VOLUME FOURTEEN
BENEFICIAL FINANCE - THE ORGANISATION, ITS DIRECTION-SETTING
AND PLANNING, AND THE MANAGEMENT OF CREDIT

 

 

CHAPTER 28
OVERVIEW OF BENEFICIAL FINANCE CORPORATION LIMITED

 

 

TABLE OF CONTENTS

28.1 INTRODUCTION
28.1.1 PURPOSE OF THIS CHAPTER
28.1.2 THE ECONOMIC AND FINANCIAL ENVIRONMENT 1984-1991
28.1.2.1 Aspects of Financial Deregulation and the Economic Environment
28.1.2.2 The Implications for Finance Companies
28.1.2.3 Summary

28.2 AN OVERVIEW OF THE BENEFICIAL FINANCE GROUP
28.2.1 INTRODUCTION
28.2.2 RELATIONSHIP WITH THE BANK
28.2.3 THE BUSINESS OF THE BENEFICIAL FINANCE GROUP
28.2.4 FINANCIAL SUMMARY OF BENEFICIAL FINANCE AND ITS SUBSIDIARIES
28.2.5 COMPETITIVE POSITION OF BENEFICIAL FINANCE AND ITS SUBSIDIARIES

28.3 THE STRUCTURE OF THE BENEFICIAL FINANCE GROUP
28.3.1 EVOLUTION OF THE BENEFICIAL FINANCE GROUP
28.3.2 MAJOR ENTITIES AND STRUCTURES

28.4 THE ORGANISATIONAL STRUCTURE OF BENEFICIAL FINANCE
28.4.1 COMPOSITION OF THE BENEFICIAL FINANCE BOARD
28.4.1.1 Board of Directors as at 30 June 1984
28.4.1.2 Board of Directors from 30 June 1985 to 30 June 1989
28.4.1.3 Board of Directors as at 30 June 1990
28.4.2 THE MANAGING DIRECTOR AND SENIOR EXECUTIVES
28.4.3 COMMITTEES
28.4.3.1 Executive Committee
28.4.3.2 Credit Policy Committee
28.4.3.3 Credit Committees
28.4.3.4 Joint Venture Committee
28.4.3.5 Asset and Liability Acquisition and Control Committee
28.4.3.6 Corporate Restructuring Committee
28.4.4 THE FUNCTIONAL STRUCTURE OF BENEFICIAL FINANCE

28.5 APPENDICES
A.1 Summary of Beneficial Finance Corporation
A.2 Beneficial Finance Corporation Limited Group - On and Off-Balance Sheet Entities
A.3 Southstate Corporate Holdings Limited Group - On and Off-Balance Sheet Entities
B Off-Balance Sheet Structure
C Members of Board
D Executive Committee
E Organisation Chart - Effective 16 April 1985
F Organisation Chart - Effective 3 March 1986
G Organisation Chart - Effective 1 July 1988
H Organisation Chart - Effective 1 July 1989
I Organisation Chart - Effective 1 May 1990

 

 

 

28.1 INTRODUCTION

 

28.1.1 PURPOSE OF THIS CHAPTER

This Chapter provides in respect of the period 1984-1991:

(a) an overview of the nature of the business activities of Beneficial Finance Corporation Limited ("Beneficial Finance") and its subsidiaries and associated entities (together with Beneficial Finance, the "Beneficial Finance Group");

(b) a summary of the reported results and financial position of Beneficial Finance and its subsidiaries; and

(c) a description of the directors, management and organisational structure of Beneficial Finance, and of the entities that comprised the Beneficial Finance Group.

This Chapter does not examine in detail the history of the Beneficial Finance Group, or its growth after its acquisition by the Bank. Its purpose is simply to provide the essential background to the activities and operations of the Beneficial Finance Group in the period 1984-1991 that are relevant to my Terms of Appointment.

28.1.2 THE ECONOMIC AND FINANCIAL ENVIRONMENT 1984-1991

The principal features of financial deregulation, the economic environment of the 1980's, and the complexities and difficulties these matters posed for the conduct of lending activities, were described in Chapter 3 - "Overview of the State Bank and of the State Bank Group" of my First Report relating to the State Bank. As this Report is being published at a later date and readers may not have ready access to my earlier Report, it is useful by way of introduction to the overview of the Beneficial Finance Group presented in this Chapter to briefly summarise some of the more important aspects of financial deregulation and the economic environment, and their particular implications for finance companies like Beneficial Finance.

28.1.2.1 Aspects of Financial Deregulation and the Economic Environment

The deregulation of the finance industry, occurring as it did in conjunction with the particular economic conditions of the early 1980's, created a high risk situation as financial institutions were subject to significant pressure to actively compete in a business environment characterised by asset-value speculation.

Deregulation of the qualitative and quantitative lending controls on the licensed banks produced a finance industry that was highly competitive, particularly in the area of lending to business. The announcement that foreign-owned banks would be licensed to operate in Australia drove Australian financial institutions to aggressively pursue lending opportunities in order to grow their balance sheets and secure market share.

The new competitive pressures forced financial institutions to actively market their loans if they expected to retain their market share. At the same time, monetary policy, which had operated essentially by restricting the funds available to the Banks by directly controlling interest rates, came to rely on the market forces of supply and demand according to the price at which credit was available. Provided that borrowers were prepared to pay the prevailing interest rate, credit was always available, subject of course to the lender's willingness to provide it - that is, on the lender's assessment of credit risk.

The consequences of financial deregulation may not have been so severe but for the particular economic environment in which it occurred. There was, in particular, a strong expectation of continued inflation following the high rates experienced in the 1970's. As the economy recovered from the 1982 recession, the combination of growth and inflation was expected to underpin the rise in asset prices, and to erode the real cost of servicing debt. The taxation system, allowing for the deductibility of interest and not taxing capital gains, encouraged the use of borrowed funds to invest in assets.

