Posts Tagged ‘KKRM’

  • ‘Phoenix’ laws under the microscope – Andy McCourt’s Reverb

    In a timely supplement to last week’s Reverb article, Andy McCourt (pictured) looks at the growing attention being directed at the sort of laws that allowed February’s GEON receivership and legal debt nullification, with a British parliamentary review tackling ‘pre-pack’ provisions.

    A Parliamentary Committee in the UK will conduct a thorough review of the abuse of pre-packed administrations in late Northern Spring, it was has reported that by a leading UK publication, Accountancy Live.

    It was reported in Print21 on 25 February that the KKRM attempt at placing GEON into administration and then buying all or some of it back from the receivers was a UK/US-style debt-wiping ‘pre-pack.’ It would now appear that legislation in the country that allowed pre-packs to flourish from the 2002 Enterprise Act, is now back-tracking due to massive abuse of the administration process.

    Pre-packs have never been a prominent feature in ANZ insolvency practice, but the net effect has undoubtedly been achieved in the past, by using DOCAs -Deeds Of Company Arrangement. Not all pre-packs per se are negative; if properly conducted in consultation with creditors and other stakeholders, they can constructively save companies and preserve jobs. However, the temptation to totally wipe out due debts and staff entitlements and start afresh has, more often than not, proved too great for the pre-packers (some would say ‘phoenixers’).

    In halting the KKRM-GEON pre-pack, Australia and New Zealand have established a landmark case for any future attempts both within and without the printing industry. With GEON, all the hallmarks of a pre-pack that would return little to creditors but make large sums for KKRM were apparent:

    • KKRM was asked to provide emergency funding, reportedly $3 million, to keep GEON trading in February. It was declined.
    • KKRM was in possession of a debt of approximately $92 million it had acquired at a heavy discount from bankers.
    • KKRM as senior secured creditor called in the receivers to GEON Group companies, and followed this with an offer of repurchase.
    • KKRM declined to pay past due GEON debts to paper suppliers in order to secure on-going paper supply. If these debts had been paid or guaranteed, paper supply would have been forthcoming.
    • In post pre-pack failure comments, KKRM has indicated that, had it succeeded, plant closures and job losses would still have been implemented

    Lord Younger, in announcing the review to the House of Lords on 13 March said:

    “On the review issue surrounding continuation of supply to insolvent businesses, this is now the subject of a government amendment being debated shortly. We propose to consult on the issue prior to implementing reforms and I am satisfied that this will address the concerns in this area.”

    KKRM via its Australian partner Allegro Funds was asked a series of questions to contribute to this article but has offered “no comment” to all.

    The complete announcement from Accountancy Live can be read here.

  • After the fall: GEON – Andy McCourt’s Reverb

    In the aftermath of the GEON collapse and the ongoing developments seeing parts of the group sold off and other parts shut down, Print21‘s Andy McCourt (pictured), investigates the increasingly complex series of events surrounding the failed print group’s demise and lays it out plain and clear for all to see.

    The outpouring of grief, disappointment and outrage over the situation with Geon and its group of companies, shows no sign of abating. For displaced staff, the injury is being compounded by the insult of not having separation certificates issued and being told to register with FEG/GEERS for any hope of a portion of their entitlements. This is a dark time indeed in the history of the printing industry, industrial relations and insolvency practice. Put another way, it’s a diabolical disgrace.

    I knew and did business with several of the business owners whose firms subsequently formed the agglomerated Geon group. Don Elliot (Agency Printing) has already aired his disgust publicly and questioned how a very profitable business can be handed over to new management who so swiftly destroyed all the value. The Van Weeren family of Dynamic Press, which suffered the tragic early death of its heir apparent and my friend Ray, would have to be one of the most successful family-run mid-size printers ever. Hard-nosed to do business with and demanding to work for, but committed to maintaining secure employment in a family atmosphere.

    The late Ron Hoolihan of Graphic World can not speak for himself so I will try: he’ll be turning in his grave. I am told on reliable authority that another printer who sold to Geon/Gresham wept openly when news of his former business’s closure and sacking of staff was announced.

    So, how do these MBA and CPA-endowed wunderkinds of the financial world manage to raze-to-the-ground and trample upon a collection of good businesses that were once the pride and joy of family owners, highly profitable, tolerable employers and so attractive that they were bought for good sums? Is there a post-graduate course in blithering idiocy for some MBA-PE types?

