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Tuesday, 3 June 2003
Page: 15894


Mr FITZGIBBON (7:42 PM) —I rise to speak on the Appropriation Bill (No. 1) 2003-2004. Macquarie Bank made an after-tax profit of around $300 million last financial year. It is an organisation backed by around $33 billion worth of assets. Tonight, I want to talk about one of the greatest acts of corporate bastardry I have seen in my seven years in this place. It is an act which has left the small to medium sized businesses in my electorate out of pocket by around $8 million. Of course, many jobs associated with those businesses are now at risk. The Nardell Colliery in my electorate began operations in March 2001, and its proponents painted a very rosy picture of its future. However, less than two years after it commenced production it was placed into receivership. The closure of the mine was sudden and contrary to market expectations.

Clearly, the major equity and debt holder, Macquarie Bank, experienced losses in its investment in the mine. The security that Macquarie Bank holds over Nardell's assets, however, will help Macquarie Bank recoup most of its investment. Unfortunately, because of the security that Macquarie Bank holds, the unsecured creditors—those small and medium sized businesses in my electorate—will be the big losers. Many aspects of the manner in which Nardell was placed into administration and receivership are of great concern to me. Firstly, they include the positive statements on Nardell's web site about Nardell and the going concern assumption. Comments made on Nardell's web site and formal statements made in Nardell's annual report would lead any reader of those reports—including unsecured creditors, of course—to believe that Nardell had a promising future and that short- and long-term debts would be honoured.

Key questions to be asked are: what changed, and when did directors become aware that no further funding would be forthcoming from Macquarie Bank or its subsidiary vehicles? My view is that Macquarie Bank nominated directors, who wholly controlled Nardell Holdings, continued to accrue debts after they knew Macquarie Bank was proposing to pull the funding plug on the coalmine. Unsecured creditors, it is worth noting, grew by 142 per cent from 30 June 2002 to the balancing date.

My second concern is about the debt capital arrangements and the appropriateness of their terms. Macquarie Bank, through various controlled entities, provided the bulk of the loan funds for the Nardell mine. The terms of the debts were advantageous to Macquarie Bank controlled entities, as typified by an interest rate of 23 per cent being charged on $22 million worth of secured notes. This raises the questions: what actions did the company take to secure additional debt on appropriate terms, and what would the terms have been if Nardell had secured an arms-length transaction with another lender? Further, for the financial year ended 30 June 2002, Nardell incurred interest and financing charges of $3.7 million, which represented 38 per cent of total revenue, yet the annual return was quite clear in stating that the business was `a going concern'.

In its full financial year of operation, Nardell recorded an operating loss of $14.5 million. The result would have been very disappointing for its stakeholders, though the directors of Nardell were of the opinion that the loss was due to `low levels of production'. However, with an expected increase in production in the next financial year, they claimed, there were expectations of a much better financial result. Notwithstanding the early optimism of the mine, on 20 February 2003 the board of directors of Nardell Holdings advised Macquarie Bank to appoint a receiver to the Nardell Coal Corporation. The decision to close the mine appeared to surprise many relevant stakeholders, including the chairman of Nardell's board, Mr Campbell Anderson. Mr Anderson stated at a creditors meeting on 27 February 2003 that, up until 19 February, he did not believe the appointment of an administrator had been an option. He had been as surprised as anyone that the mine was going to close.

The following are salient features of the financial statements of the Nardell mine at 30 June 2002. There were total assets of approximately $44 million and total liabilities of approximately $40.4 million. The major liabilities were: interest bearing liabilities of $33.5 million—all owed to entities controlled by Macquarie Bank; accrued interest on these liabilities of $3.5 million—of course, again all owed to entities controlled by Macquarie Bank; and unsecured trade creditors of $3.3 million. The equity position totalled $4 million, and it comprised $18.4 million of equity capital provided by Nardell Holdings and the loss of $14.4 million sustained in 2002. Nardell is ultimately controlled by Macquarie Bank, which is the major equity holder and debt financier for the operation of the mine. As a controlled entity, Nardell is theoretically an extension of the ultimate holding company—that is, of course, Macquarie Bank.

A review of Nardell's web site on 9 March 2003 reveals several statements which express confidence about the future of Nardell and its operations. It is paradoxical that these positive statements remain on the web site more than two weeks after the company was placed into administration. I ask the House to consider the following quotes from the web site:

... Nardell is strategically positioned to be a reliable, low cost supplier to both the export and domestic coal markets.

Current production at Nardell will be up to 1.5 Million tones per annum, with plans to increase production to five million tones per annum.

Another quote is:

Nardell has several contracts in place with several major Asian steel mills and power utilities to purchase the Mine's high quality semi-soft coking and thermal coal with the first major export shipment made in July 2001.