An obvious and available investment opportunity for anyone having access to finance was real estate. Further, real estate, regarded as tangible assets of sound value, was readily accepted by lenders as security against which loans would be made.

The ready availability of credit had the direct result that a considerable amount of investment activity in the mid to late 1980's was directed to commercial property acquisition and development, particularly after the stockmarket crash in October 1987. Money was borrowed not only for the purpose of commercial property acquisition and development, but for other purposes secured against the increasing nominal value of the borrower's commercial property holdings.

Commercial property values rose to record highs by the end of 1989. Just as share prices had fallen in October 1987, so commercial property prices fell to more realistic long-term economic values, and perhaps even lower. Commercial property prices, which had been sustained by the ready availability of credit, were particularly severely affected by rising interest rates.

28.1.2.2 The Implications for Finance Companies

There are a number of particular features of financial deregulation as it relates to finance companies that should be noted.

First, being non-bank financial intermediaries that were not subject to regulation, finance companies like Beneficial Finance were not themselves deregulated. The implications of deregulation for Beneficial Finance were indirect, principally in the form of increased competition from the newly deregulated licensed banks in its established areas of business.

The increased competition from banks forced Beneficial Finance to re-appraise its business activities. The most important result was a shift in the focus of Beneficial Finance's activities toward:

(a) the financing of, and direct equity participation in, larger commercial real estate developments; and

(b) corporate lending.

These were the two principal growth areas of lending activity in the 1980's. It is a feature of Beneficial Finance's business activities in the 1980's that they were heavily influenced by the particular opportunities provided by the economic environment of the day.

Second, and reflective of the increased competition from the licensed banks, finance companies generally lost a significant share of the market to the newly deregulated banks. Although finance companies, on average, experienced growth in total assets in excess of 20 per cent in 1985 and 1989, and growth in excess of 5 per cent in 1986, 1987, 1988 and 1990,() the finance companies' overall share of the total market declined over the period 1984-1991, as shown by Table 28(1). Market share is measured as the percentage share of total assets of all financial institutions.

Table 28(1)
Total Assets of Financial Institutions
as a Percentage of Total Assets
as at 30 June


Institution

1985
%

1986
%

1987
%

1988
%

1989
%

1990
%

1991
%

Finance Companies

8.2

7.5

6.1

5.3

5.5

5.5

4.6

Reserve Bank

6.7

6.1

5.5

4.4

3.7

3.3

3.7

Total Other Banks

38.1

39.1

39.0

40.2

42.8

43.6

45.7

Permanent Building Societies

5.7

5.1

3.8

3.8

3.7

3.1

2.8

Money Market Corporations

7.0

7.6

8.0

8.6

8.0

7.1

6.1

Other Non-Bank Financial Corporations

4.7

4.7

4.9

4.9

4.0

3.7

3.4

Total Life Insurance and Superannuation

18.1

18.7

20.9

20.1

19.8

20.0

20.4

Total Other Financial Institutions

11.5

11.2

11.8

12.7

12.5

13.7

13.4

Total

100.0

100.0

100.0

100.0

100.0

100.0

100.0

During the same period the five largest finance companies - Australian Guarantee Corporation Limited, Esanda Finance Corporation Limited, Custom Credit Holdings Limited, CBFC Limited and Beneficial Finance - increased their combined share of the total assets of all finance companies from 55.7 per cent to 76.5 per cent.() It is significant that these five finance companies were all subsidiaries of banks. Among this group, Beneficial Finance's growth in assets was the most rapid. Table 28(2) shows that Beneficial Finance's share of the total assets of the five largest finance companies almost doubled, from 4.6 per cent in 1985 to 8.9 per cent in 1990.

Table 28(2)
Comparison of Assets fro Beneficial Finance
And its Four Major Bank Owned Competitors

1985

1986

1987

1988

1989

1990

Institution

Billion
$

%

Billion
$

%

Billion
$

%

Billion
$

%

Billion
$

%

Billion
$

%

Beneficial Finance

0.7

4.6

1.0

5.7

1.1

6.1

1.8

8.5

2.2

7.8

2.7

8.9

AGC

6.9

44.8

7.9

44.9

8.2

45.3

9.7

45.3

11.6

41.2

12.2

40.4

Esanda

3.7

24.0

4.0

22.7

4.1

22.8

5.1

23.8

8.3

29.4

9.0

29.8

Custom Credit

2.9

18.8

2.9

16.5

2.7

14.8

2.7

12.6

3.5

12.4

3.4

11.3

CBFC

1.2

7.8

1.8

10.2

2.0

11.0

2.1

9.8

2.6

9.2

2.9

9.6

Total

15.4

100.0

17.6

100.0

18.1

100.0

21.4

100.0

28.2

100.0

30.2

100.0

Third, deregulation had implications for the funding of finance companies. Before deregulation, finance companies' traditional primary source of debt funding had been the issue of debentures. In March 1985, the issue of debentures was made easier by allowing debentures to be issued using a short form prospectus. This reduced the administrative and legal costs associated with raising funds, and gave finance companies more flexibility to manage the volatility in interest rates which followed deregulation. The removal of stamp duty on debenture transfers further enhanced finance companies' access to funds, leading as it did to the development of a secondary market in debentures.

Between 1984 and 1991, finance companies raised an increasing proportion of funds in the domestic and international wholesale money markets. These markets provided funds at a lower cost than had previously been available through debenture issues and other debt sources. Access to wholesale capital markets assisted finance companies to fund the significant growth in total assets achieved over that period.

Beneficial Finance's first major move into the international capital markets was a $US 50.0M Euronote facility from Hong Kong in mid-1985.() Before that issue, Beneficial Finance had relied on domestic sources of funding.