    The pride that existed on the pressroom and bindery floors of these once great businesses never went away. This was the human capital that the likes of Geon and the ‘old’ Blue Star were fortunate to inherit. The private-equity backed owners played it to the hilt, citing all the usual corporate platitudes of ‘loyalty’ and ‘people are our greatest asset’ and ‘proud to be a member of such a great team’ – before turning on them like a cobra striking at its prey and then severing all the lifelines that might offer hope. “Don’t be evil” is Google’s motto; theirs may well have been: “Be evil.” Having acquired once proud businesses and staff who took great pride in their work, all that this particular branch of private equity management could deliver was false security.

    Lulled by corporate mission statements and platitudes; mind-numbed by banal work practices requiring skilled press operators to stop printing while they swept the floor, kept yellow lines bright and the old lie ‘people are our greatest asset’ – savvier Geon staffers just quit, while those with fewer choices stayed in a place that, according to some, seemed to take on all the characteristics of Orwell’s dystopian 1984 – complete with Proles, Newspeak and Thought Police. Not to mention a Big Brother.

    A DISGRACED BRAND NAME

    Then there’s the renaming – Geon – it’s what a great industry friend, now retired, would call ‘an exercise in applied wankmanship.’ The more academically inclined might call it epistemological solipsism, but ‘applied wankmanship’ will do. Geon: – do you know what it means? There are three possible meanings, all of them apposite to the press-wreck we have witnessed. A Geon can be a theoretical object or shape corresponding to ‘Biederman’s Recognition-by-Components Theory’ – is that clear? In Physics, a Geon can also be a theoretical electromagnetic or gravitational wave held together solely by its own energy field. In Geology; it’s a long, long extinct time period such as Jurassic and Mesozoic.

    Not only did Geon, under Gordon Towell’s  CEO watch, choose an appalling name to replace the more logical Pacific Print Group, but it then, under Graham Morgan’s watch, ‘refreshed’ the brand mere weeks before disappearing up its own Geon. This makes Nero look like a brave firefighter in ancient Rome.

    Destroying brand value, profits, jobs and reputations has many faces but the most prominent one I can see in all this is: greed – closely followed by incompetence. Becoming wealthy is not necessarily an essential by-product of greed. Some people can create fortunes by just being honest with themselves and others – Warren Buffet for example; Bill Gates is another. Even our own Kerry Packer was unfairly charged with being greed-driven; I think he was more achievement-driven and hyper-competitive; like Dick Smith, another example.

    No, the greed that has driven Geon to where it is now is all the corrosive, amoral, lying, exploiting and manipulative kind of greed that betrays its own needs and wants. Gresham Private equity thought it could make a massive return for its #2 Fund by loading Geon up with debt, leeching all the value out of it and selling it off like discarded old wife – for just $1: ONE DOLLAR!! according to the AFR’s ‘Street Talk’ columnist Anthony Macdonald. KKRM saw that it could buy Geon’s (and other) debts at a huge discount but claim back the full amount by use of a dextrous piece of corporate chicanery whereby anyone owed unsecured money – including staff – by Geon would suddenly be cast into a mire-filled ditch of unrecoverable bills and claims. If anyone believes that the asset sale followed by liquidation of Geon will realize more than the $92 million it owes to KKRM, the Tooth Fairy will visit you at 5am tomorrow.

    A DEEP AND DISTURBING KNOCK-ON

    It’s not just the big debts to paper companies, the ATO and staff entitlements that should worry us. Geon dealt with scores of smaller suppliers, contractors and service providers.

    With an estimated $120 million of debt – $92 million of which is KKRM’s secured amount purchased for much less than half of that from Lloyds/BOSI; it is easy to focus on big unsecured creditors. However, the hurt drills down deep into our industry with dozens of small suppliers and contractors, such as David Crowther’s  Colour Graphic Services who provided ISO 12647 implementation, uniting and certification services to GEON.

    Crowther notes: “I’m not saying what we are owed but it is a very significant amount for a small service business like ours. We deliver a very high level of personalised technical support and training which makes it all the more painful when that goes unpaid for. I have made a lot of close working relationships with GEON staff, and even have a few close friends that I have known for over 35 years. Yes I have been hit hard, but there is always someone worse off than yourself and I really feel for those struggling with a family, mortgage and wondering where there next pay check is coming from.

    “For me I like to take a positive outlook and not to dwell on the past. There is still a number of high quality, well run printing businesses that I deal with day to day, so it is head down still doing the best I can to deliver what I believe is the regions best colour quality systems support,” he says, just one example of many.

    As these smaller creditors seek to re-engineer their businesses to cope with cash losses, they themselves may struggle to meet their obligations. Some will survive – usually by mortgaging personal property – but some will fall by the wayside in a sad but inevitable knock-on effect as certain as tsunamis follow deep sea earthquakes. Most of these will go unreported as the Geon debacle winds down.

