Cymbis Finance Australia Limited (Receivers and Managers Appointed) ("Cymbis") ACN: ABN:

Transcription

1 Detailed report to Debentureholders Cymbis Finance Australia Limited (Receivers and Managers Appointed) ("Cymbis") ACN: ABN: February 2015 Dear Debentureholder I refer to our previous reports to Debentureholders of which there have been eighteen since our appointment on 6 August While there are still a number of matters which will delay the finalisation of the receivership, they are not significant to the outcome for Debentureholders. While we await their finalisation we take this opportunity to provide you with a detailed summary of the key actions, issues and outcomes of this receivership. Our report is set out under the following headings 1. Executive summary 2. Background (a) Cymbis (b) Reasons for the appointment 3. Detailed financial analysis of the receivership 4. Receipts (a) Loan book recoveries (b) Property realisations (c) Mortgage indemnity insurance recoveries (d) Third party recoveries (e) Other recoveries 5. Costs (a) Asset recovery costs (b) Debentureholder management (a) Other costs 6. Debentureholder returns (a) Critical issues (b) Returns to date (c) Further distributions 7. Other matters (a) Finalisation of the receivership (b) Liquidator (c) Trustee liaison (d) Communications (e) Final comments PricewaterhouseCoopers, ABN Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T: , F: , Liability limited by a scheme approved under Professional Standards Legislation.

2 1. Executive summary Cymbis was a property finance company that raised funds through the issue of debentures in order to finance loans to property investors and developers mainly in coastal, regional areas of Queensland. In 2008, following a succession of borrower defaults on scheduled loan repayments, Cymbis began experiencing significant cash flow problems and was unable to meet repayments due to its Stockholders (otherwise known as Debentureholders). As a result, Cymbis management requested the Trustee for the Debentureholders to appoint a receiver and manager and on 6 August 2008 the Trustee appointed Greg Hall and I as receivers and managers of Cymbis. As at the date of appointment, Cymbis had a loan book of approximately $64.1m and amounts due to Debentureholders of approximately $64.5m, comprising $49.8m due to the Enhanced class of Debentureholders and $14.7m due to the Ordinary class of Debentureholders. The most significant asset of Cymbis and therefore the main area of focus of the receivers and managers during the course of the receivership was the Cymbis loan book. Recoveries from the loan book can generally be categorised as follows: Loan book recoveries: Recoveries achieved as a result of working with Cymbis borrowers to collect loans, either through a sales process initiated by the borrowers or via borrowers refinancing their loans with other financiers, as they fell due. Mortgagee in Possession ( MIP ) recoveries: Recoveries achieved as a result of Cymbis having to take enforcement action against borrowers in order to realise the properties which secured the loans advanced by Cymbis. Insurance recoveries: Recoveries achieved as a result of the receivers and managers pursuing Cymbis insurers, under mortgage indemnity insurance policies, for the shortfall on loans after realisation of the secured property. A summary of the recoveries made by the receivers and managers in each of the above categories and the costs associated with these recoveries and other aspects of the receivership is set out below. ($ 000) Loan Book Recoveries Debentureholder Management Loan Book MIP Insurance Other Receivership matters Gross recoveries 13,353 27,813 14,069-1,869 57,104 Expenses / other (1,695) (5,361) (2,414) (2,111) (1,204) (12,785) Net recovery 11,658 22,452 11,656 (2,111) ,319 Expenses as a % of gross recoveries 13% 19% 17% Total Total distributions paid to Enhanced Debentureholders to date 42,659 % recovery across all Debentureholders (based on Debentureholder registry as at date of appointment) 66.2% % recovery to Enhanced Debentureholders (based on Debentureholder registry as at date of appointment) 85.7% Debentureholder management cost per year of the receivership 0.5c/$ Note: The above summary is based on the receivers and managers receipts and payments up to 31 December