The funding arrangements of Beneficial Finance and their management are examined in Chapter 34 - "The Funding of Beneficial Finance".

28.1.2.3 Summary

The highly competitive, unfamiliar and volatile financial and economic environment of the 1980's was a dangerous time for all financial institutions, as attested to by the well documented losses reported at the end of the decade. I have in undertaking my Investigation been very mindful of the problems and dangers confronting financial institutions in the 1980's, many of which are apparent now only with the benefit of hindsight. This is a matter that must be kept firmly in mind when considering the events which lead to the losses incurred by Beneficial Finance.

 

28.2 AN OVERVIEW OF THE BENEFICIAL FINANCE GROUP

 

28.2.1 INTRODUCTION

Beneficial Finance was incorporated in South Australia on 1 March 1960. The company specialised in the provision of real estate and housing finance by way of direct lending, usually secured by mortgage, and in motor vehicle and equipment leasing. Funds for operations were provided by shareholder equity contributions, commercial borrowings and debenture issues.

The company was listed on the Adelaide Stock Exchange until it was acquired by the Savings Bank of South Australia in April 1984.() Beneficial Finance became wholly owned by the State Bank on 1 July 1984 upon the Bank's formation by the merger of the former State Bank of South Australia and the Savings Bank of South Australia.

28.2.2 RELATIONSHIP WITH THE BANK

As at 30 June 1990 the Bank's equity investment in Beneficial Finance was reported in the Bank's annual report as being $158.6M,() representing the initial acquisition cost of $50.0M, and additional capital contributions of $108.6M: $8.6M in 1986, $35.0M in 1988, $40.0M in 1989, and $25.0M in 1990. The Bank also had loans to the Beneficial Finance Group of $133.1M,() and at various times before 1990 had supported Beneficial Finance's issues of preference shares with letters of credit. At 30 June 1990 the Beneficial Finance Group had total assets of $2,674.6M, representing 12.7 per cent of the Bank Group's consolidated total assets.() Beneficial Finance was one of the largest individual investments of the Bank.

In the financial years 1985 to 1990 Beneficial Finance consistently contributed to the reported consolidated operating profit after tax of the State Bank Group, as shown in Table 28(3):

Table 28(3)
Operating Profit After Income Tax




Year Ended
30 June



State Bank
Group
$M



Beneficial
Finance
$M

Beneficial
Finance
As a
Percentage
%

1985

35.3

7.0

19.8

1986

36.8

8.2

22.3

1987

45.9

10.0

21.8

1988

66.4

17.4

26.2

1989

90.8

30.0

33.0

1990

24.1

4.7

19.5

Table 28(4) shows that although Beneficial Finance consistently paid dividends to the Bank during the period 1984-1990, those dividends were less than one-half of the capital contributed by the Bank to Beneficial Finance over that period. No dividend was recommended by Beneficial Finance's Board of Directors following the poor financial performance of the Beneficial Finance Group in the year ended 30 June 1991:

able 4 Page 28-11

Table 28(4)
Dividends Paid and Capital Contributions

Dividend
Paid
$M

Capital
Contribution
$M

1984

0.6

-

1985

0.6

-

1986

5.9

8.6

1987

6.1

-

1988

11.1

35.0

1989

18.6

40.0

1990

8.0

25.0

50.9

108.6

The Board of Directors of Beneficial Finance had strong representation from the Bank during the period 1984-1991. Table 28(5) names the common directors of Beneficial Finance and the Bank:

able 5 Page 28-12

Table 28(5)
Common Directors


Name of
Director

Beneficial
Finance
Position



Period of Common Directorship

L Barrett

Chairman

23 July 1984 - 1 July 1989

T M Clark

Director

28 March 1984 - 10 February 1991

R P Searcy

Director

23 July 1984 - 26 March 1991

D W Simmons

Director
(Chairman from
1 July 1989)

 

26 April 1984 - 25 March 1991

A G Summers

Director

28 July 1989 - 25 March 1991

A R Prowse

Director

29 June 1990

Mr K S Matthews, a General Manager of the Bank, was also a director of Beneficial Finance from June 1985 until May 1990. He was replaced as a director by another Bank executive, Mr M G Hamilton.

28.2.3 THE BUSINESS OF THE BENEFICIAL FINANCE GROUP

Beneficial Finance's 1984 Annual Report described its "primary areas of business" as being:

(a) short term bridging and construction finance;

(b) long term mortgage finance on established properties;

(c) leasing/commercial hire purchase finance for machinery, vehicles and equipment;

(d) loans to businesses for working capital and project finance;

(e) finance for professional practices; and

(f) loans to individuals.

There were important, and some dramatic, changes to the business activities of Beneficial Finance after July 1984.

Beneficial Finance engaged in corporate lending after 1984, a business it had not previously carried on to any significant extent. The 1984 Annual Report did not mention corporate finance among its primary areas of business. The 1985 Report, however, described corporate finance as the "fastest growing sector of Beneficial's business", representing 11.8 per cent of year-end receivables, compared to only 1.1 per cent as at 30 June 1984. The 1986 Annual Report again described corporate finance as the fastest growing sector of its business, representing 6 per cent of total lending during the year (up from 2 per cent at 30 June 1985). Corporate finance receivables totalled $411.0M at 30 June 1987, and increased to $766.0M by 30 June 1988, a rise of 86 per cent. Corporate lending in 1988 represented 39 per cent of new lending, up from 11 per cent in 1987, 6 per cent in 1986, and 2 per cent in 1985.

