Director sailed Dorchester past storm

TIM HUNTER
Last updated 05:00 08/06/2014
Paul Byrnes
CHRIS SKELTON/Fairfax NZ
MAKING GOOD: Paul Byrnes, MD of Dorchester Pacific.

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His usual cheerful demeanour drops momentarily as Paul Byrnes recalls his company teetering on the brink of oblivion.

"I distinctly recall a number of commentators at the time that we put that capital reconstruction plan in place almost baying for receivership," he says.

"Thank goodness investors didn't take their advice."

It would not have been an easy decision for them.

Listed finance company Dorchester Pacific had already asked debenture holders to agree a moratorium on $164 million they were owed. Then, after paying just 50c in the dollar, it was asking them to throw out that deal and accept a complicated package of promises instead, all in the interests of Dorchester's potential survival.

It was a big ask - and a long shot.

That June, four years ago, Dorchester managing director Byrnes and chairman Grant Baker took their scheme on the road, presenting to investors in Auckland, Wellington, Christchurch, Dunedin, Palmerston North, New Plymouth, Tauranga and Hamilton as they sought approval to keep the company alive.

They got it. And last month Dorchester reported a record net profit of $8.2 m while forecasting profit would rise further to $15m in the year to March 2016.

After the devastating losses posted for five consecutive years after 2008 (barring a technicality in 2011) Byrnes kept believing in not just a turnaround, but a long-term future.

"I know it sounds a bit odd," he says, "but achieving the best profit the company's ever had was something that I did talk to the staff about - that not only can we survive but we can be a better business than ever, even in the heyday."

That's one goal ticked off, then.

Another was to get Dorchester to a market capitalisation of more than $100m, "and when our market capitalisation was $1.5m it seemed a long way away".

That was dealt with last year.

"The third thing for me is I would like to be able to say ‘. . . and our investors got 100c in the dollar'."

File that one under "pending". Despite the progress, it's still unclear when Byrnes will be able to feel relieved of the obligation to make good the money for those investors who stuck it into Dorchester Finance.

Their losses were caused by the now-familiar story of poor-quality lending, particularly on property, but the parent company's woes were compounded by a dreadful decision to double down on property with a 25 per cent stake in St Laurence. Remarkably, it was intended as a prelude to a merger, but the stake had to be written off in early 2008 as the property-loan bonanza came to a screeching halt.

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Byrnes recalls working late setting up the Dorchester moratorium in 2008, taking calls from investors who faced losses from multiple finance company investors and were anxious for signs of hope.

"For some of them, because they were at the end of their lives, almost, this was their savings, and it probably has been a driver for me.

"It's probably why I've felt there has been a commitment, but I think we've achieved a really good outcome and people have said, ‘oh it's really happened in the last 15 months or so', but the work was in the two years before that."

When Byrnes took over the helm at Dorchester in May 2008 it was supposed to be a part-time assignment at 15 hours a week. As he puts it: "It wasn't by aspiration that I did step in."

Despite his reluctance, Byrnes had ideal credentials to grasp Dorchester's nettle.

He knew the business well, having been on the board since early 2004, serving as a representative of the late Hugh Green, whose family interests still own a substantial stake.

He had an accountancy background but had never worked in an accountancy practice, preferring the commercial world of manufacturing and small business.

In 1985 he was headhunted to lead Holeproof, a socks and underwear maker spun out of Pacific Dunlop, with the aim of merging it into another textile firm. That didn't work out and Byrnes ended up in a management buyout alongside the now-defunct Rainbow Corporation, before moving to 100 per cent ownership in 1991.

By his account he "worked pretty hard for five years" and sold Holeproof back to Pacific Dunlop in 1995.

Thereafter Byrnes was involved in early-stage investments, with stakes in Navman and Prism Software, and took on various directorships including Hellaby Holdings and Top Energy.

So when Byrnes took over from Dorchester's young CEO Andrew Walker, he had some miles on the clock and the experience to see a crisis coming.

"I remember the first week (in the job) was going and seeing all the directors and saying to them, ‘look, my view is this company, with this forecast, I can see it's not going to make it through'."

The only thing to do was admit defeat while there was still cash in the bank, so Dorchester pulled its prospectus and defaulted on its debts on June 25, 2008.

Byrnes sees that early decision as crucial in giving the company a chance, along with an absence of the scandal that clung to other non-bank lenders at the time.

"At least we were in some ways free to concentrate on strategy for the business rather than defending challenges from Serious Fraud Office or Companies Office or anyone else."