3 The key factors that have most significantly impacted on the level of recoveries achieved by the receivers and managers is summarised below: Impact of the global financial crisis: The global financial crisis had a significant impact on the property market in Queensland not only in terms of property prices but also the ability of borrowers to successfully refinance their loans. Borrower security: The majority of borrowers were special purpose companies established for property acquisition and development purposes with little to no other assets available to be realised to fund repayments due to Cymbis. The majority of these companies and third party guarantors ultimately ended up in formal insolvency and/or bankruptcy processes themselves. Insurance recoveries: While recoveries achieved in this area was at the upper end of the range provided to us by our legal advisers, there were a number of issues relating to the interpretation of the policy documents and also Cymbis internal loan management practices which impacted on recoveries achieved. Time factors: As a result of the issues outlined above, the asset recovery process has taken a significant time to complete and has necessarily involved additional costs being incurred in order to recover assets for the benefit of the Debentureholders. While there were a number of issues that impacted on the level of recoveries achieved by the receivers and managers from the assets of Cymbis, the most significant issue impacting on the level of returns to the Debentureholders was the outcome of the Court directions hearing in the Supreme Court of Queensland in December As Debentureholders may recall, following an application by the Trustee to the Court for directions concerning how the assets of Cymbis should be distributed, the Court determined that Enhanced Debentureholders had priority over the Ordinary Debentureholders in terms of recoveries from the assets of Cymbis (after payment of various recovery and other costs) and that this priority also extended to interest which continues to accrue on the debentures. As a result of the above, the receivers and managers have paid distributions to the Enhanced Debentureholders in priority to the Ordinary Debentureholders. Based on recoveries achieved to date, the receivers and managers have paid 11 distributions totalling $42.7m to the Enhanced Debentureholders, representing a return of 85.7 cents/$ based on the balance due to the Enhanced Debentureholders as at the date of appointment. Regrettably, as a result of recovery levels achieved and the Court's determination, the receivers and managers have been unable to distribute any monies to the Ordinary Debentureholders. While there are still a number of matters which need to be dealt with before the receivership can be finalised, they are not significant to the overall outcome for Debentureholders. On current estimates, we expect to be able to finalise all remaining matters in this calendar year after which a final distribution of approximately 1.3 cents / $ (based on the balance due to the Enhanced Debentureholders at the date of appointment) can be paid to the Enhanced Debentureholders. This will take the total return to the Enhanced Debentureholders to 87 cents / $ (based on the balance due to the Enhanced Debentureholders at the date of appointment). 3

4 2. Background (a) Cymbis Cymbis commenced operation on 10 August Its offices were located in the Brisbane CBD and at the time of our appointment it had five staff managing the day to day affairs of the business. The staff were employed by a related company which contracted its services to Cymbis. The directors of the company and their relevant appointment and cessation dates are detailed below. Director Appointed Ceased Owen Tallentire 10 August 2004 Wayne Douglas 10 August October 2006 John Toigo 10 August January 2005 Colin Ryan 12 January August 2008 Douglas Merritt 12 January April 2008 Robert Sutherland 20 December July 2008 According to company searches the ultimate owner of Cymbis was a NZ registered company called Cymbis Trustees Limited. This company was struck off in October Cymbis was established to lend money, predominately to property developers at various stages of the development process. Cymbis appears generally to have been able to charge these developers a premium over rates that would have been charged by banks or other first tier financiers. In addition, in the event of default these rates increased by significant amounts. It is assumed that the premium was able to be charged as the borrowers were not able to obtain the finance from lower cost financiers, however Cymbis management indicated to us that it was also for a range of other reasons including ease of doing business with Cymbis. The majority of the borrowing was for developments in regional, coastal areas of Queensland. The loans made by Cymbis were secured in three ways. First, by the taking of security over the relevant property and often the borrowing company itself, secondly with mortgage indemnity insurance (subject to various terms) and then with various guarantees generally from the principals of the borrowing companies. Cymbis lending to its client base was in turn funded by the raising of funds via the issue of debentures. In general this was in two groups being the Enhanced Debentureholders and the Ordinary Debentureholders. Generally money from the pool of Enhanced Debentureholders was used to make loans of up to 66.67% of the value of the mortgaged property and the Ordinary Debentureholders funds were used to top up these loans to up to a maximum of 75% of the value of the mortgaged property. The debenture funds were borrowed on a wide range of terms (both periods and rates) with interest rates generally above standard bank interest rates, reflecting the additional risk associated with the associated lending. The issuance of the debentures by Cymbis was covered by a number of prospectus documents registered with ASIC. 4