Beneficial Finance's business also expanded after 1984 to include the financing of, and equity participation in, large structured finance property projects. This business was an extension of it's traditional lending for real estate, but differed in the size of the exposures, the nature of the projects, and the structuring of the deals (usually on a tax-effective basis, a widely used arrangement until 1988 when the Commissioner of Taxation issued a ruling effectively banning its use).

Table 28(5) shows the changing profile of Beneficial Finance's business after 1984 as measured by the proportion of net receivables lent in each product/business sector between 1985 and 1990. Net receivables are defined as gross receivables net of income yet to mature. Gross receivables include short and long term advances, vehicle and equipment financing (including leasing, commercial hire purchase and chattel mortgage), personal loans, commercial and corporate lending and lending to real estate projects. Gross receivables are determined before any general or specific provisions for doubtful debts.

Table 28(5)
Net Receivables, by Product/Business Sector

Longer Term
Advances on
Established
Properties
%

Shorter
Term
Advance on
Construction
%


Vehicles &
Equipment
Leasing
%


Commercial
/Personal
Loan
%



Corporate
Lending
%


Real
Estate
Projects
%

1985

15.5

37.6

39.2

1.2

5.1

1.4

1986

13.5

36.5

42.1

0.9

6.2

0.8

1987

14.5

32.8

38.0

0.9

12.3

1.5

1988

10.4

26.3

28.5

0.6

33.5

0.7

1989

14.3

32.9

27.6

0.3

24.1

0.8

1990

12.6

29.2

26.8

0.6

26.5

4.3

The changing portfolio composition also reflects the shift in emphasis, in the period from 1985 to 1990, from shorter term advances on established property and construction (bridging finance) towards longer term commercial and corporate lending on property developments. The loan portfolio was heavily exposed to real estate: Beneficial Finance management estimated that, by 30 June 1990, property based lending transactions represented 60 per cent of the net receivables portfolio.() This compares with an industry average of about 45 per cent() as at the same date.

The move away from smaller retail and consumer lending is also demonstrated by the relative decline in vehicle and equipment leases and personal loans.

Beneficial Finance also expanded and diversified its business activities through the acquisition of other businesses and loan portfolios. The principal acquisitions were:

1988:

(a) Purchase of portfolios of receivables from Equiticorp, both in Australia and New Zealand.

(b) Acquisition of a majority interest in First Pacific Mortgage Limited.

(c) Acquisition of 100 per cent ownership of Asset Risk Management Limited.

(d) Acquisition of Campbell Capital Limited, an investment bank with a significant commercial property portfolio.

1989:

(a) Establishment of Southstate Corporate Finance Ltd in New Zealand.

(b) Acquisition of IBIS Information International Limited, a business information and corporate advisory firm.

(c) Purchase of an interest in Pacific Rim Leisure Limited, a property developer in tourist facilities.

These acquisitions both increased Beneficial Finance's assets, and diversified its business activities.

There was after 1984 a dramatic increase in the size of the financing transactions undertaken by Beneficial Finance. A half-yearly exposure review presented to the Board of Directors on 5 September 1984 showed that, as at 26 July 1984, Beneficial Finance had only five exposures to clients or groups of clients of $5.0M or more, the largest being $5.9M, or about 10 per cent of the company's capital base. Exposures of more than $2.0M for real estate, and other exposures of more than $1.5M, totalled only $87.0M out of net receivables of $469.2M. The 1984 Annual Report showed that the average size of the company's receivables at 30 June 1984 was only $25,000.

By 30 September 1990, the credit risks by exposure to client groups as shown in the Quarterly Report in Risk Exposure() were:

Amount of Risk

Range ($M)

$M

% Total

Less than $20.0M

2,387.0

71.8

$20.0M to $24.9M

67.6

2.0

$25.0M to $39.9M

548.0

16.5

Greater than $40.0M

322.9

9.7

3.325.5

100.0

The September 1990 Quarterly Report showed that, as at September 1990, Beneficial Finance had twenty four client exposures in excess of $25.0M. Of the total exposure of $870.9M to those clients, $428.9M, or 49.2 per cent, was non-performing. The three largest non-performing loans were $60.4M, $50.3M and $46.2M respectively.

These developments resulted in a rapid increase in the company's total assets, at a rate well in excess of the average rate of other finance companies. The increase in total assets was a reflection of the increase in Beneficial Finance's net receivables:

 

Table 28(6)
Increase in Net Receivables


Net Recievables
As at June

Total
Increase
$M


Increase
%


Industry Average
%

1984

492

1985

715

45.3

16.4

1986

963

34.7

8.7

1987

1,069

11.0

4.9

1988

1,556

45.6

15.4

1989

2,097

34.8

33.3

The total growth in Beneficial Finance's net receivables between 1984 and 1989 was 326.6 per cent, compared to the average of its finance company peers of 103.9 per cent. The average annual growth in Beneficial's net receivables over the period was 34.3 per cent, while the average of its finance company peers was 15.7 per cent. This rate of growth of Beneficial's lending assets, which was more than double that of other finance companies, is reflected in the increase in its market share, from 3.9 per cent in 1984 to 8.1 per cent in 1989.

The increase in total assets and net receivables was accompanied by an accumulation of off-balance sheet assets, held through a complex structure of off-balance sheet companies and trusts through which Beneficial Finance carried on a significant proportion of its business activities, including its participation in joint ventures and its acquisition of some new assets.

Traditionally, the Beneficial Finance Group's business activities were conducted by Beneficial Finance itself, or by a subsidiary. In the mid to late 1980's, however, Beneficial Finance utilised a variety of off-balance sheet structures, primarily because of restrictive debt covenants contained in the trust deeds which governed Beneficial Finance's debenture issues.() The structure of the Beneficial Finance Group and the use of on- and off-balance sheet entities is described in detail in Chapter 41 - "Management and Financial Information Reporting".

