Published 3 December 2008
The Securities Commission issued guidelines today on what investors should consider when a moratorium proposal is put to them.
The commission said it couldn’t protect people against genuine investment risk: “Our investigations are about whether the companies misled their investors. If they did the directors can face imprisonment, fines or compensation claims, whether or not the company is in receivership or moratorium.
“Moratorium documents are a form of offer document and are therefore subject to the same rules as other offer documents. The commission reviews moratorium offer documents and will take action to ban them if we consider they contain any false or misleading information.
“We are working with the Registrar of Companies, who has already laid criminal charges in 3 cases and banned some directors, and the commission’s investigations of other cases are well advanced.
“Many investors are currently faced with considering proposals by finance companies for a moratorium or debt restructuring programme. Investors are being told the only real alternative is receivership. A moratorium means that investors forego interest, capital or both for a period of time.
“If a finance company is placed in receivership, investors usually face the prospect of getting back less than their full investment. If the directors are proposing a moratorium they should believe that this will give investors a better chance of getting more of their money back. While a moratorium may extend the life of the company, in many cases it will merely be a longer-term winding down of company assets.
“When considering a moratorium, investors should ask themselves the following questions:
1. How would my rights be different under receivership?
2. How much am I likely to get under receivership, and when?
3. How much do the directors think I will get under a moratorium, and when?
4. Which is more in my interests, given my investment needs (including payout timeframes)?
5. What assumptions have the directors made if they say a moratorium will result in better returns? What are the risks compared with the risks of receivership?
6. Who would supervise a moratorium and report to the trustee or investors?
7. What is the plan to change the moratorium proposal if there are changes in the company’s situation or economic conditions?
8. Do I get another chance to vote if things aren’t going as expected?
9. Is there an independent expert’s report and, if so, what does it say?
10. Have there been any independent valuations of assets?
11. If parties related to the company are contributing assets, are there independent valuations?
12. What does the trustee have to say about the moratorium?
13. What are the financial & legal implications for the directors & other related parties under receivership compared with a moratorium?
“An important consideration is the time period for any returns to investors. While the total return may be likely to be less under a receivership, any returns will most likely come sooner than under a moratorium.
“Therefore it is important to look at the ‘net present value’ of the amounts that are expected to be recovered under each option, as well as the expected total return. A net present value calculation converts expected future benefits into their value today, because money received today is worth more than money received later.
“Because payment to investors is deferred, this means they are being asked to take a further risk on the future performance of the company’s assets & management. The longer the moratorium period, the longer this risk will exist. Assets may decline, rather than rise over time. Either decision involves risks.
“In deciding to recommend a moratorium, the company’s directors must have made some assumptions about the future value of the company’s assets. Investors should be told what these assumptions are and the basis for them. Investors also need to know how the same assumptions would stack up if applied in the shorter term under a receivership.
“If investors have any doubts about any of these matters they should seek independent advice before voting.”
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Attribution: Commission release, story written by Bob Dey for the Bob Dey Property Report.