5 (b) Reasons for the appointment We understand that in 2008 Cymbis started to experience cash flow problems. Cymbis management advised that scheduled loan repayments were being hampered by the fact that borrowers were unable to refinance their loans as they began to fall due. This turned out to be an early warning sign of the global financial crisis. Uncertainty in the market also led to a reduction in property sale clearance rates and property valuations which in some areas reduced significantly. Cymbis was lending to developers at all stages of the development process of the secured property including everything from completed units to vacant, undeveloped land. The slowdown impacted property sales all along the development chain with property in regional Queensland severely impacted. Cymbis was in effect undercapitalised and did not have any significant cash reserves. As a result, as repayment of loans from borrowers slowed, Cymbis was very quickly unable to repay monies due to Debentureholders as they fell due. In the few weeks prior to our appointment around $7.7m of debentures fell due for repayment and the company was unable to meet these commitments. Cymbis management communicated this to the Trustee for the Debentureholders and in addition advised the Trustee that it did not expect to be in a position to repay a further $3.6m which was due to be paid to Debentureholders by 11 August Based on this position, Cymbis management requested that the Trustee appoint a receiver and manager to take control of the company. This appointment was made on 6 August

6 3. Detailed financial analysis of the receivership Set out below is a summary of the recoveries made by the receivers and managers during the course of the receivership, the costs associated with these recoveries and other aspects of the receivership and the net return to Debentureholders based on distributions paid to date. ($ 000) Loan Book Recoveries Debentureholder Management Loan Book MIP Insurance Other Receivership matters Gross recoveries 13,353 27,813 14,069-1,869 57,104 Expenses / other (1,695) (5,361) (2,414) (2,111) (1,204) (12,785) Net recovery 11,658 22,452 11,656 (2,111) ,319 Expenses as a % of gross recoveries 13% 19% 17% Total Total distributions paid to Enhanced Debentureholders to date 42,659 % recovery across all Debentureholders (based on Debentureholder registry as at date of appointment) 66.2% % recovery to Enhanced Debentureholders (based on Debentureholder registry as at date of appointment) 85.7% Debentureholder management cost per year of the receivership 0.5c/$ Note: The above summary is based on the receivers and managers receipts and payments up to 31 December Further details in relation to the above mentioned recoveries and costs associated with the receivership is set out in the following sections. The key factors that have most significantly impacted on the overall financial outcome are set out below. Impact of the global financial crisis The uncertainty caused by the global financial crisis had a significant impact on the demand for property in new developments in regional areas on the Queensland coast. Furthermore, in the areas that Cymbis was lending to there were a significant range of other developments underway, many of which ended up in a distressed situation. This resulted in a significant amount of distressed property on the market at the same time and consequently property values plummeted in these areas. Borrower security Most of the parties borrowing from Cymbis were special purpose companies established for property acquisition and development purposes and which either had no substantial business interests in unrelated areas, little personal equity and / or were exposed in the same or similar locations to other financiers. This meant that they were unable to meet interest repayments from other sources and ride out the market downturn. Insurance recoveries A key item which may have attracted Debentureholders to Cymbis was the fact that it had purchased a range of mortgage indemnity insurance policies from various Lloyds syndicates. This insurance however was limited to the principal amount of loans advanced and imposed a 6

7 range of strict operating requirements in terms of Cymbis internal loan management practices. While a significant recovery was negotiated from this party it was substantially less than might otherwise have been expected for a range of reasons discussed further in Section 4(c) below. Time factors Given the difficulties in the property market and consequently the time taken to recover assets and subsequently negotiate with insurers, the receivership has taken a significant time to complete. These delays have inevitably led to additional costs being incurred thus reducing returns to Debentureholders. These costs are analysed in more detail in Section 5. As a result of the above factors the overall net recovery to Debentureholders to date (based on distributions paid to Debentureholders) has been approximately 66.2 cents/$ against the total Debentureholder registry at the date of appointment. However, as a result of the Court determination with respect to the priority of payment as between the Enhanced and Ordinary Debentureholders (discussed further in Section 6(a)), this has resulted in the Enhanced Debentureholders recovering approximately 85.7 cents/$ (based on the balance due to the Enhanced Debentureholders at the date of appointment) with the Ordinary Debentureholders receiving no distribution. As indicated by the table above, of the $44.3m total net recovery to date, we have distributed $42.7m to Debentureholders leaving a current balance of $1.6m being held by the receivers and managers. This relatively small balance of funds is being held while we finalise the last remaining aspects of the receivership. Once this has occurred, a final distribution will be paid to Debentureholders. See Section 6 and 7 below for further details in relation to Debentureholder returns and matters that remain to be finalised before the receivership can be concluded. 7