    IN THE LAP OF THE RECEIVERS

    And winding down it is; we are nearing the final round of asset sales prior to the March 25th, or thereabouts, second creditors meeting. McGrathNicol, on both sides of the Tasman, are furtively seeking buyers.

    Andrew Grenfell and William Black of McGrathNicol NZ, in response to my questions on Geon’s NZ operations including the world-class Highbrook supersite have said:

    “(We) are pleased to confirm that offers were received by the deadline of Friday 8 March 2013. The receivers are currently working through those offers. As negotiations have not yet completed the receivers cannot comment further at this time.”

    With yesterday’s news that wages will continue to be paid by the receivers until the end of this week, things are looking better for some of our Kiwi friends than they are this side of the ditch, unless you are one of the unfortunate ones to have already lost their jobs, courtesy of the receiver.

    The GEON administrators, PPB Associates, are there to administer the assets of the business because the directors believed the company was, or risked becoming, insolvent. Sources close to PPBA are at pains to point out that it is the receivers, McGrathNicol, and not PPBA who have the necessary employee information to issue separation certificates and advise asset purchasers such as Blue Star on how to contact staff to whom they wish to offer re-employment.

    PPBA does however have a role to play in the availability of the Fair Entitlement Guarantee (FEG: formerly GEERS) to ex-Geon staff. They are working closely with both FEG and McGrathNicol to determine the best outcomes. For employee entitlements to be paid from Geon receivables, there must be a surplus from the realized ‘circulation assets’ i.e. debtors, cash-at-bank and non fixed-asset incomes. First dibs go to the administration and receiver’s fees, then staff entitlements. For fixed assets (presses, property etc), the secured creditor KKRM comes ahead of staff, so there is little hope there of a surplus.

    McGrathNicol is highly respected  in the insolvency world with several high-profile receiverships and liquidations either under their belt or in progress such as ABC Learning Centres, Allco Finance, Banksia Securities, Harris Scarfe and the infamous HIH Insurance to name but a few.  Like all registered receivers, they must declare independence and impartiality in any receivership or liquidation.

    Receivers’ and administrators’ fees often come in for criticism and they are certainly high, with a Senior Partner charged at anything up to $700 per hour and even a junior admin assistant at $160. The hours for multiple associates can mount up to a frightening level; PPBA disclosed their estimated costs for the first six days alone of the Geon administration at around $100,000, before McGrathNicol’s fees.

    Receivers and administrators pay themselves first ahead of all other creditors. When you consider the risk they take in guaranteeing wages and debts during the administration, this is understandable but can sometimes result in all surplus recovered assets being used to pay fees. I know this from experience; I was once owed a paltry $3,500 by a company placed into liquidation. I optimistically put my claim in with the receivers, only to be informed a few weeks later that there was no surplus as all the recovered monies had gone in fees and the company was 100% liquidated.

    THE QUICKER THE BETTER

    So, the best hope for staff entitlements is that McGrathNicol can wrap this one up fast, keep fees down and leave some money left over from circulating assets (there is an ASIC formula for calculating the percentage of their fees attributed to circulating/floating and fixed assets). At this stage, no one knows, and in the meantime they have fired workers on both sides of the Tasman to keep their wage bill under control.

    Receivers and liquidators are all-powerful; the Kings of the jungle in the corporate menagerie. They have teams of forensic accountants to go after the money and if they find illicit goings on, must report these to ASIC who can and have, as in the case of HIH (Ray Williams and Rodney Adler), prosecuted and put perpetrators in gaol. They are the fiscal waste collection and recycling service for businesses; an essential service that cleans up other people’s mess and attempts to return distilled purity to the market. Sadly, there is always collateral damage and that means individuals and families. Insolvency Law is currently under Treasury review with the Insolvency Law Reform Bill, and none too soon.

    It is heartbreaking to read some of the ex-Geon employee and smaller supplier comments on this forum. The spin and disinformation fed to them appears to have continued right up to Geon’s last breath, creating the false sense of security. Even the AMWU was ‘Of the view that this was a very viable company.’

    For many of the proud and highly skilled staff of Geon, everything will be too late but the hope on the horizon is that the new houses of Blue Star/Wolsely/Selig in Australia and Blue Star/Mercury/Sturgess in NZ are built on much more solid foundations with industry-knowledgeable heads, a firm capital base and realistic expectations of returns.

    The pride of members of the ANZ printing workforce is immortal: – the false security engendered by Geon Group is already smouldering in the dust of decay and putrefaction.

