Former banker reveals stress at Feltex

Feltex’s Australian bank “could have” demanded immediate repayment of its funding facilities in late October 2005, a former risk manager for the ANZ says.

That could have brought about the carpet maker’s collapse a year earlier than eventually happened as it was totally reliant on ANZ funding of more than $150 million, Peter Holland told the Auckland District Court yesterday.

Mr Holland, whose corporate portfolio management unit was responsible for monitoring distressed or problematic loans, was called as the first Crown witness in a trial of five former Feltex directors which began yesterday.

The directors – Peter Thomas Peter Thomas, Peter Hunter, John Hagen and Michael Feeney, and former chairman Tim Saunders – have pleaded not guilty to charges under the Financial Reporting Act.

The charges concern Feltex’s interim financial statements for the six-month period ended December 31 2005, the first set of accounts prepared by Feltex under the new international financial reporting standards (IFRS). The accounts were finalised and published in February 2006.

The Registrar of Companies alleges the Feltex directors failed to disclose an ANZ Bank debt facility as a “current” liability and did not disclose a breach of financial covenants during that period.

If convicted, each director is liable to a fine not exceeding $100,000.

Mr Holland said his role was to initially “shadow” and provide oversight to accounts, before they moved under his unit’s direct control.

He said he was notified that the bank had concerns about Feltex in June 2005 and his team became fully involved in November.

In September Feltex indicated to the ANZ that it was considering a major restructuring plan to save costs as falling earnings meant it was running up against its covenants.

As part of the restructure Feltex wanted to close its Melbourne Braebook yarn plant but would need a further $10 million working capital loan to help absorb the decommissioning costs.

At this point Feltex had brought in global consultants LEK to conduct a review of the proposal.

The ANZ, by this time applying greater vigilance to the Feltex account, brought in its own external consultant to review the restructure.

It hired Colin Nicol of corporate insolvency specialists McGrath Nicol to review the affairs of the company.

Mr Holland said the bank decided to advance the $10 million but there were several conditions attached.

Firstly that loan was short in term – being repayable by December 20.

“We needed to be convinced the company could do the restructure so we gave it a month or two while keeping our options open,” Mr Holland said.

“We could have [called in the loans] but Feltex had several initiatives underway and it wouldn’t have been right. It was wait and see.”

And secondly, it would be priced according to the bank’s risk profile of Feltex. ANZ priced the loan at 2.75 basis points over the bank bill rate - a “very high rate” at that point of the cycle, Mr Holland said.

But further to that, after seeking a second report from Mcgrath Nicol, ANZ acted to amend the pricing on its main facilities, including an $A75 million term loan.

A new deed was drawn up to “bring together” the various funding lines and advance the $10 million for restructuring costs.

The interest rate on the term loan was increased by 80 basis points to 200 points over the bank bill rate and an $A40 million cash loan went up by 112 points to 195.

By the end of November the ANZ was getting even more twitchy. At an internal meeting on the November 29 the bank brought in senior credit officials.

The tone of that meeting was that Feltex was “going south,” Mr Holland said.

Earlier in the trail Justice Doogue declined an application from Feltex accountants Ernst & Young to have certain documents excluded from evidence.

The defence team is expected to argue that and if Ernst and Young had not failed in its obligations, the directors would not be on trial.

Case continues