Table 28(7) illustrates the geographic spread of Beneficial Finance and its subsidiaries' Australian net receivables portfolio over the period covered by my Investigation:

Table 28(7)
Net Receivables, by State
as at 30 June

NSW
%

QLD
%

VIC/TAS
%

WA
%

SA/NT
%

1984

36.4

22.4

16.0

14.3

10.9

1985

33.4

19.2

22.6

13.0

11.8

1986

31.1

17.7

25.0

11.5

14.7

1987

30.4

17.1

26.2

12.3

14.0

1988

28.1

12.7

22.9

13.7

22.6

1989

30.0

15.0

24.0

9.0

22.0

1990

30.0

12.0

21.0

9.0

28.0

The growth in net receivables in South Australia in 1988 and 1990 was due, in part, to asset acquisitions from other institutions,() and to a number of loans to interstate borrowers being initiated and managed in South Australia.()

Beneficial Finance's 1990 Annual Report announced the company's intention to "refocus the Company on its core business", noting that Beneficial Finance had been affected by the finance industry being "too aggressive", and by the rapid growth in property development funding, particularly larger structured property business which was causing most concern. The Report attributed Beneficial Finance's problems to "over aggressiveness, particularly in the area of structured property finance".

28.2.4 FINANCIAL SUMMARY OF BENEFICIAL FINANCE AND ITS SUBSIDIARIES

Table 28(8) provides key financial information of Beneficial Finance and its subsidiaries, as disclosed in its annual reports. The information does not include the results, assets or liabilities associated with any off-balance sheet entities except to the extent that Beneficial Finance provided loans to those entities.

Table 28(8)
Beneficial Finance Corporation Limited and Subsidiaries
Key Financial Information
as at 30 June

1984
$M

1985
$M

1986
$M

1987
$M

1988
$M

1989
$M

1990
$M

1991
$M

Net Interest

Income/(Expense)

25.2

31.2

38.4

71.4

45.4

16.2

(7.6)

19.5

Operating Revenue

74.1

96.7

147.0

185.6

235.8

329.1

421.1

300.3

Doubtful Debts

3.8

4.1

6.7

11.1

18.8

14.5

48.2

0.8

Operating Profit

5.9

8.7

12.4

16.3

21.4

36.0

(21.5)

(37.6)

Operating Profit After Tax

0.7

7.0

8.2

9.8

18.9

30.0

4.7

(112.4)

Total Assets

502.3

747.4

1043.0

1129.0

1655.2

2250.4

2674.6

1802.2

Total Liabilities

444.2

682.3

962.6

1044.9

1528.2

2082.6

2485.1

1665.1

Net Assets

58.1

65.1

80.4

84.1

127.0

167.8

189.5

137.1

Total asset growth of the consolidated group in the period 1984-1990 was 432.5 per cent, while total liabilities increased by 459.5 per cent. Net assets grew by 226.2 per cent, the lower growth rate reflecting the increased leverage of the group.

The decline in total assets in the year ended 30 June 1991 of $872.4M was due in large part to the sale of $481.0M of non-performing assets to Southstate Corporate Holdings(), a subsidiary of the Bank, and the transfer of $152.3M of receivables to the Bank.() This represented almost 24 per cent of the total assets of Beneficial Finance and its subsidiaries as at 30 June 1990.

28.2.5 COMPETITIVE POSITION OF BENEFICIAL FINANCE AND ITS SUBSIDIARIES

Table 28(9) compares the competitive position of Beneficial Finance and its subsidiaries as reported in its consolidated financial statements with other finance companies in Australia in respect of profitability, credit quality and the growth in assets and profits.

Table 28(9)
Comparison of Growth Measures


Increase in Total Assets

Increase in Operating
Profit After Tax



Year

Financial
Companies
%

Beneficial
Finance
%

Financial
Companies
%

Beneficial
Finance
%

1985

20.7

49.4

9.4

865.4

1986

6.3

39.3

(35.8)

16.7

1987

7.0

9.1

35.1

22.0

1988

12.4

46.6

14.6

74.0

1989

25.4

36.0

25.6

72.4

1990

6.6

18.3

(46.2)

(84.3)

Comparison of Profitability Measures

Operating Profit After Tax/
Average Net Assets

Net Interest Income/
Average Total Assets



Year

Financial
Companies
%

Beneficial
Finance
%

Financial
Companies
%

Beneficial
Finance
%

1985

13.1

12.4

N/C

4.0

1986

7.3

12.4

N/C

3.5

1987

12.0

12.2

5.3

3.6

1988

12.8

16.5

5.2

5.1

1989

16.0

20.4

4.0

2.3

1990

7.1

2.6

4.4

0.7

Comparison of Credit Quality Measures


Doubtful Debts Expense/
Average Net Receivables

General Provision for
Doubtful Debts
Receivables



Year

Financial
Companies
%

Beneficial
Finance
%

Financial
Companies
%

Beneficial
Finance
%

1985

0.5

0.7

0.8

1.2

1986

0.9

0.8

1.1

1.2

1987

1.1

0.7

0.8

1.2

1988

0.7

1.5

0.7

1.6

1989

0.7

0.8

0.6

1.5

1990

1.5

2.1

0.7

0.9

Table 28(9) demonstrates two factors already noted in respect of Beneficial Finance:

(a) During the period Beneficial Finance's total assets grew at a significantly faster rate than the industry average.

(b) Beneficial Finance's growth in profit exceeded the industry average in all years during the period to 1989, but then suffered a greater decrease in 1990.

 

28.3 THE STRUCTURE OF THE BENEFICIAL FINANCE GROUP

 

28.3.1 EVOLUTION OF THE BENEFICIAL FINANCE GROUP

Appendix A.1 illustrates, in overview, the structure of the Beneficial Finance Group as at 31 March 1991.

