Former Feltex chairman Tim Saunders told ANZ Bank in late November 2005 that if it didn't have continued bank support he would have to “hand over the keys” to the company. This statement was made to Peter Holland, former head of ANZ's corporat
Former Feltex chairman Tim Saunders told ANZ Bank in late November 2005 that if it didn’t have continued bank support he would have to “hand over the keys” to the company.
This statement was made to Peter Holland, former head of ANZ's corporate portfolio management, a few days before to Feltex’s annual shareholders meeting on December 1, former chief executive and director Peter Thomas said.
Mr Thomas was giving evidence in defence of charges he and four other former directors are facing under the Financial Reporting Act.
The five are defending charges of failing to disclose a breach of banking covenants in the December 2005 half-year accounts and failure to classify debt to the ANZ Bank as a current liability.
Mr Thomas said the talk of handing over the keys came amid discussions with Mr Holland over what to do about Feltex’s banking covenants, which would “clearly” be in breach as at December 31, 2005.
“Mr Holland sat back and said ‘there will be no receivership here’,” Mr Thomas told the Auckland District Court.
Mr Thomas said Mr Holland then agreed word for word what Mr Saunders would say to shareholders at the annual meeting.
The general theme was that Feltex continued to have a strong relationship with its bank.
“Normalised” ebitda
Mr Thomas told the court that he attended two important meetings with Mr Holland just before the AGM.
The meetings were held to discuss Feltex’s banking covenants, among other issues. At this time Feltex had debt to ANZ of about $A120 million.
ANZ had earlier agreed to provide an additional working capital of $A10 million to help Feltex absorb the costs of a restructuring proposal that included the closure of its Braybrook yarn plant in Melbourne.
This agreement came at a cost with ANZ lifting its interest rate margin to 1.95 percent above the bank bill rate and scheduling a review of the facility on November 30.
Mr Thomas said his understanding after having discussions with ANZ and Mr Holland was the bank would look at renegotiating the definitions of the covenants.
He said the definitions would have to be changed to reflect “normalised” earnings, which would have restructuring costs stripped out.
Mr Thomas said he told Mr Holland that if the covenants were not “flexed” then Feltex would require a waiver.
With restructuring costs and lower trading profits it was mathematically impossible for Feltex to stay within its financial covenants, Mr Thomas said.
He said at one meeting, held at a coffee bar in Melbourne, Mr Holland told him, ‘you will have a waiver.’
“I left the meeting understanding that we would have a waiver,” Mr Thomas said.
But ANZ did not provide a waiver to the covenants until May 2006.
Feltex collapsed into receivership in September 2006.
ANZ held different view
In earlier testimony, Mr Holland told the court that granting waivers for covenant breaches was regarded a serious matter for the bank and he would never insinuate to a company director that a waiver would or might be granted.
He said the bank would not discuss the prospect of a waiver until a company made a formal request in writing.
At no stage before the release of Feltex’s December 2005 half-year accounts did ANZ receive a written request, Mr Holland said during his questioning last week.
An independent report prepared for the bank by McGrath Nicol said if Feltex was liquidated, ANZ could lose $A64 million, about half the bank’s exposure.
Ernst & Young to blame?
Meanwhile, in opening the defence case, Paul Davison, QC, said his clients did not dispute that the financial statements did not meet the applicable reporting standards.
However, they pleaded not guilty to the charges under section 40 of the Financial Reporting Act, claiming they took all reasonable and proper steps to ensure they did comply.
They claim they relied on the advice of Ernst & Young auditors and Feltex's finance department that the financial statements for the half-year complied with NZ IFRS.
Yesterday, former Feltex chief financial officer Des Tolan said he didn’t know the accounting standards that the financial statements were issued under.
“We accept the fact that we got it wrong,” he said.
