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An interesting investment

November 20th, 2008

BrisConnect is a multibillion enterprise set up to build a series of PPP road and buslink projects in Brisbane. The backers are the usual big names like Macquarie Bank and Deutsche Bank.
Yet a Melbourne woman, named Hang Fe, just bought a 10 per cent stake in BrisConnect and you can do likewise if you have a spare $32 000 sitting around (immediate word of advice:DON’T). Shares in BrisConnect are currently trading at 0.1 cents, so Hang Fe’s investment brought her no less than 32 million of them.

The catch (there’s always a catch, isn’t there) is that these are partly paid “stapled securities” carrying with them an obligation to pay an additional $1 a share next April, and a further $1 in early 2010. For 32 million shares, that comes out at $64 million dollars. But most analysts say the value of fully paid shares will be well below $2, so anyone who pays up will lose a lot of money.

It seems safe to say that, at this point, holding BrisConnect shares makes sense only if you have no other assets the company can seize to enforce the $1 payment. For someone in this position, the shares appear to represent a one-way bet, admittedly at long odds. And, presumably, anyone who is in position to pay will be sure to sell out before the payment is due in April: a problem with partly paid shares of which I was unaware until now.

Since the remaining payments almost certainly won’t be made, the obligation will therefore fall on the underwriters. That in turn raises the question of whether the underwriters will still be around, and in a position to pay up, when the money falls due. That seems fairly likely as regards the payment due in 2009, but much less certain as regards Macquarie in 2010. At that point, the whole thing will presumably fall back into the lap of the Queensland government.

Note: I am Not a Financial Advisor, and I don’t claim an exact understanding of either Brisconnect or the implications of buying partly paid shares when you are already insolvent. So, please seek proper advice before going anywhere near this.

Hat-tip: Rabee Tourky alerted me to this

Categories: Economics - General Tags:
  1. rabee
    November 20th, 2008 at 23:18 | #1

    The problem is that the asx doesn’t allow negative prices. It’s price is presently 0.001 cents. There is a large number of sellers and no buyers.

    If they allowed negative prices, then I guess many investors will be happy to pay to get rid of this share.

    The big story is that Macquarie, and other international banks underwrote the deal. So if people default, the Macquarie will have to pay the difference.

    I’ve added some more material to the post to cover this. Thanks for that, and for the alert

  2. carbonsink
    November 21st, 2008 at 07:51 | #2

    I watched this on the 7:30 report last night. Terrifying.

  3. Donald Oats
    November 21st, 2008 at 08:13 | #3

    Usually I have some compassion for people that get in over their heads, but I’m having trouble in this case where people bought at 1 cent or so.

    For those caught with an expensive stapled that then dropped on them as the financial crisis took hold, then yeah maybe a smidge of sympathy. But for those trying to make money on Bris-Con once it was a penny dreadful, and not understanding anything about what they are buying, just where does the line lie separating naive ignorance from blind greed? Didn’t they ask themselves “What’s that mean?” when they saw the security described as stapled, and as partly-paid, etc? Or ask themselves, why did the securities drop so much to reach $0.01 (noone wants them), or, on what basis do I think they will go up in price after I buy them (wishful thinking)?

    Still shaking my head at that story last night.

  4. Socrates
    November 21st, 2008 at 08:23 | #4

    A question from ignorance for those who know – do brokers have any obligation to fully inform buyers of their liabilities when buying such shares? Are they classed as professional advisors or salesmen?

  5. Ernestine Gross
    November 21st, 2008 at 08:24 | #5

    I am with Donald Oats on this one.

  6. Andrew
    November 21st, 2008 at 08:59 | #6

    This was actually the case with Telstra when the government sold its shares as partly paid as well. The reporting at the time of the returns being made from T3 all completely missed the point that the returns were inflated by the implicit leverage in the partly paids.

    OIf course T3 did investors did well when the share market was rising – they had effectively borrowed $1.60 interest free from the government. However, as we can now see, leverage works both ways! If T3 had happened within 18mths of this credit crisis then a whole lot more retail investors would have been burnt like T2!

  7. Michael of Summer Hill
    November 21st, 2008 at 09:45 | #7

    John, in reference to PPPs in general, Blake Dawson survey findings in ‘Scope for Improvement 2008′ show scoping to be an ‘endemic problem’ in Australia with a growing trail of budget blowouts, delays and disputes with cost over-runs of $200 million or more in a quarter of the country’s mega-projects worth over $1 billion. Top report.

  8. observa
    November 21st, 2008 at 10:09 | #8

    ‘A question from ignorance for those who know – do brokers have any obligation to fully inform buyers of their liabilities when buying such shares? Are they classed as professional advisors or salesmen?’
    With online trading accounts now Socrates, the mouse clicker is effectively his own broker and it’s a case of broker beware, or rather it may come down in court to all those conditions he signed up to with the onlines, in effectively becoming his own sub-broker. The underwriters will have to pursue all these overwriters and have every legal right to do so.

  9. rog
    November 21st, 2008 at 10:21 | #9

    Yes, whilst Macquarie sold their holdings at a massive loss their underwritings will ensure their active participation in BrisCoonnect.

    I dont feel sorry for the lady investor/gambler (she thought she was getting something for next to nothing) or Macquarie but I am inclined to think that MacBank will still be with us in 2010. Anybody investing in BrisConnect will be made to honour their commitment

  10. November 21st, 2008 at 10:29 | #10

    That reminds me of a similar catch in limited liability company shares. People commonly suppose that that means their personal liability is limited to what they paid when they got them with nothing outstanding. No, that only applies when they are fully paid up. It can also happen when (say) $1 shares were originally issued at 10 cents each, with the remainder to be be paid as, when and if called upon. The liability is limited to that call amount, and may exceed the market value of the shares. This catch doesn’t require abstruse derivatives or anything like that.

