Banking breach not disclosed

Documents obtained by the Sunday Star-Times reveal that VTL Group, whose subsidiary Nathans Finance collapsed into receivership in August, had serious debt problems in its American business as far back as 2005, but decided to hide them from investors.

Shareholders in vending machine franchisor VTL have lost millions since August as the share price plummeted from $1 to just 6c, and $167 million of Nathans Finance debenture money is at risk.

Much of that sum was lent to VTL. At the end of July VTL's debt to Nathans was $110m.

But while considerable sums of investors' cash was risked with VTL, the Star-Times has learned that its American business, All Seasons, was in breach of its banking covenants in August 2005, just months after VTL bought into the company. VTL's management and its auditor Staples Rodway were aware of the breach and discussed disclosing it in the company's accounts for the year to June 2005, but decided the issue was "insufficiently material".

By January 2006 All Seasons' debt problems were so severe that its American banker CapitalSource was threatening to pull the plug, an action that would have left All Seasons unable to pay staff.

On January 17, VTL's law firm Minter Ellison Rudd Watts wrote to the stock exchange begging it to fast-track a waiver that would allow VTL to provide a $2.1m letter of credit to All Seasons without a shareholder vote.

Without the waiver, Minter Ellison wrote, VTL would not have enough time to consult its shareholders before CapitalSource withdrew its funding, leading All Seasons to default on its obligations an event that would cause "irreparable damage to All Seasons and VTL Group's interests in All Seasons".

Despite, or perhaps because of, the desperate nature of the problem, Minter Ellison also begged the NZX not to reveal the breach of banking covenants or that All Seasons would be selling assets to remedy its financial situation with CapitalSource.

The documents obtained by the Star-Times under the Official Information Act show the NZX was uncertain about the grounds for maintaining secrecy. NZX solicitor Edward Brown wrote on January 20: "Given that All Seasons represents a significant investment of VTL we question whether the fact that All Seasons is in breach of its banking covenants is material information that should be disclosed."

Minter Ellison senior associate Mark Stuart replied later that day, arguing that NZX listing rules implied "something more serious than a breach of the terms of a financial facility would be required (such (as) actual enforcement following a breach) would be required before disclosure would be required (sic)".

When the letter of credit was finally revealed to the market on February 1, Stuart's view had won the day the breach remained a secret.

The question of whether a breach of banking covenants should be disclosed was addressed by this month's Securities Commission report on Feltex. The answer in Feltex's case was unequivocal a breach of banking covenants was material and Feltex should have disclosed it.

Nathans Finance trustee Matthew Lancaster, of Perpetual Trust, was incredulous the breach had not been disclosed.

"If that's not material, what is? And the NZX agreed to it (the non-disclosure)? Fantastic. That's staggering."

Lancaster said the issue was important because of the level of intercompany lending. "It would have had an impact on the carrying value of the investment by Nathans into VTL. (The breach) is something we would have liked to have known."

When the Star-Times contacted VTL chairman Gary Stevens, he said: "I'm not going to get into any discussions on anything with the Sunday Star-Times."