How an ex-factory worker helped save iconic company
None of my many professional experiences came close to the demands and difficulties we confronted while saving Investa
In September 2007, Morgan Stanley Real Estate Funds (MSREF) and some of the world's most prominent sovereign wealth and pension fund investors purchased the Investa Property Group, a well-known property company listed on the Australia Stock Exchange, for about $6.5 billion. It was one of the largest "take-private" transactions in the history of Australia.
This transaction was also one of the largest undertaken by Morgan Stanley and its real estate funds group. MSREF was the world's biggest real estate investor with about $185 billion of assets under management at one time and offices worldwide.
To pay for the purchase, MSREF used about $2 billion in equity and $4.5 billion in debt. The heavy reliance on debt funding was typical of private equity firm transactions in the heyday of leveraged investments, and cheap and available debt.
However, excessive corporate debt was a primary reason why so many companies failed, and it contributed significantly to the global financial crisis (GFC), that began with Lehman Brothers' bankruptcy in 2008. Such high-risk investment strategies by banks led to stricter U.S. federal legislation and worldwide banking regulatory changes.
The Investa business plan called for a quick sale of Investa assets at peak prices and use of the proceeds to pay down the high level of debt to a more sustainable level.
All of the debt was relatively short term (two to five years maturity), it was cross-collateralized (default on one loan, and all loans were due and payable immediately), and it was partially guaranteed by MSREF.
The plan employed a strategy of selling assets quickly after the acquisition at high prices typical of market expectations. Such a strategy can be very rewarding when markets are in balance and values are increasing; but the same strategies are vulnerable to financial market declines.
When the GFC commenced within a year of the acquisition, global capital markets froze, and it was impossible to sell hard assets (e.g., office buildings). Investa suffered from high levels of required interest payments that far exceeded income from the property portfolio.
The GFC also stressed Morgan Stanley and its funds business. MSREF suffered losses throughout the world as property values and income declined and commercial buildings competed for a diminish-ing supply of tenants. While MSREF had guaranteed a substantial portion of Investa's loans, in the depths of the GFC there were no lon-ger sufficient funds to pay the guarantees if Investa defaulted.
The bank was also under severe financial pressure and only late support from a Japanese bank saved Morgan Stanley. A default by Investa on $4.5 billion of debt and the loss of $2 billion of equity could have had far-reaching consequences for institutional investors and banks generally. It would further pressure real estate values and commercial markets.
To complicate matters further, Australia has corporate laws that are very punitive toward debtors who do not repay their loans. The country does not have a U.S. Chapter 11-type law that allows corporate reorganization. When a company cannot pay its bills or loans, the normal course is to call in an administrator to take control of the company and liquidate the assets.
When board members believe the company will be unable to pay its bills during the upcoming 12 months, that board must declare the company "insolvent" and cease doing business under Australian law. Failure to do so can result in board directors' personal liability for any debts incurred.
Intentional borrowing when a company should have been declared insolvent is also a criminal offense punishable by jail. As chairman of the board and CEO, I was doubly in jeopardy if the company failed and it was determined the company should have been declared insolvent at an earlier date.
With billions of dollars of debt maturing and no obvious source of funds to pay off the debt, insolvency concerns constantly loomed in the background as we tried to navigate through the GFC. I frequently met with outside corporate counsel regarding insolvency laws and their applicability to Investa's circumstances.
I was often told that we were operating in a grey area where a reasonable person would have to believe that the company would figure out a way to pay its debts. This vague answer gave me little comfort; many of my senior colleagues transferred their assets into a spouse's name because of solvency concerns.
For the past 25 years, I have been a "corporate fix-it" or "corporate turnaround" guy for property companies. When a company is underperforming or a particular commercial building is at risk, I am a guy that investors can call to remedy the situation.
None of my many professional experiences came close to the demands and difficulties we confronted at Investa during the GFC. None tested a management team as my colleagues and I were tested from 2008 through 2012.
My life has encompassed the joys and sorrows from one's journey: the happy days filled with sunshine and hope, and the dark days of overcast and depression. I have benefited from years of marital bliss and mutual dependence, and suffered the tears of rejection from a late-in-life divorce.
I have experienced poverty and wealth; viewed life from the factory assembly line and the executive corner office; experienced the highs of long-distance running and the lows of the stroke unit in a foreign hospital; and traveled the world conducting business in different cultures and settings. This is my story.
This is an edited extract from Scott MacDonald's book, Saving Investa: How an ex-factory worker helped save one of Australia's iconic companies (XOUM Publishing $29.99), now available at good bookstores and online.