When Beneficial Finance was acquired by the State Bank in July 1984 it had a simple corporate structure consisting of a holding company and nine wholly owned subsidiaries. There were no off-balance sheet entities.

In the period from July 1984 to February 1991, the Beneficial Finance Group evolved from this simple structure into a complex group of inter-related companies, partnerships, trusts and unincorporated joint ventures. Many of these entities were off-balance sheet - that is, they were not consolidated into the statutory financial statements of Beneficial Finance.

The off-balance entities were established to allow Beneficial Finance to pursue identified business activities, including tax effective structured finance transactions, joint venture relationships and other finance related acquisitions, without being limited by the restrictions imposed by its debenture trust deeds. The trust deeds' usually provided that the subsidiaries of Beneficial Finance had to guarantee the obligations and liabilities of Beneficial Finance and other subsidiaries in the group. This precluded the guaranteeing company from pledging specific assets in preference to the trustee for the debenture holders, and required trustee approval for the acquisition or disposal of any subsidiary.()

Beneficial Finance's off-balance sheet entities, other than the IBM Centre Trust, were owned by four off-balance sheet holding companies:

(a) Kabani Pty Limited;

(b) Malary Pty Limited;

(c) Fortina Pty Limited; and

(d) Lagan Pty Limited.

The mechanism for establishing these companies off-balance sheet involved the issue by each company of two classes of shares, each with an equal capacity to control the company. Each class of shares was held by a separate discretionary trust of which Beneficial Finance was a beneficiary. One class of shares was controlled by Bondi Investments Pty Ltd as Trustee for the trust while the other was controlled by Thomson Simmons (Nominees) Pty Ltd, an independent holding company, again as trustee. Appendix B illustrates this mechanism.

In a number of cases Beneficial Finance, or a wholly owned subsidiary, would hold less than a controlling interest in an entity while an off-balance sheet entity would hold a further interest sufficient to take the cumulative holding of the Beneficial Finance Group and its related entities above 50 per cent. Beneficial Finance considered it did not "control" such off-balance sheet entities, and so they were not consolidated in the statutory financial statements.

Growth in the number of entities and the complexity of the group structure is reflected in Appendix A.2A, and in the following summary of the types of entities which were effectively held under both Beneficial Finance and Southstate Corporate Holdings as at 30 June 1990:

(a) Beneficial Finance's on-balance sheet entities included eighteen subsidiaries, three joint ventures and a number of associated companies.

(b) Beneficial Finance's off-balance sheet entities included at least thirty "subsidiary" companies of interposed trusts, although a number of these companies were non-trading and had been established to act as corporate trustees of various financing arrangements involving Unit Trusts. There were also at least six joint ventures, and at least fifteen associated companies off-balance sheet.

(c) Southstate Corporate Holdings Limited, a wholly owned subsidiary of the Bank, had at least forty subsidiary companies and twenty associates which it acquired from Beneficial Finance upon the restructuring of the Beneficial Finance Group in June 1990. These entities were included as wholly-owned entities of the Bank at 30 June 1990, but remained under the management of Beneficial Finance. The entities transferred to Southstate Corporate Holdings in June 1990 included:

(i) Campbell Capital Limited and its subsidiaries.

(ii) Asset Risk Management Limited and its subsidiaries.

(iii) Aquamarine Mortgage Limited (formerly First Pacific Mortgage Limited).

(iv) Pacific Rim Leisure Pty Limited and its subsidiaries.

(v) Guan Holdings Ltd and its subsidiaries, which were companies incorporated in New Zealand.

During the late 1980's the Beneficial Finance Group became a participant in a significant number of property developments. A variety of investment arrangements were used, including unincorporated joint ventures() and single purpose companies.() As well as providing finance to the joint ventures, Beneficial Finance often held an equity interest as a property investor and developer.

Beneficial Finance also acquired a number of businesses which further increased the size and complexity of the group. These included:

(a) The acquisition of a portfolio of receivables() from the Equiticorp Group of Companies in New Zealand.

(b) The establishment of Southstate Corporate Finance Limited in New Zealand.

(c) The acquisition of the Sydney based investment bank, Campbell Capital Limited.

(d) The acquisition of a major interest in First Pacific Mortgage Limited, a financier which itself held minority interests in a number of companies.

(e) Establishment of the joint venture company Asset Risk Management Limited with Fletcher Challenge Limited of New Zealand to market operating leases in Australia.

(f) The purchase of a controlling shareholding in Pacific Rim Leisure Pty Limited, a property developer specialising in tourism facilities.

(g) The purchase of a controlling interest in the economic research and corporate advisory firm IBIS Information International Pty Limited.

A method of overcoming the difficulties presented by the debenture trust deeds without utilising off-balance sheet entities was presented to the Board of Directors in 1987. On 29 May 1987, a restructuring proposal was presented to the Board which recommended that:

"A new Holding Company be formed wholly owned by the State Bank of South Australia, and that Beneficial Finance Corporation become a 100% subsidiary of the new company. A separate subsidiary of the Holding Company is then to be formed to incorporate some of the activities of the existing off-balance sheet operations and to handle transactions which would be limited by existing Trust Deed restrictions." ()

This proposal apparently originated from the 1987 Strategic Planning Conference, where it was resolved "that for Beneficial to achieve optimum results in the next five years a new corporate structure was essential to overcome Trust Deed limitations on segments of the company's operations, minimise contingent liabilities and to expand into overseas markets."

