PricewaterhouseCoopers ABN 52 780 433 757 17 December 2009 Dear Debentureholder Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 www.pwc.com/au Elderslie Finance Corporation Limited ACN: 008 678 233 ABN: 26 008 678 233 (Receivers and Managers Appointed) (In Liquidation) ( EFCL ) Fifth Report to Debentureholders Our appointment as Receivers and Managers was made on 2 July 2008 by the Trustee, Perpetual Trustees W.A. Limited ( Perpetual ) who holds security over EFCL and certain of its subsidiaries on behalf of Debentureholders 1. This further update to Debentureholders should be read in conjunction with prior reports on EFCL available from our website www.pwcrecovery.com. The purpose of this report is to provide Debentureholders with an update in relation to the following: Estimated return to Debentureholders; Our activities as Receivers and Managers since our last report dated 29 June 2009; Strategy for the realisation of assets and distribution of Debentureholder funds; and Ongoing investigations and other relevant matters. The report is divided into the following sections: Section Description 1. Return to Debentureholders 2. Lease Book Assets 3. 4. 5. 6. Property Assets Related Party Loan Other Loans and Investments Investigations 7. Next Steps 1 For convenience in this report we refer to EFCL and its subsidiaries as EFCL. Liability limited by a scheme approved under Professional Standards Legislation
Section 1: Return to Debentureholders Our estimated return for Debentureholders remains at less than 10 cents in the dollar. This return is forecast to be payable over the next 5 years. The first payment may be paid in late 2010. The return arises from the realisation of assets of EFCL, its 16 subsidiaries and the assets of Hotel Nominees Pty Limited ( HN ). Below is further information on the assets of EFCL, its subsidiaries and HN, outlining why the return to Debentureholders is expected to be less than 10 cents in the dollar. We have not provided specific values in this report of expected sale returns and other expected receipts by the Receivers and Managers. This information is commercially sensitive (for example where we are currently in the process of negotiating the sale of an asset) and public disclosures might jeopardise potential returns to Debentureholders. In broad terms there are four key factors affecting the return to Debentureholders as follows: 1. The assets of EFCL have or will realise substantially less dollar amounts than their book values; 2. There are prior ranking secured creditors that must be paid before Debentureholders are permitted a return; 3. There are employee entitlements that must be paid before Debentureholders are permitted a return; and 4. In many cases the process to realise the assets is complex and therefore expensive The major categories of assets within the receivership are as follows: 1. The lease book: The lease book is the major asset within the receivership. The value for Debentureholders arises from the management of 14,000 leases, involving the collection of lease payments and the realisation of the residual value of the leased assets. The run off of the lease book will take five years due to the term of the leases. We note a series of financial institutions (collectively the Funders ) had bought or took security over lease payments under certain leases, which effectively means the Funders are entitled to payment of these monies in respect of the relevant leases before Debentureholders are permitted a return. 2. Property assets: EFCL sold a large proportion of its property portfolio in June 2007, as disclosed in the consolidated financial statements for 30 June 2007. At the date of our appointment EFCL still held a number of property assets, the majority of which were subject to secured loans and mortgages that rank before the Trustee s security. 3. Related party loan: EFCL has a substantial loan receivable from HN, the parent entity of EFCL. The value of the assets supporting this loan falls far short of the liability. 4. Loans and investments: EFCL had made a number of loans and investments in unlisted businesses. A large number of these were early stage technology businesses where performance of the companies has not met those companies earlier projections and the value in the businesses is far less than the amounts invested. Our estimated return to Debentureholders of less than 10 cents in the dollar does not account for potential returns from any legal claims against third parties, which claims are currently being assessed. (2)