8 4. Receipts The key asset of Cymbis was its loan book, which broadly comprised loans to property developers secured against properties at various stages of the development process. Generally the loans were structured within the following parameters: Loans covered only one stage of the development process with the intention that they then be refinanced via more conventional finance. Loans from the Enhanced Debentureholder pool covered an amount up to the value of 66.67% of the valuation of the secured property. In most cases the amount advanced was less than this in order to cover for interest accruing during the borrowing period. Additional funds, up to a maximum of 75% of the value of the secured property, could then be lent from the pool of funds raised from the Ordinary Debentureholders. Loan periods did not exceed 18 months. There was a limit on the maximum exposure to one borrower (including related parties) of no more than $10m. Loans were covered by first mortgage security, collateral security and mortgage indemnity insurance to cover the principal amount of the loans. In the early stages of the receivership our strategy was to work with the borrowers to collect the loans in an orderly fashion as they fell due. Given the apparent high level of security and the relatively high costs of the alternative approach of taking enforcement action against borrowers, this appeared to be the most cost effective and value maximising approach to recovering Cymbis loans for the benefit of the Debentureholders. Accordingly, this approach was pursued while reserving our rights to take action if we deemed it necessary. This strategy was successful in the short term, particularly with respect to loans secured by properties which were either fully developed or at the latter stages of the development cycle which could more easily be refinanced or sold by the borrower. Conversely, loans secured against properties at an earlier phase of the development cycle were much more difficult to collect as borrowers were unable to refinance or sell the properties in a timely manner. While we again tried to work with these borrowers in order to avoid the additional cost of taking enforcement action, we ultimately ended up having to take control as mortgagee in possession of a considerable proportion of the secured properties. Together with the depressed state of the property market at the time, which impacted on price levels achieved, and the additional time and cost taken to realise the secured property, this resulted in a significant shortfall in terms of the recovery of Cymbis loan balances. This created a need for the receivers and managers to pursue claims under Cymbis mortgage indemnity insurance policies (discussed further below) and against the borrowing companies and third party guarantors, most of which entered into formal insolvency and bankruptcy processes themselves, which resulted in limited recoveries being achieved. A summary of the recoveries made by the receivers and managers during the course of the receivership to date together with the estimated costs of recovery is set out below. Further details on these recoveries is set out in Sections 4(a) to 4(d) below. 8

9 ($ 000) Loan Book Recoveries Total Loan Book MIP Insurance Loan book realisation 13, ,057 Property / asset realisation - 27,201-27,201 Mortgage indemnity insurance recoveries ,069 14,069 Interest received & other sundry income / refunds Gross recoveries 13,353 27,813 14,069 55,235 Expenses / other 1,695 5,361 2,414 9,470 Expenses as a % of gross recoveries 13% 19% 17% 17% Net recovery 11,658 22,452 11,656 45,765 Total loan book on appointment 64,056 Gross recovery as a % of total loan book on appointment 86% Expenses as a % of total loan book on appointment 15% Note: The above summary is based on the receivers and managers receipts and payments up to 31 December (a) Loan book recoveries As noted above, the strategy adopted during the early stages of the receivership was to work with the borrowers in order to collect the loans in in an orderly fashion as they fell due. While this strategy was successful in the short term, particularly with respect to loans secured by properties which were either fully developed or at the latter stages of the development cycle which could more easily be refinanced or sold by the borrower, the number of borrowers who were ultimately able to repay their loans was limited. While the state of property market in Queensland at the time meant that it took longer for Cymbis borrowers to sell and/or refinance their loans, the benefits of persevering and affording Cymbis borrowers time to achieve such an outcome is evidenced by the lower costs of recovery (13% of gross recoveries) compared to the costs of recovery relating to those loans where it was necessary for us to take possession of the secured property as mortgagee in possession (19% of gross recoveries). It should also be noted that some of the costs relating to the loan book recoveries relate to time spent working with borrowers who ultimately ended up as mortgagee in possession sales. The real recovery costs for this category of recoveries could therefore be lower than is shown here. (b) Property realisations As it became clear to most borrowers that they were unlikely to be able to exit their loans at or around the property valuation levels applying at the time loans were initially advanced, a wide range of alternative solutions were proposed and in many cases there was increasing resistance to working with us to clear the debt as quickly as possible. As a result we generally ended up needing to take the necessary action to take possession of the properties securing the loans as mortgagee in possession. This ultimately resulted in increased costs particularly as sale processes were often protracted due to market conditions. 9