No action was taken to implement the restructuring until November 1989, when a new proposal presented to the Board outlined the reasons for, and benefits of, a revised corporate structure essentially designed to bring the off-balance sheet entities onto the balance sheet, but outside the scope of the debenture trust deeds. The new proposal was probably prompted by proposed changes to the law regarding the consolidation of controlled entities. As was proposed in 1987, the off-balance sheet entities would become subsidiaries not of Beneficial Finance, but of a new holding company of which Beneficial Finance would also be a subsidiary. Beneficial Finance and the previously off-balance sheet entities could then be separately consolidated into the accounts of the new holding company.() The benefits identified in the proposal included:

(a) overcoming the inability to group off-balance sheet entities for tax purposes;

(b) reducing the overall cost of funds by conducting operations on-balance sheet; and

(c) improving control and reporting of all operations.()

In June 1990 the Beneficial Finance Board approved a revised restructuring proposal.() The restructuring proposal was based on Special Submission() 308 which had been presented to the Board in May 1990. The main objectives of the restructuring set out in Special Submission 308 were:

(a) to bring onto the balance sheet as many off-balance sheet vehicles as feasible prior to 30 June 1990;

(b) to transfer onto the Beneficial Finance balance sheet only those vehicles which could enhance the financial performance of the company; and

(c) to recognise the move away from large structured finance real estate transactions, thereby reducing the necessity for use of off-balance sheet vehicles or funding.

The restructuring also involved the sale of a number of Beneficial Finance's non-performing off-balance sheet entities to Southstate Corporate Holdings, a company wholly owned by the Bank and originally called Beneficial Holdings Ltd.

28.3.2 MAJOR ENTITIES AND STRUCTURES

Briefly stated, the major operating entities and structures of the Beneficial Finance Group were:

(a) Beneficial Finance Corporation Limited was the holding and principal operating company of the Beneficial Finance Group.

(b) Brinim Limited, a wholly owned subsidiary of Beneficial Finance, was a financier for tax-based property financing arrangements.

(c) Off-Balance Sheet Trusts were established to overcome limitations associated with the terms of Beneficial Finance's debenture trust deeds. Four off-balance sheet sub-groups were established: the Kabani, Malary, Lagan and Fortina groups. The sub-groups were used, among other things, for property and bloodstock investments.

(d) Joint Venture investments included:

(i) Allied Westralian Finance Limited - a finance broker in Western Australia.

(ii) Aquamarine Mortgage Limited (formerly First Pacific Mortgages Ltd) - which held a loan portfolio and a Queensland property development.

(iii) Asset Risk Management Limited - an operating lease joint venture subsequently acquired in full by Beneficial Finance in 1988.

(e) Equus Financial Services Limited provided finance for time share accommodation.

(f) Leasefin Pty Limited engaged in commercial leasing.

(g) Mortgage Acceptance Nominees specialised in real estate lending and bloodstock financing.

(h) Pegasus Leasing Limited provided financing for the bloodstock industry.

(i) Property Developments - Beneficial Finance provided debt financing to property developments and took an equity position in a number of the projects including:

(i) East End Market Company - a proposed multi-purpose development in Adelaide.

(ii) Mindarie Keys - a residential and tourist development in Western Australia.

(iii) Pacific Rim Leisure Pty Limited - a developer and investor in tourism and related property investments, primarily in Cairns.

(iv) IBM Centre Perth - a commercial office development.

(j) Campbell Capital Limited was a Sydney based investment bank acquired in 1987.

(k) Ravlick Holdings Limited was the holding company for the Beneficial Finance Group's investment in New Zealand assets, including the acquisition of a portfolio of receivables acquired from Equiticorp.

 

28.4 THE ORGANISATIONAL STRUCTURE OF BENEFICIAL FINANCE

 

28.4.1 COMPOSITION OF THE BENEFICIAL FINANCE BOARD

From the time of its acquisition by the Bank in 1984 until mid-1990, the composition of the Beneficial Finance Board was relatively stable. A history of the Board's membership over the period 1984-1991 is set out below.()

Throughout Section 28.4.1:

"*" Indicates a director of the Bank at the relevant time.

"+" Indicates an executive of the Bank.

28.4.1.1 Board of Directors as at 30 June 1984

Mr K D Williams AM [Chairman]

Mr J A Baker [Managing Director]

Mr N Barrell

Mr T M Clark * +

Mr C H Rennie CBE

Mr D W Simmons *

Mr J B Studdy

Between 1 July 1984 and 30 June 1985, the following changes took place:

(a) Mr L Barrett* OBE was appointed Chairman of the Board in October 1984.

(b) Mr K D Williams AM was appointed Deputy Chairman of the Board after stepping down from the position of Chairman in October 1984.

(c) Mr C H Rennie, CBE, retired on 30 June 1985.

(d) Mr R P Searcy* and Mr K S Matthews+ were appointed to the Board of Directors in July 1984.

28.4.1.2 Board of Directors from 30 June 1985 to 30 June 1989

Mr L Barrett OBE * [Chairman]

Mr K D Williams AM [Deputy Chairman]

Mr J A Baker [Managing Director]

Mr N Barrell

Mr T M Clark * +

Mr K S Matthews+

Mr R P Searcy *

Mr D W Simmons *

Mr J B Studdy

Mr R D Malcolmson MBE was appointed to the Board of directors in September 1987.

Between 1 July 1989 and 30 June 1990:

(a) Mr L Barrett* OBE retired as Chairman and director effective, as at 1 July 1989.

(b) Mr D W Simmons* was appointed Chairman, effective from 1 July 1989.

(c) Mr N Barrell died on 5 July 1989.

(d) Mr A G Summers* was appointed on 28 July 1989.

(e) Mr K S Matthews+ retired on 25 May 1990.

(f) Mr R D Malcolmson MBE retired on 29 June 1990.

(g) Mr K D Williams AM retired on 29 June 1990.

(h) Mr M G Hamilton+ was appointed on 29 June 1990.

(i) Mr A R Prowse was appointed on 29 June 1990.