Timing of Payment The total investment by Debentureholders was approximately $150m. In order to make a distribution of, for example, 10 cents in the dollar, we need to have $15m of funds after payment of all costs and expenses of the receivership. Any distribution from the receivership will be made on a pro-rata basis to Debentureholders. There are a number of payments that need to be paid or provided for before any distribution to Debentureholders can be made. These are as follows: Funders and prior ranking secured creditors must be settled first from assets subject to their rights or security. These are the Funders of the lease book and mortgagees of the property assets as detailed above. Employee entitlements must be settled from funds in the receivership in advance of the Trustee s security. Employee entitlements totalling $1.5m have been paid to date, representing payment in full of these liabilities. Costs of maintaining the business: the Receivers & Managers traded the lease book business during the sale process and until arrangements could be agreed with AMAL to outsource the servicing of the lease book operations. The remarketing and warehousing operations of the business also had to be continued until the outsourcing agreement with Grays was agreed. The costs associated with trading these businesses (such as wages, trade payables, utilities, insurance) are payable as an expense of the receivership. The costs of running these businesses are substantial. The costs of AMAL and Grays in respect of running the lease book operations and remarketing and warehousing operations respectively need to be paid as an expense of the Receivership. The remuneration of the Receivers & Managers, legal advisers, other advisers and service providers need to be paid or provided for as an expense of the receivership. Given current market conditions and the relatively illiquid nature of the available assets, the timeframe over which funds will be returned to Debentureholders will be governed to a large extent by the term of the leases. It is anticipated this process will take up to five years. We have provided further explanation of the lease book in Section 2 of this report. Distribution to Debentureholders will be made as cash is realised net of payments and expenses (as detailed above). We expect to make a first distribution to Debentureholders in late 2010 but this may change depending upon the realisation of assets. Trustee Consultation Since our appointment to EFCL, we have continued to consult with the Trustee, Perpetual, and have kept them informed of developments affecting the return to Debentureholders. Due to the lack of funds to meet the expenses of the receivership (particularly earlier in the receivership) the Trustee agreed to pay and has paid much of the cost of the investigation (referred to in Section 6 below) to date. These costs have included receivers, solicitors and barrister s fees. The Trustee will be entitled to recover these advances from the Receivership when funds become available. (3)
Section 2: Lease Book Assets The lease book is the major asset within the EFCL receivership. It comprises approximately 14,000 individual leases. The value of the lease book arises from the value of both the future receivable streams generated by the leases and any residual value of the assets themselves and is one of the key assets over which Perpetual holds security as Trustee on behalf of the Debentureholders. Certain lease payments under the lease book are, however, either owned by or subject to prior ranking security held by a number of financiers (collectively the Funders ) who were owed a total of approximately $184m at the date of our appointment. This effectively means that the Funders are entitled to payment of $184m from the value of the lease book. In addition, the servicing and collection of leases and the realisation of the residual value of the assets is a costly process. Faced with the relatively slim potential return for Debentureholders from such a process, we immediately embarked upon a strategy of attempting to sell the lease book in order to generate a more immediate return for Debentureholders. The sales process ran from July to November 2008, but was eventually abandoned given the lack of viable offers. Since then we have outsourced the servicing of the leases to AMAL and the collection and realisation of assets to Grays. This was done with the approval of Perpetual (on behalf of Debentureholders) and of the Funders. As a consequence of the need to retain the lease book, the return to Debentureholders from this asset will be a reflection of the timetable of returns from the leases. The leases mostly terminate over the next five years. This availability of cash will drive the timetable for returns to Debentureholders. Section 3: Property Assets The majority of the property assets are subject to secured loans with registered mortgages secured against the properties. In all instances the current value of the properties has decreased from the book value. In many cases the amount outstanding to the mortgagee is in excess of the current market value and in some cases the secured lender has taken possession of the property and there is no benefit for Debentureholders. We are currently marketing for sale the remaining properties, while dealing with any secured lenders on those properties. Section 4: Related Party Loan EFCL made loans over a number of years to a related party, HN, which is the Trustee of a Trust that holds the shareholding in EFCL. The loan was for $69m at the date of our appointment. The assets supporting this loan are as follows: 1. The shareholding in EFCL, which now has no value; 2. An investment in Junee Rail Group Pty Ltd, which we are attempting to sell as Receivers & Managers of HN; 3. A loan to Australian Handsets Pty Ltd, a company that is in liquidation; (4)