And another quote is:

Nardell is strategically placed to be a reliable, low cost supplier to both the export and domestic markets with contracts already in place to supply a large Asian steel mills and the nearby Macquarie Generation power stations which supply almost 22% of south-eastern Australia's electricity needs.

These are all statements on the web site which would have given unsecured creditors every confidence in their financial relation with the company. A review of formal statements made in the 2002 annual report by the directors of Nardell also present a positive view of the future of the company. I note that the directors' report and the directors' declaration are dated 18 September 2002, approximately five months prior to Nardell being placed under administration. I ask the House to consider the following directors' statements. In explaining the poor performance in the first year, the directors state:

As a result of the low levels of production the loss of the consolidated entity for the financial year after providing for income tax amounted to $14.457 million.

At face value, the financial result would be concerning to all relevant stakeholders in the mine. However, under the heading `Significant changes in state affairs', the directors state:

The development of the Nardell Colliery has progressed to a stage where commercial levels of production are expected to commence during the forthcoming year.

Further in the directors' declaration, it is stated:

... there are reasonable grounds to believe that Nardell Holdings Pty will be able to pay its debts as and when they become due and payable.

However, five months after these statements were made, the directors advised that the company should be placed under administration. Obviously, factors which impact on the viability of an operation can change. But the directors were very clear in supporting the fact that the entity was a `going concern'. The Macquarie Bank's involvement basically underlines this view.

The accounting `going concern' assumption was one of the key principles and assumptions relating to the preparation of financial statements. In essence, the accounting `going concern' assumption is premised on the assumption that the entity is expected to be able to pay its debts as and when they fall due and continue in operation without any intention or necessity to liquidate its operations within the next 12 months. Further, according to Australian Accounting Standards policies:

When preparing the financial report, an assessment must be made of the entity's ability to continue as a going concern. The financial report must be prepared on a going concern basis unless it is intended to either liquidate the entity or to otherwise wind up its operations ...

Further:

In assessing whether the going concern basis is appropriate, it is necessary to consider all available information ... which is at least, but is not limited to, twelve months from the reporting date.

... ... ...

... it may be necessary to consider a wide range of factors including current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can be established that the going concern basis is appropriate.

In the context of the direction provided by Australian Accounting Standards, it is very interesting to read note 1 of Nardell's financial statements. It says:

The financial statements have been prepared on the going concern basis which the directors believe to be appropriate for the following reasons:

(i) Macquarie Investment Trust III—

that is the wholly controlled investment vehicle of the bank—

the majority shareholder in Nardell Holdings Pty Limited (the company), has confirmed to the directors its continued support to Nardell in working towards the completion of development and operation of the Nardell Colliery.

... ... ...

(ii) Subsequent to year end, the $22 million convertible note facility from Macquarie Investment Trust III ... which was fully utilised at year end, was extended to a $30.2 million facility ... Macquarie Investment Trust III has no current intention to call the convertible notes held by it and issued by Nardell Holdings Pty Limited.

(iii) Mine development activities have been completed to a stage where the directors have a high level of confidence that profitable mining operations are achievable in the short term.

In the specific context of Australian Accounting Standard AASB 1001, the assurances provided imply a time frame of at least 12 months—that is, to 30 June 2003. Australian Auditing Standard AUS 708 Going Concern provides detailed and specific guidelines to auditors on their obligations concerning the analysis of the going concern assumption. It states:

When planning and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of the going concern basis underlying the preparation of the financial report.

Significantly, if the auditor believes there is an uncertainty about the entity's future viability, the auditor is required to mention this specifically in the audit report. In this case the auditor basically has two options. One, if the auditor considers that the uncertainty is adequately disclosed in the financial report, the auditor should give an unqualified opinion with an emphasis of matter—that is, further explanation to the readers of the report. Two, if the matter is not adequately disclosed, this constitutes a disagreement with management and then the auditor is required to issue a qualified report—that is, to indicate reasons for the disagreement with management.

The auditors of PricewaterhouseCoopers provided a totally unqualified report, which is interesting given that Nardell had recorded a loss of $14.4 million. Because of the financial ramifications of the liquidation, auditors are typically very careful in accumulating evidence to support their going concern judgment. By not providing a qualified report or an emphasis of matter unqualified report, presumably PricewaterhouseCoopers were of the opinion that Nardell would continue to operate for at least an additional 12 months. By clear implication they had taken the same view as the directors, but the support of Macquarie Bank warranted an unqualified opinion. However, it would be interesting to understand exactly what the auditors relied upon in providing such an unqualified opinion.

