When Brokers Float, Beware The Dive

The Age

Wednesday March 19, 2008

Michael West

B&B has declined to put any more money into Tricom in its struggle to find a buyer.

ONE of the sure-fire signs a sharemarket cycle is approaching its peak is when stockbrokers begin buying each other and floating their own firms.

This cycle was no exception. Wilson HTM, Findlays, Austock and Bell listed last year, their respective share prices soaring in an overheated market while Macquarie was poaching staff from Goldman Sachs and big-ticket dealers were fetching $250,000 sign-on fees just to bring their business to another broking house.

Right on cue the market dived.

As small investors now start to capitulate to the bearish conditions, worn down or driven out by their losses, retail trading volumes are on the wane.

Against this backdrop, Lance Rosenberg's bid to sell his troubled Tricom operation to Colin Bell's Bell Financial Group failed yesterday. But Tricom's creditor, Babcock & Brown, declined to put any more money in to fund the deal.

Babcock, which did a lot of business through Tricom, had already lent the struggling broker $35 million to help it settle its trades. The stake came about through a share swap and is secured; so Babcock will rank ahead of ordinary shareholders in any wind-up.

The Bell proposal was to inject $50 million into Tricom to keep the business alive. Rosenberg was to have taken 15% of Bell subject to staggered performance hurdles. For its part, Bell was prepared to take on $20 million in liabilities.

Tricom's two major creditors would have to come to the party on the rest of the liabilities. ANZ was happy with the deal. It wanted to keep the business alive. Babcock, however, did not want to tip any more money in. This leaves Babcock with a perceived overhang in its stock as a chunk of the Tricom loan book is lent over shares in Babcock and its satellite trusts. The amount is believed to be about $70 million, not large in the scheme of things.

One of the vexing issues for Tricom, and any prospective suitor, is its loan book.

Given the prevailing environment of tumbling stock prices, Tricom founder Rosenberg had done a neat job of getting the stock lending book with ANZ, Merrill Lynch and Credit Suisse down from $2.4 billion last June to $340 million this week.

As far as Tricom's liabilities went, sources said a mooted lawsuit from Allco was not the killer in the deal.

Tricom's woes came to the fore on so-called Black Tuesday last month after a stock lending deal over Allco shares went awry. A Tricom client had taken a large "short" position in Allco, Allco shares plunged on news of margin calls over Allco Principals Trust's stake in Allco Finance Group. Tricom "called the stock" back from its custodian ANZ to cover the short position but ANZ failed to deliver; which left Tricom in the lurch on settlement.

Despite staring down the abyss of insolvency, Tricom was putting a brave face on things last night. There were "discussions with other parties", it said.

The Tricom predicament is not great news for Babcock chief Phil Green. Green has been on a world roadshow to restore investor confidence in his company. Unlike financial engineering fellow Macquarie Group, however, he's sending out mixed signals.

While Macquarie has been sending out as few signals as possible - announcing the odd asset sale only while privately drumming up interest for its wholesale infrastructure funds - Green has gone on the front foot. He swiftly dealt with the head stock's margin loans in the satellites, reaffirmed bullish guidance for a $750 million profit this year and pulled out the chequebook to buy stakes in the three Rubicon trusts. These three got smashed again yesterday on news of margin calls in what was deemed to be the strongest trust, Rubicon Japan.

This is a market, however, where perception dwarfs earnings forecasts and asset values - which is probably fair enough as asset values had a fair tick skywards during the bull market - and the perception that a deal is a dud can only undermine the two things Babcock and its peers need most: confidence and a reasonable stock price.

© 2008 The Age

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