10 (c) Mortgage indemnity insurance recoveries While we are limited in what we can disclose to Debentureholders around the recoveries achieved as a result of Cymbis claims under mortgage indemnity insurance, a summary of the claims submitted and recoveries achieved is set out in the table below. ($ 000) Claims submitted (18 claims relating to 21 loans) 27,360 Adjustments relating to amounts advanced for interest & fees 5,455 Adjusted quantum of claims submitted 21,905 Claims accepted prior to mediation (5 claims) 4,069 Settlement achieved at meditation (13 claims) 10,000 Gross recovery 14,069 Expenses / other 2,414 Net recovery 11,656 Gross recovery as a % of adjusted quantum of claims submitted 64% Net recovery as a % of adjusted quantum of claims submitted 53% Note: The above summary is based on the receivers and managers receipts and payments up to 31 December There were a significant number of issues with respect to the claims which Cymbis made under the mortgage indemnity insurance policies. This included a major issue of interpretation around what was the principal and interest portion of the loan, various issues around Cymbis internal loan management practices and various other differing interpretations relating to the insurance policy documents. The claims process was also not assisted by the fact that a key party involved in the arrangement and management of Cymbis insurance arrangements was a New Zealand based insurance broker who entered into liquidation during the claims process. Ultimately the settlement achieved from Cymbis insurers was at the upper end of the range provided to us by our legal advisors. It also came with the considerable benefit of avoiding potentially many years of legal proceedings and significant legal costs had we been required to fully prosecute the matter in Court. Under the insurance arrangements, the insurer obtains first rights to third party recoveries in the event that claims are paid out. As part of the settlement reached with the insurers, it was agreed that we would receive 20% of any net recoveries achieved by the insurers as a result of any actions taken by the insurers against valuers associated with loans advanced by Cymbis. The insurers are currently pursuing some actions against valuers associated with loans advanced by Cymbis however at this stage we are not certain on the timing or likelihood of recovery. This is the only significant item remaining to be resolved before we can finalise the receivership. (d) Third party recoveries The main potential areas for third party recoveries would in the normal course have been: the borrowing company itself; the guarantors; and actions against other third parties such as valuers 10

11 As noted above, these rights transfer to the insurer in the event that claims are paid out. Most of the parties borrowing from Cymbis where special purpose companies established for property acquisition and development purposes and which either had no substantial business interests in unrelated areas, little personal equity and / or were exposed in the same or similar locations to other financiers. This meant that they were unable to meet interest repayments from other sources and ride out the market downturn. In relation to recoveries against the borrowing companies and guarantors, while we initially pursued these parties, in the majority of cases the borrowing companies and guarantors almost all ended up in liquidation (in the case of borrowing companies) and bankruptcy (in the case of the guarantors). As noted earlier in this report, most of the borrowing companies were special purpose companies established for property acquisition and development purposes and which either had no substantial business interests in unrelated areas, little personal equity and / or were exposed in the same or similar locations to other financiers. Accordingly, other than the secured property, there was either very little or no other assets which could be relied upon to recover further monies to repay the Cymbis loans. In relation to recoveries against valuers associated with the loans made by Cymbis, these are currently in the hands of the insurers who in some cases are pursing actions against these parties. As a general comment however it is fair to say that prior to the global financial crisis many properties were selling at or around the prices that would support the valuation provided. Accordingly, while these properties sold at considerably less value after the global financial crisis, this does not mean the valuer had incorrectly valued the property at the time loans were advanced by Cymbis. Evidence of actual negligence by the valuer is required to have a valid claim. We await the outcome of these matters in due course. (e) Other recoveries The only other substantial recovery in the receivership was an amount of approximately $1.9m which represented cash on hand at the date of our appointment. Of this amount approximately $380k represented application monies received from investors for new debenture stock. These monies were held on trust and eventually refunded on the direction of the Court. 11