  11. observa
    November 21st, 2008 at 10:40 | #11

    ‘If they allowed negative prices, then I guess many investors will be happy to pay to get rid of this share.’

    I agree rabee and there may be many willing ‘buyers’ to assist, given the long term prospect of the investment, but alas those trading rules.

    Let me give you another frustrating anomaly I came across. You and the missus have a joint online share trading account to buy and sell shares in joint names for $29.95 a click instead of $100 minm or even higher percentage with a broker. There is a new public share offer (TAB in our case)and you both apply separately to maximise share take-up. The two tranches now sit in individual names until a takeover by Tabcorp with cash plus Tabcorp shares and that triggers capital gains naturally.(aint income tax grand?) With share markets looking gloomy you think it’s a good idea to amalgamate the two small holdings under the joint CHESS account in order to sell them online. Normally you can do that with an off-market share transfer for the price of a stamp, now there’s no stamp duty on share transfers. All well and good until you find its rejected because each shareholding’s market value doesn’t exceed the minimum of $500 allowed under law. This despite the fact that Tabcorp would prefer to deal administratively with one small shareholder than two. Notice also that we’d have to pay a broker $200 now to sell around $900 worth of shares, so we keep them for the dividends and regularly throw the continual advances from the sharks to help alleviate the burdens of small shareholders, in the bin. Apparently lots don’t.

  12. observa
    November 21st, 2008 at 13:05 | #12

    Perhaps some words of wisdom imparted by an old horse trader a long time ago when an enthusiastic young O was discovering the wonderment of purveying pre-loved conveyances. From memory-

    ‘It’s pretty simple son. You can sell anything if the price is right, even if you have to pay someone to cart it away and that’s called rubbish!’

  13. jquiggin
    November 24th, 2008 at 15:05 | #13

    Comment from Kien

    A basic assumption that investors make is “limited liability” – being the idea that there is no recourse to the investor’s own personal assets. I don’t quite understand how the lawyers for BrisConnect have somehow been able to get around this limitation, especially where the investor acquires BrisConnect shares from the initial subscriber.

    Also, does the initial subscriber to BrisConnect shares somehow get away free of any liability whatsoever just by transferring the shares to someone else? If that is the case, perhaps the unfortunate buyer could set up a limited liability company and transfer her shares to that company. Just a suggestion – obviously get legal advice as to efficacy – but perhaps something worth trying.

    Finally, these type of shares should be banned from the ASX as “toxic”. It violates the basic principle of limited liability. Where shares are issued subject to future financial obligations, the only consequence of not meeting those obligations should be limited to forfeiture of those shares. There should be no claim on personal assets.

    These “toxic” shares free ride on the concept of limited liability that retail investors have associate with shares listed on the ASX. If companies wish to issue these type of shares, they should be issued only to “sophisticated investors”; they should not be listed.

  14. November 24th, 2008 at 16:01 | #14

    ‘A basic assumption that investors make is “limited liability” – being the idea that there is no recourse to the investor’s own personal assets’.

    JQ, did you see what I wrote above? What you are describing is the “no liability company”, not the “limited liability company”, which is rare in the world although – oddly enough – Australia allows it, largely because of the peculiar circumstances of mining companies.

  15. Devastated
    December 4th, 2008 at 12:56 | #15

    Is there a lawyer in the house? I know ignorance is not accepted as an excuse but 1 hour of net seaching did NOT bring up the unpaid $2-00 warning anywhere I looked. As a result shares/units were purchased the day before it hit the fan. My fear of losing what little we own is frankly terrifying, it will destroy our lives, bankrupt us, destroy my daughters confidence & any inheritance she may have coming to her family & our grandson. I believe that Brisconnect should do the right & honourable thing & redeem these blocks of units from all the retail investors caught as it will gain only notoriety as building a tunnel over the bones of average Queenslanders & others by destroying all hopes of them living in dignity. We will be on the streets with no where to live as bankrupts if this tough line scenario plays out.
    I am gutted that a minimum required $500-00 parcel of shares comes with a $1 million dollar debt and there are NO WARNINGS out there to prevent any retail trader from getting burnt at the click of a mouse. This is fundamentally wrong & criminal – there is no way the average mum & dad (or pensioner grandparents in our case)would be able to service a $1 million dollar debt that they haven’t even signed for. These units at this price SHOULD NOT BE AVAILABLE FOR SALE IN THE RETAIL MARKET. Why are they not in a trading halt?
    I am not alone – we desparately need help from smarter people than us.

  16. December 4th, 2008 at 14:50 | #16

    Hang Fe has now sold out – for a consideration of $32,300. Looks like she did not make a loss (except for the brokerage) after all.
    Did you buy some of them, Devastated?

  17. February 18th, 2009 at 07:32 | #17

    Looks like a clear case for the shareholders association.

    Have you guys read the old comic book Lucky Luke? The Directors look like prime candidates for being run out of town on a rail tarred and feathered!

    By the time this all plays out they may regard the damage to their reputation would have been less if they were tarred and feathered!

  18. Chomp
    February 24th, 2009 at 19:50 | #18

    “By the time this all plays out they may regard the damage to their reputation would have been less if they were tarred and feathered!”

    Hear hear!!

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