4. Deposits on a number of units in a property development in Queensland which have been recovered; and 5. Various loans and investments in both related and unrelated entities that have little or no value. As Receivers & Managers of HN we are continuing to negotiate with interested parties for the shareholding in Junee Rail Group Pty Ltd. Due to the nature of the investment, any realisation of the shareholding may take an extended period of time. As Receivers & Managers of HN we have successfully negotiated the return of deposits paid in a Queensland property development following the default of the developer Any repayments in respect of this loan will fall far short of the total liability. Section 5: Loans and Investments EFCL had a number of other loans to third parties or investments in other entities, for example TOMR Telematics Pty Ltd ( TOMR ), Pinnacle Software Pty Ltd ( Pinnacle ) and Genasys Holdings SL ( Genasys ), which were technology companies, a New Zealand based energy company and Trevarick Pty Ltd (a vineyard). The business activities of these companies were or are mainly speculative ventures. The net proceeds received from the sale of the TOMR and Pinnacle assets were insufficient to enable repayments in respect of these outstanding loans, of $13m and $12m respectively at the date of our appointment. The proceeds from the sale of the Trevarick assets were $2m. Prior to our appointment, EFCL entered into a sale agreement for a 40 per cent shareholding in Genasys, an entity based in Spain. The sale was for deferred consideration payable in June 2012, which is to be calculated depending on the underlying value of Genasys at that date. We have attempted to effect an early settlement of the sale contract but the interested party has withdrawn. It is likely that settlement will therefore not occur until June 2012, in accordance with the sale agreement. We have been actively seeking a purchaser for EFCL s shareholding in an unlisted New Zealand based energy company, however to date little interest has been received. We will continue to explore opportunities to realise this shareholding. With respect to other third party loans due to the Elderslie Group, we have served notice on various parties and are considering the merits of taking legal action, as appropriate, to recover these loans. It should be noted that in most cases the circumstances associated with these loans are very complex and avenues for recovery are often complicated. Section 6: Investigations Since our last report we have continued our investigations into the affairs of the Elderslie Group including: Preparing for and conducting public examinations of the auditors; Obtaining legal advice in relation to certain claims that are being considered by the Receivers & Managers; and Analysis of further accounting information of the Elderslie Group and the value of the underlying assets of the Elderslie Group as a result of the public examinations. (5)
The public examinations of the auditors were held on 18 and 19 August 2009. Following the public examinations, we have undertaken further analysis and investigation of certain matters and we are currently considering, together with Perpetual, the commercial merits of pursuing any claims, taking into consideration matters including the prospects of the claim succeeding (albeit as assessed at a preliminary stage), costs that may be associated with making a claim, funding of a claim, the length of time which it may take to prosecute any claim and the availability of funds to parties against whom a claim may be made to satisfy the claim. We are unable at this time to comment further on our investigations. We will advise Debentureholders in more detail in our next report. Section 7: Next Steps We expect to provide a further update to Debentureholders in the next six months, however we will review the timing of our next update as the receivership progresses with a view to providing the update at the most appropriate time. In the meantime, if you require further information or have questions, please use one of the following methods to contact us: Visit the Website www.pwcrecovery.com and select Elderslie Finance Corporation Limited. This can be found under Businesses Under Management for updates and information in relation to the Elderslie Group Phone the call centre on 1300 788 510. Please note that due to high call volumes, if the call is not immediately answered, please leave a message and we will get back to you as soon as possible. Please also note that the call centre will be closed from Friday 25 December 2009 to 3 January 2010 (inclusive); or Write to: The Receivers and Managers Elderslie Finance Corporation Limited (Receivers and Managers Appointed) (In Liquidation) PricewaterhouseCoopers GPO Box 2650 SYDNEY NSW 1171 Yours sincerely Greg Hall Receiver & Manager Phil Carter Receiver & Manager (6)