12 5. Costs (a) Asset recovery costs As referred to earlier in this report, the receivers and managers took the initial approach of attempting to work with Cymbis borrowers to have them repay their loans, rather than taking enforcement action which would result in additional costs being incurred. In the early stages of the receivership we utilised a number of the Cymbis management team to manage the collection process. This was considered the most cost effective way of collecting Cymbis loans given management s existing knowledge and relationship with the borrowers, their knowledge of the secured properties and their lower cost relative to the receivers and managers. Ultimately, as borrowers struggled to repay their loans and often became more difficult to deal with, we were forced to take possession of a large portion of the property that was held as security for the loans and work through a sale process with or without the borrower s cooperation. This necessarily required the receivers and managers to take over full management of the recovery process and Cymbis staff numbers were wound back accordingly. The costs of the realisation process were also increased due to a range of factors the most significant being the extended time it took to sell the various properties. This led to multiple sales and valuation processes being required, extra advertising costs and in some cases special incentives to agents to sell, particularly in instances where we had a significant number of properties for sale in estates that were in competition with other mortgagee in possession sales. In addition it was necessary to maintain mortgage indemnity insurance cover in order to ultimately be able to make the claims against the insurer. Overall realisation costs to date have amounted to approximately 17 cents/$ against total gross loan book recoveries or 15 cents/$ against the total Debentureholder registry at the date of appointment. A summary of these costs is set out below. ($ 000) Loan Book Recoveries Total Loan Book MIP Insurance Gross recoveries 13,353 27,813 14,069 55,235 Expenses Receivers fees & expenses 1, ,881 MIP fees & expenses - 1,780-1,780 Legal fees & expenses ,006 1,762 Cymbis staff costs (including office expenses) Property costs (including rates, levies, taxes, maintenance, insurance) - 1,342-1,343 Sale costs (including valuation, advertising, agents fees) 47 1,373-1,420 Mortgage indemnity insurance premiums Total expenses 1,695 5,361 2,414 9,470 Expenses as a % of gross recoveries 13% 19% 17% 17% Expenses as a % of the total Debentureholder registry as at date of appointment 3% 8% 4% 15% Note: The above summary is based on the receivers and managers receipts and payments up to 31 December

13 (b) Debentureholder management At the time of our appointment there were 1,857 Enhanced Debentureholders and 420 Ordinary Debentureholders. Debentureholders were spread over a wide geography with a considerable portion of Debentureholders based in NZ. The characteristics of each individual Debentureholder in the registry varied considerably in terms of applicable interest rates, maturity dates and interest calculation & accrual methodology (e.g. compounding, non-compounding). Information with respect to the Debentureholder registry was also held on a unique information platform which did not make it easy to transfer to a different system. In the early years of the receivership there was a high volume of Debentureholder correspondence and calls. For these reasons it was considered that initially the management of day to day Debentureholder matters would continue to be dealt with by a number of existing Cymbis staff under the supervision of the receivers and managers staff. By just under two years the volume of enquiry had fallen and tended to become more technical around receivership issues, status of the receivership and forecast returns. These questions were very often referred to our staff and therefore we closed the Cymbis office and transferred the management of Debentureholders to our office. As these calls further reduced and became much more routine we were then able to further reduce the cost by outsourcing the majority of Debentureholder management matters to Link Market Services, a professional provider of share registry services who was well equipped to deal with day to day Debentureholder matters and the maintenance of and transactions related to the Debentureholder registry. This has proved to be cost effective albeit many Debentureholders still choose to talk directly to staff in our office, which we are of course more than happy to accommodate. Over the course of the receivership to date, Debentureholder management has cost a total of approximately 3 cents/$ against the total Debentureholder registry at the date of appointment or an average of 0.5 cents/$ per year of the receivership on the same basis. (c) Other costs Apart from the above, the most significant other cost in relation to the receivership has been associated with the requirement for the receivers and managers to maintain financial records and to comply with the regular reporting requirements of the Australian Securities and Investments Commission, the Australian Prudential Regulatory Authority and the Australian Taxation Office. Together with other administrative costs (not associated with asset recovery), these costs have amounted to approximately $120k per year. 13

