Things look like they have turned pear-shaped for Queensland developer Petrac. Last year they had $200 million in projects, this year it is $100 million – same projects, different value. They were not shy borrowers, so somewhere between the two values lies the loss that their lenders are likely to suffer. Petrac is today looking to go into voluntary administration, but word is tomorrow it will be receivership, and thence to liquidation.
Their major lender, come joint-venture partner, was Valad. Valad has been caught up in the Bank of Scotland problems and is reviewing its portfolio. If Petrac didn’t have a cash burn it wouldn’t have a problem, but very few property development companies don’t have a cash burn between projects, so Petrac won’t be the only one vulnerable.
Valad is not the only financier reviewing its portfolio. Yesterday I was told that Suncorp Metway is refusing to settle some deals, even though they are approved. Anyone relying on the wholesale funding market is being very careful. That even includes Australia’s big four banks, and it certainly includes smaller regional fry, like SME. St George got it’s timing right to be swallowed by Westpac, but who is going to swallow the Bank of Queensland, for example. And I stress this is “for example”, but I suspect that it’s debt obligations are majority funded on the wholesale rather than the retail market.
Much of the Queensland property development industry has been built on joint ventures and mezzanine finance, which in turn have been built on excessively small capital bases and non-recourse loans. When the music stops, not just one, but most of the chairs, can get stolen away. A number of property companies have been nominated to me as being likely to be in the same position as Petrac. I’ll try to find time to research some of them in the next few days to see whether the nominations stand up.