there could be an injection of capital from offshore if the moratorium proceeded.

mwest@fairfax.com.au

© 2008 The Age

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