It is very significant that part of the funding of Nardell activities came from two sources. The first was mezzanine finance of a loan of around $10 million from Bond Street Investments, another wholly controlled subsidiary of Macquarie Bank. The interest payable was calculated on the outstanding principal at 12 per cent per annum. The loan and the interest owing are secured by a fixed and floating charge over the assets of Nardell Holdings. The second source of funding was convertible notes worth $22 million from Macquarie Investment Trust III—again, a wholly controlled entity of Macquarie. Interest is calculated on the convertible notes at 23 per cent per annum. It would have been cheaper to put the debt on Mastercard! The convertible notes and the interest owing are secured by a fixed and floating charge over the assets of Nardell and Nardell Holdings. Thirteen million in convertible notes were convertible into ordinary shares at the discretion of MITIII at any time up to 30 June 2006 at a price of 63c per share. The remaining $9 million in convertible notes were convertible into ordinary shares at the discretion of MITIII up until 30 June 2006 at a price of 44c per share.

Another contentious question is: what is a fair and appropriate interest rate on the debt the Macquarie Bank controlled entities provided Nardell, given that the debt was both secured and convertible to equity? Obviously interest rates on specific loans will be a factor in general interest rates, plus a margin of risk. In normal arm's-length transactions, competitive forces will dictate the interest rate and the terms of the loan. However, in circumstances when an entity is providing the finance to a related entity, common practice is to use an interest rate for commercial bank bills plus a risk margin of two to four per cent. In general terms, for the last few years, bank interest rates have been at around six per cent. Consequently, we would have expected the rate on the mezzanine loan and the convertible nature to have been around eight or 10 per cent and not 23 per cent.

Obviously, there was a greater perceived risk, which certainly was not indicated in the 2002 annual report, with interest rates factored upwards at a rate of more than double the standard rate—that is, 23 per cent—combined with both a fixed and a floating charge that seemed to be outside normal expected boundaries. So, the debt holder has an interest rate reflecting a perceived risk beyond normal lending parameters, which is further covered by a fixed and floating charge. The questions remain: what action did the company take to ensure that additional debt on appropriate terms could be secured? What would those terms have been if another source had attempted to be secured?

On a related matter, it is significant that during the financial year ending 30 June 2002, Nardell incurred interest and finance charges of $3.7 million. It is of some note that the interest expense was approximately 38 per cent of total revenue from the coal sales that Nardell earned—which was around $9.7 million—yet the annual return considers the company to be a viable and ongoing concern.

There are other issues that warrant consideration, including the apparent growth in unsecured creditors leading up to the day before Nardell was placed into receivership, the domination of the board by Nardell and Macquarie Bank—it was wholly controlled—and the information used by auditors to support the unqualified opinion. These are explained in a report prepared by Professor Scott Holmes and a colleague at the University of Newcastle. I thank them for their contribution in that regard, but I do not have the time this evening to canvass all their points. The key points I want to make are the following. A few pointy heads at Macquarie Bank had a great idea for all their investment trusts: invest in a coalmine. When they decided it was not going to be as profitable as they had hoped they pulled the funding pin, leaving unsecured creditors to take a bath.

I wrote to ASIC in March this year, asking it to investigate the issues I have raised in the House tonight. To my great distress, ASIC wrote back to me on 22 April informing me that, having had an initial look and some discussions with the administrator, they were not prepared to pursue the matter any further. There was one paragraph in that letter that intrigued me. It was this one:

ASIC conducts an assessment of every complaint we receive. In determining which matters we will select for further action, consideration is given to a range of factors including the likely regulatory effect of any available action.

I will tell you what that means, Mr Deputy Speaker: within its limited resources, ASIC is more interested in pursuing the high profile cases. Unfortunately, my small to medium sized businesses in the electorate of Hunter are not high profile enough for ASIC. It is prepared to spend lord knows how much money pursuing Rene Rivkin for an act of insider trading which, at the end of the day, is claimed to have led to a profit for him of around $350—yet $8 million to $10 million is owed to my unsecured creditors by an act of absolute bastardry on behalf of the Macquarie Bank and ASIC does not see any merit in pursuing the case. The first question is: why is ASIC not interested in pursuing the case further?

I want to pose some questions about Macquarie Bank's relationship with government in this country: the strong relationship between the bank and the Commonwealth and, I do not mind saying, the strong relationship between the bank and state Labor governments in this country. I note that in the New South Wales parliament—or at least within the Labor parliamentary caucus in Macquarie Street—last week there was a caucus resolution adopted that, in future, when the New South Wales government is considering public-private partnerships with big organisations like Macquarie Bank, those considerations should include the extent to which those private partners are prepared to be good corporate citizens and to fess up to their moral obligations to the people with whom they do business.

A division having been called in the House of Representatives

Sitting suspended from 8.05 p.m. to 8.21 p.m.


Mr FITZGIBBON —I will make one final point. One year's annual salary of the CEO of Macquarie Bank, Allan Moss, which is around $6 million plus a significant amount of shareholder options, would cover the money owed to the unsecured creditors in my electorate. Macquarie Bank should do the right thing by them.