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New Zealand Securities Commission |
Last Updated: 15 November 2014
Ref: 500-140 / #106975
3 December 2008
Moratorium proposals – what investors should
consider
Investor confidence has been severely tested over the past 18 months as
finance companies have collapsed or frozen repayments. Investigating
these
failures is a major enforcement priority for the Securities Commission.
The Commission cannot protect people against genuine investment risk. Our
investigations are about whether the companies misled their
investors. If they
did the directors can face imprisonment, fines or compensation claims, whether
or not the company is in receivership
or moratorium.
Moratorium documents are a form of offer document and are therefore subject
to the same rules as other offer documents. The Commission
reviews moratorium
offer documents and will take action to ban them if we consider they contain any
false or misleading information.
We are working with the Registrar of Companies who has already laid criminal charges in three cases and banned some directors, and the Commission’s investigations of other cases are well advanced.
Many investors are currently faced with considering proposals by finance companies for a moratorium or debt restructuring programme. Investors are being told the only real
alternative is receivership. A moratorium means that investors forego
interest, capital, or both for a period of time.
If a finance company is placed in receivership, investors usually face the
prospect of getting back less than their full investment.
If the directors are
proposing a moratorium they should believe that this will give investors a
better chance of getting more of
their money back. While a moratorium may extend
the life of the company, in many cases it will merely be a longer term winding
down
of company assets.
When considering a moratorium investors should ask themselves the following
questions:
1. How would my rights be different under receivership?
2. How much am I likely to get under receivership, and when?
3. How much do the directors think I will get under a moratorium, and when?
4. Which is more in my interests, given my investment needs (including payout timeframes)?
5. What assumptions have the directors made if they say a moratorium will result in better returns? What are the risks compared with the risks of receivership?
6. Who would supervise a moratorium and report to the trustee or investors?
7. What is the plan to change the moratorium proposal if there are changes in the company’s situation or economic conditions?
8. Do I get another chance to vote if things aren't going as expected?
9. Is there an independent expert’s report and if so what does it say?
10. Have there been any independent valuations of assets?
11. If parties related to the company are contributing assets are there independent valuations?
12. What does the trustee have to say about the moratorium?
2
13. What are the financial and legal implications for the directors and other
related parties under receivership compared with a moratorium?
An important consideration is the time period for any returns to investors.
While the total return may be likely to be less under
a receivership, any
returns will most likely come sooner than under a moratorium.
Therefore it is important to look at the “net present value” of
the amounts that are expected to be recovered under each
option, as well as the
expected total return. A net present value calculation converts expected future
benefits into their value
today, because money received today is worth more than
money received later.
Because payment to investors is deferred, this means they are being asked to
take a further risk on the future performance of the
company's assets and
management. The longer the moratorium period, the longer this risk will exist.
Assets may decline, rather than
rise over time. Either decision involves
risks.
In deciding to recommend a moratorium the company's directors must have made
some assumptions about the future value of the company’s
assets. Investors
should be told what these assumptions are and the basis for them. Investors also
need to know how the same assumptions
would stack up if applied in the shorter
term under a receivership.
If investors have any doubts about any of these matters they should seek independent advice before voting.
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URL: http://www.nzlii.org/nz/other/NZSecCom/2008/11.html