A moratorium was agreed late that year aiming to repay investors all their principal in 12 instalments over three years. But as time went by it became obvious Dorchester faced a fork in the road - it had to raise capital or go under. "And that wasn't going to be possible - no-one was going to put money in - without reaching some settlement with the debenture-holder debt."

The deal was not pretty.

Investors had been paid 50c in the dollar by this stage but were still owed $81.9m. Byrnes persuaded them to swap that remaining repayment plan for four types of securities.

One was units in a $33m property trust, formed to hold four property assets Dorchester had acquired when loans went bad.

Another was $3.7m of shares in Dorchester Pacific, issued at a nominal 10c in the dollar.

The third was options to buy more shares for 12.5c each, and the fourth was a $20m issue of capital notes paying 5 per cent for three years.

Together, the securities had a face value of about $57m, or $24m less than Dorchester owed.

At a stroke the company had lightened the obligation by $24m while shifting a good chunk of it off balance sheet.

The quid pro quo was an injection of $10m by Dorchester's shareholders, principally Baker's investment firm The Business Bakery and Hugh Green Investments, who bought into a share issue at 10c a share.

Byrnes also subscribed for 2.5m shares, topping up a holding of 1.7m shares he had acquired in 2008 at an average of 37c.

After that it was all about tidying up Dorchester's jumble of services, cutting out the business lines that were too small or too capital hungry to be sustainable.

From a swath of interests that included financial advice, publishing, mortgages, reverse mortgages, life insurance and pensions, Byrnes trimmed down to two.

"What we saw out of all those businesses was a vanilla finance product - lending on motor vehicles under sensible credit and ending policy, which weren't all that sensible at the time - and the insurance business."

He digs out a sheet from 2006 showing Dorchester's spread of services and flicks it out on the desk.

"Look at the list there - life and superannuation - they're all products you need a very big balance sheet and you need scale. Really, the insurance that was sustainable was more related to motor vehicle lending, so [that's] consumer insurance products around motor vehicle insurance, motor vehicle breakdown insurance, loan repayment insurance and what they call gap insurance, which insures the difference between the market value of your car and what you're insured for.

"The good thing about those is they're low risk, short tail. They're all risks you can manage, and any risk or any claim over $50,000 we've reinsured, so our worst case scenario is a $50,000 claim."

Narrowing its focus allowed the business to cut costs, including reducing its head office space in Auckland's Shortland St.

"A floor here's worth $400,000 a year," says Byrnes. "When you've got 2.5 and only need one, you've got a lot of costs."

Gradually, Dorchester clawed its way back from the brink and regained profitability, just, in the year to March 2013.

This year's record result owes a lot to a new line of business acquired 18 months ago - debt collector EC Credit Control - and the company has since added the acquisition of Levin-based car loan company Oxford Finance and 20 per cent of Turners Auctions to its portfolio.

The deals are meat and drink to Byrnes.

Ask him what he does when he's not working and he has to stop and think. Family, a bit of tramping, an interest in wine sufficiently keen to own a piece of Western Australian vineyard, but "there are not too many hours left to do all those things. I enjoy business."

Byrnes reckons he spends 25-35 per cent of his time on mergers and acquisitions and is pleased with the results so far.

"You can't go into the M&A shop and start picking them off the shelf. It's a lot of time involved and you look at a lot of things. Through very good acquisitions, the Turners, EC Credit, and Oxford, the last thing we want to do is stuff it up. If it's just not right we will maintain our discipline."

Oxford was a great fit and a simple business, says Byrnes, but still took five months to reach a deal.

"Then there was another business we went through and did the full [due diligence]. We got fairly close to an agreement and would probably revisit it if the vendors came back to us, but time went to that and it may have cost a few thousand by the time you pay PWC and your legal advisers. You just have to write it off. That's M&A."

Yet after 10 years at Dorchester, Byrnes is ready to pass on the baton. He's happy to continue for 18 months to two years, he says, but if someone suitable came along he'd stand aside.

"I've said to the board I will see this through and it's actually quite enjoyable at the moment, but I'm too old for this. I was a CEO 30 years ago and don't need it."

Not that he's easing up - with just over 33m shares, Byrnes has a healthy chunk of his wealth tied up in Dorchester. The holding reflects his investment of about $4m in the company - a stake currently worth about $7.8m.

"That's some skin in it to keep you interested in your presence."

And if the finance company investors get their money back, he'll be happy.

- Sunday Star Times

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