14 6. Debentureholder returns (a) Critical issues The most significant issue to impact on the level of returns to Debentureholders, other than the loss in value of the assets themselves, was the outcome of the directions hearing in the Supreme Court of Queensland in Brisbane in December A report was issued to Debentureholders on 20 November 2008 by the receivers and managers, advising Debentureholders that the Trustee had made an application to the Court in order to obtain directions regarding the distribution of the proceeds from the realisation of the assets of Cymbis and that the Court had set a date of 4 December 2008 for the matter to be heard. A copy of the application was included in the report to Debentureholders and other documents in relation to the proceedings were also made available to the Debentureholders. In the report to Debentureholders, it was also noted that because the outcome of the Court hearing could impact on returns to Debentureholders, the Trustee recommended that Debentureholders seek their own professional advice with respect to the application and the effect which it might have on them. It was also advised that Debentureholders could appear at the hearing if they wished to do so. In essence, while there was a view that each group of Debentureholders, being Enhanced and Ordinary, had access to different pools of assets in the event of default, the legal position appeared to be that in fact the Enhanced Debentureholders had the first right to all of the assets of Cymbis (after payment of various recovery and other costs). As this was a matter with significant implications as to how money was distributed the Trustee determined that it needed to seek the Court s directions. The Court confirmed that the correct position was that the Enhanced Debentureholders did have first right to all of the assets of Cymbis in priority to Ordinary Debentureholders (otherwise known as Stockholders) receiving any money. Furthermore, the Court advised that the Enhanced Debentureholders also had a right to receive ongoing interest in full (even after the appointment of the receivers and managers) in priority to any receipt by Ordinary Debentureholders. The Court also advised that Debentureholders were able to elect whether they would have principal or interest repaid first in any distribution. Based on this ruling, the receivers and managers have proceeded to pay out Enhanced Debentureholders in priority to any return to Ordinary Debentureholders. Given recovery levels achieved, this has meant that there is no prospect of a recovery for Ordinary Debentureholders. Indeed based on recovery levels and the ruling that ongoing interest would be paid to Enhanced Debentureholders this has meant that even if there had been no costs at all associated with the receivership there still would have been no recovery for Ordinary Debentureholders. (b) Returns to date The table below sets out the distributions made to date in this receivership. As indicated, and in accordance with the Court ruling referred to above, these returns have all been made to the Enhanced Debentureholders. 14

15 Date of distribution Amount distributed ($m) Distribution based on the balance outstanding to Enhanced Debentureholders on the date of appointment (cents/$) 31 October April August March July December April September June September November Total As noted above, given the level of recoveries and the outcome of the Court directions hearing, there have been no returns to the Ordinary Debentureholders. (c) Further distributions As indicated earlier in this report, we are currently holding a small balance of funds until all matters concerning the receivership have been completed. On current estimates, we expect this will be in this calendar year after which a final distribution of approximately 1.3 cents / $ (based on the balance due to the Enhanced Debentureholders at the date of appointment) can be paid to the Enhanced Debentureholders. This will take the total return to the Enhanced Debentureholders to 87 cents / $ (based on the balance due to the Enhanced Debentureholders at the date of appointment). 15