    McGrathNicol Australia and KKRM via Allegro Funds were invited to answer a series of questions for this article but at time of completing, have not done so. Thanks to PPBA and McGrathNicol NZ for their input.

  • GEON – It’s a Pre-Pack! Andy McCourt’s ReVerb

    Shock, emotion, uncertainty, anger and vitriol have reverberated around our industry since the announcement of GEON’s administration followed by receivership. In the midst of this, logic and reality appear to have taken the back seat. Print21’s Andy McCourt (pictured) takes a closer look at the situation.

    The term ‘Pre-Pack’ may not be widely used here but it is well known in the UK, particularly in the printing industry. In simplest of terms, a Pre-Pack administration is one where the directors have already made a deal with the administrators and receivers before placing a company into CVA (Company Voluntary Administration). The deal of course is to buy all or part of the company‘s assets back and continue business under a new name or a slightly changed version of the old name (e.g. XYZ (2013) Pty Ltd).

    Changes in 2002 to UK law, known as the Enterprise Act, made Pre-Packs legally achievable over the more dubious practice of Phoenixing. Predictably, there has been an avalanche of unpopular Pre-Packs since then. Australian law has never embraced the concept of Pre-Packs but there is no doubt the practice exists here in process if not name – click here for details.

    Corporate Law firm DLA Piper notes:

    “Despite all of the impediments outlined above, pre-pack transactions have been successfully implemented in Australia by way of a receivership sale of assets or a restructuring and trade-on through a Deed of Company Arrangement.” The full article can be seen here.

    So, a rose by any other name smells as sweet and it is possible that KKR/Allegro (KKRM) are using gray areas of Australian corporate law to achieve a Pre-Pack outcome at GEON. Incidentally, the M in KKRM stands for ‘McKeller’ after the project name to acquire the distressed debt from Lloyds and BOSI. It’s after our poet Dorothea McKellar, ironically, who wrote ‘My Country’. Insolvency law has been under review by government committees for some time. There appears to be a dire recognition for the need to change, but a distinct lack of strategy and policy to achieve it. See my column from April 2010 here.

    The June 2012 Act known as the Tax Laws Amendments Measures have been reported elsewhere to make illegal ‘Phoenexing’ to avoid PAYG tax and Superannuation Guarantee Levy payment obligations, with directors supposedly personally liable for Tax and SGL. However, first ‘Phoenixing’ must be proven and any country town solicitor would be able to challenge that. All it needs is a new company name and anyway, directors with less than 12 months service are not liable.

    This means, if any of the KKRM executives have taken or will take on directorships of GEON (currently only Samford Maier and Jack Crumlin are listed as directors), they are not liable under the Act. Speaking of Jack Crumlin, he is a partner in Norton Crumlin Associates of North Sydney, who still have the (pictured) proud boast on their website about helping Gresham and GEON. Just how is ‘success’ defined in your world, Jack? Anyway, GEON is being groomed for a Pre-Pack, not Phoenixing because Phoenixing is naughty and possibly illegal.

    Why Pre-Pack? This is the simplest question to answer. It wipes out all debt and yet leaves the assets of the concern in the hands of the former owners for a fresh start. It’s a dream process for the owners, a nightmare for creditors – unless as the owner, you are also the most senior secured creditor and your ‘debt’ suddenly becomes equity in a business with plenty of assets but no liabilities.

    It is still possible that KKRM might be ‘gazumped’ that is that the Receivers might receive a higher offer from a third party and they are legally required to consider all the best outcomes for the business. If this happens, KKRM still win as any proceeds from the sale, less fees, would go to them in majority.

    This is how the growing world of private equity works. The degree of financial and legal sophistication is light years ahead of the average print business owner-operator. Nothing in what is happening in the GEON receivership is illegal, it would appear. Sure, there is moral outrage and gnashing of teeth by unsecured creditors – and understandably so.

    Employees of GEON would have to be the group that is suffering most and what is about to happen is a 2-edged sword. Their only hope of continued employment and perhaps even some of their entitlements such as long service leave and super, is that either the Pre-Pack is successful or a White Knight buyer scoops the company. It’s not a nice space to be in.

    And what of GEON’s customers and long-term contracts? By definition the contracts are voided by the insolvency…they can choose to keep printing with GEON or take their business elsewhere.

    The entire issue is vexed with contradictions and conundrums but this is the price we pay for operating in a free market economy. When it is working well, we praise the system; when it fails, we curse it.

    I expect to see a Pre-Packed GEON emerge within 10-14 days, there are time requirements on the process. Where it goes from there is anyone’s guess.

    Let’s hope the lessons are learned and learned well.