Crunch time is approaching for ANZ and Merrill Lynch over Opes Prime; they must soon decide whether to settle expensively, or settle in for years in court.
Right now they are dithering – seeking refuge in technicalities. But that can’t go on for long. Just because things have gone quiet lately doesn’t mean it’s no longer dangerous.
Nathan McMahon, the CEO of Cazaly Resources, is probably a fairly typical client of Opes Prime Stockbroking. He thought he was using it as a margin lender, but it turned out he had given it title to all of the stock in a large and varied portfolio. When it went broke, ANZ seized and sold the lot. McMahon lost all of his equity – tens of millions of dollars worth.
McMahon doesn’t want a cash settlement; he just wants his shares back. He has joined the Slater & Gordon class action and told me “the remedy that we are chasing is for ANZ to go into the market and buy our stock back and give it to us”.
That’s because there have been some big moves among the stocks concerned since the appointment of an administrator on 27 March. For example, Cazaly Resources was trading at 25c at the end of March and is now at 50c. Any cash that McMahon receives in respect of that shareholding is now worth half what it was then.
This is just one strand in a spaghetti of complications that will ensure the Opes mop-up drags on and on.
The administrator John Lindholm of Ferrier Hodgson, is talking to both ANZ and Merrill Lynch, but they are not in formal mediation and despite a flurry of stories three weeks ago that ANZ had made an offer of 62c in the dollar, there is no offer and no prospect of a settlement at this stage.
ANZ says it won’t go into mediation unless Merrill Lynch does too. Merrill says it has no need or desire to mediate, but it’s happy to talk.
The total loss is $560 million, which consists of the difference between the market value of the shares that ANZ and Merrill took control of on 27 March, and the loans that Opes had advanced against those shares (that is, the total equity of Opes Prime’s clients).
Complicating this amount is the fact that the market value of each of those stocks is now different to what it was on 27 March – some more, some less.
What is standing in the way of progress right now is the matter of how that $560 million is shared between ANZ and Merrill – assuming they accept that they have to cough up part of it.
It seems that Merrill is sitting on a surplus of between $40 million and $60 million that is due to be paid to Lindholm, although the exact amount is shrouded in complexity as well.
That’s because Merrill’s deal with Opes was not under the Australian Master Securities Lending Agreement (AMSLA), as ANZ’s was, but the Global Master Securities Lending Agreement (GMSLA), which contains subtle but important differences.
Merrill also took a fixed charge over its security immediately after the administrator was appointed, the validity of which may be challenged. If the charge is not valid, Merrill’s liability may be much greater.
Meanwhile Lindholm is also challenging – on undue preference grounds – ANZ’s charge over the assets of the Opes group, acquired a week before administration began in return for an extra loan of $95 million. That claim is for $200 million.
The total of those two amounts being claimed by Lindholm ($50 million plus $200 million) would produce 45c in the dollar for Opes clients.
Even if those two sums were accepted by ANZ and Merrill – which they are not – there isn’t the ghost of consensus about how any additional settlement amount might be split up.
And even if Lindholm managed to get ANZ and Merrill into mediation, and then they agreed to pay that full amount as part of a deed of company arrangement, he cannot bind the clients/creditors from continuing their own litigation.
Which brings us back to McMahon and others like him.
Opes had a total of 1200 accounts for, it’s thought, about 600 individual clients. There are six individual lawsuits afoot, including one class action with a second on the way.
About a 10th of the clients are directly involved in litigation, but while it’s fair to say these are the 60 angriest people, they are not the only ones who are angry.
The ANZ-related clients are angrier than the Merrill Lynch ones because Merrill had higher loan-to-value ratios (because they only lent on top 100 stocks), so the clients’ equity in them was less and their losses were therefore smaller.
ANZ was lending on LVRs of 50% to 60% against penny dreadful stocks, so the client losses are much greater (and some of those stocks have also jumped in the past three months).
Each claim will probably have to be settled individually, in return for individual releases.
This nightmare will result in a final total payout somewhere between Lindholm’s 45c in the dollar and 100c.
In my view, given the sloppiness (at best) and deceit (at worst) in their relationships with Opes, ANZ and Merrill are up for something close to 100c in the dollar minus a litigation time discount – that is, somewhere between $400 million and $500 million, or between 70c and 90c in the dollar.
Perhaps ANZ did mumble an offer of 62c in the dollar at the end of May (at least to themselves). If that was 62% of the full $560 million, or $350 million, then it was probably realistic.
That would leave $100 million for Merrill Lynch to pay to bring the total up to $450 million, or 80c in the dollar, which just might buy releases from all the Nathan McMahons and their lawyers.
If that sounds reasonable to them, then ANZ and Merrill should immediately call a meeting of Lindholm and all the lawyers and put 80c on the table.
If not, and the two banks are confident of their legal positions, then they should tell everyone they’ll see them in court, where they will all get to know each other very well indeed.
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