16 7. Other matters (a) Finalisation of the receivership We expect that the receivership should be able to be finalised in this calendar year once all remaining matters have been completed. As noted earlier in this report, the settlement with the insurers in relation to the mortgage indemnity insurance claims involved, amongst other things, an agreement that we would share the outcome of any recoveries achieved as a result of actions against valuers associated with loans advanced by Cymbis. While such claims were always the right of the insurer in respect to claims paid out by them, we were able to negotiate a proportionate share for Debentureholders in the event that a recovery was made. This proportion is after the insurer recovers its costs of pursuing such recovery actions. As indicated earlier in this report, the insurers are currently pursuing some actions against valuers associated with loans advanced by Cymbis however at this stage we are not certain on the timing or likelihood of recovery. We do not however expect any substantial recoveries from this source. (b) Liquidator We anticipate that a liquidator may shortly be appointed to Cymbis. To avoid any confusion for Debentureholders we set out below a brief summary of the different roles of ourselves, as receivers and managers, and a liquidator. As receivers and managers we were appointed to take control of all of the assets of Cymbis and realise them for the benefit of the Debentureholders, being the secured creditors of the company. A liquidator s role is to act for all the creditors of the company both secured and unsecured. In cases where there is a receiver in place managing the assets of the company, a liquidator s focus is on the unsecured creditors. By way of example, unsecured creditors might include suppliers to the company or various government bodies such as the ATO. We expect, in this case, that a liquidator appointed to Cymbis will, amongst other things, carry out a review to determine whether there have been any offences committed by the directors or others involved in the running of the company and whether some unsecured creditors were paid in preference to others. We would also expect them to review the receivers and managers actions during the course of the receivership. Once this work has been completed, and assuming that we have retired as receivers and managers, the liquidator will then finalise the winding up of the company. Once this has occurred, the company will be deregistered by the Australian Securities & Investments Commission. Given the extensive reporting you have received from us during the course of the receivership I would not expect that a liquidator will incur any further costs of reporting to Debentureholders unless there is some specific matter which arises as a result of any liquidator's investigations which is of particular relevance to Debentureholders. (c) Trustee liaison All matters concerning the receivership have been, and continue to be, closely monitored by the Trustee on your behalf. We continue to be in regular contact with the Trustee to seek its input and approval in connection with important matters associated with the receivership. 16

17 Once all remaining matters concerning the receivership have been concluded, the Trustee will ultimately retire us as receivers and managers of the company and then finalise its role in relation to Debentureholders. (d) Communications Please continue to contact Link Market Services Limited ( Link ) in relation to the Debentureholder register, including: Enquiries in relation to your holding; Updating Debentureholder details including change of address and bank account details; Processing Off Market Transfers and other transfers in relation to your holding; Providing investment information to Estate Administrators; and Re-issuing misplaced cheques and other payments. Link s contact details are as follows: Address: Cymbis Finance Australia Limited (Receivers & Managers Appointed) c/o Link Market Services Limited Locked Bag A14 SYDNEY SOUTH NSW 1235 AUSTRALIA Enquiry line: (02) cfau@linkmarketservices.com.au It is important that you notify Link of any changes in your contact details, so that we can continue to keep you informed of any developments and to ensure that any correspondence in relation to Cymbis, including update reports and distribution payments are delivered to your correct address. If you have recently changed your address, please contact Link so that they can send you relevant forms to change your address details in the Debentureholder register. To assist Link in dealing with your enquiries please ensure you state your Debentureholder number (which may also be referred to as your security number) when making enquiries. (e) Final comments We have set out this detailed account of our management of the receivership of Cymbis in order to provide you with as comprehensive a picture as possible of the reasons for the shortfall in the return to Debentureholders. It is highly regrettable that we have not been able to pay out a higher return to Debentureholders but this has not been possible for the reasons set out in this report. Clearly the outcome of the Court s ruling in regard to the priority of payment as between the Enhanced and Ordinary Debentureholder has had a devastating impact on the position of the Ordinary Debentureholders. 17

18 We have at all times tried to minimise the costs involved in the recovery process but the nature of the asset recoveries in very difficult market conditions and the significant number of Debentureholders has made this difficult. If you have any specific queries in relation to your Debentures then please contact Link via the various means indicated above. If you wish to discuss anything that has been raised in this report or have any other questions in relation to the management of the receivership, please do not hesitate to contact either James Munday on or me (Ian England) on my direct line which is Yours faithfully Ian England Receiver and Manager Greg Hall Receiver and Manager 18