28.4.1.3 Board of Directors as at 30 June 1990

Mr D W Simmons * [Chairman]

Mr R P Searcy * [Deputy Chairman]

Mr J A Baker [Managing Director]

Mr M G Hamilton+

Mr T M Clark * +

Mr A R Prowse

Mr J B Studdy

Mr A G Summers *

Between 1 July 1990 and 30 June 1991:

(a) Mr J A Baker resigned from the Board on 31 August 1990.

(b) Mr J D Malouf was appointed to the Board on 26 October 1990.

(c) Mr T M Clark* resigned from the Board on 10 February 1991.

(d) March 1991 - Mr Hamilton+ (14 March), Mr Summers* (25 March), Mr Simmons* (25 March) and Mr Searcy* (26 March) resigned from the Board.

(e) April 1991 - Mr R D E Bakewell* (29 April) and Mr S G Paddison+ (10 April) were appointed to the Board.

(f) Mr Paddison+ resigned from the Board on 4 June 1991 and was replaced by Mr M S Shanahan*.

The directors of Beneficial Finance from time to time are shown in tabular form at Appendix C.

28.4.2 THE MANAGING DIRECTOR AND SENIOR EXECUTIVES

Mr Baker was Managing Director when Beneficial Finance was acquired by the Bank, and remained in that position until his resignation on 31 August 1990. Mr Hamilton, who was a senior executive with the Bank, replaced Mr Baker as Managing Director. Mr Hamilton was replaced as Managing Director by Mr Malouf in October 1990, and resigned from the Board on 14 March 1991.

Mr Baker was recruited from Citicorp Australia in 1982 when the previous Managing Director of Beneficial Finance, Mr D Moore, resigned. While at Citicorp Australia Mr Baker held the position of financial controller and later General Manager responsible for New South Wales and the Australian Capital Territory. Before working at Citicorp Australia he had been employed by Ford Credit Australia, Ford Motor Company and the ANZ Bank.

Mr Malouf was recruited by Beneficial Finance in 1986 from Citicorp Australia. He worked in the Corporate Services, Northern Business and Asset Management divisions of Beneficial Finance before his appointment as Managing Director.

The senior executives of Beneficial Finance came from a variety of backgrounds, but predominantly from the banking and finance industries. Initially, senior executives were drawn from the line management of Beneficial Finance. As the company grew in the late 1980's, key positions were filled by personnel recruited from outside the Beneficial Finance and State Bank Groups.

In the period from 1984 to 1991 there were frequent corporate reorganisations and changes in the roles and responsibilities of the senior executives of Beneficial Finance.

28.4.3 COMMITTEES

Some of the decision making processes of Beneficial Finance in the period from 1984 to 1991 were nominally undertaken through a system of committees. The most significant of these were the Executive Committee, the Credit Policy Committee, various Credit Committees, the Asset and Liability Control Committee, the Joint Venture Committee and the Corporate Restructure Committee.()

28.4.3.1 Executive Committee

The Executive Committee was comprised of the senior executives of each of the operating and service divisions. The Chairman of the committee was the Managing Director. Its role was to review and endorse various reports and submissions that were to be put to the Board of Directors. The reports and submissions covered such matters as strategic plans, reviews of operating results, corporate restructure proposals, and provisions for non-performing loans.

The Executive Committee received monthly reports of each division's activities, and special reports, discussion papers and a detailed financial report prepared for each monthly meeting.

The members of the Executive Committee from 30 June 1985 are shown on Appendix D.

28.4.3.2 Credit Policy Committee

The members of the Credit Policy Committee (sometimes referred to as the Credit Review Committee) were the divisional credit managers and state managers. It was chaired by Mr T M Siegele, General Manager, National Credit from 1984 to May 1990, and then by Mr J Mudge, Chief Manager, National Credit. Its role was to review the credit policies of Beneficial Finance and to recommend necessary changes. This review process included monitoring Beneficial Finance's exposure to particular industries and geographical locations, and recommending changes to approved credit limits.

28.4.3.3 Credit Committees

The Credit Committees were comprised of personnel with credit experience commensurate with the particular committee's approval limit. Together with frequent changes to the organisational structure of Beneficial Finance, there were also frequent changes in the composition of these committees and their approval limits. The ultimate credit approval authority was the Board of Directors. Below board level were Board sub-committees and national credit committees, and divisional and State committees.

Credit Committees, as opposed to the Credit Policy Committees, had the function of reviewing credit submissions. Depending on the dollar value of the submission and the approval limit of the committee, the committees could approve, amend or reject a submission, or recommend it for approval by a credit committee with a higher approval limit.

28.4.3.4 Joint Venture Committee

A Joint Venture Committee was formed in July 1987, chaired by Mr Barton, General Manager, Professional Services division. It was established in view of Beneficial Finance's and the Group's increasing participation in joint venture transactions, and its role was to establish criteria for assessing joint venture opportunities, oversee the implementation of joint venture initiatives and to monitor their progress. The committee was disbanded in July 1988, and responsibility for assessing and monitoring joint ventures passed back to the appropriate operating divisions.

28.4.3.5 Asset and Liability Acquisition and Control Committee

The Asset and Liability Acquisition and Control Committee was established in early 1989. Its function was to liaise between the Treasury and lending divisions of Beneficial Finance, providing Treasury with early notification of significant deals being written or maturing and of any new products being developed, and communicating Treasury's funding strategies to the lending divisions to increase their awareness of the benefits available from a well planned funding strategy. The committee, which met on a monthly basis, was comprised of three employees from the Treasury division, the marketing manager from each operational division and a manager from the Planning division. It was chaired by Mr R Horwood, General Manager, Treasury. Towards the end of 1990 the committee ceased to meet, primarily because organisational changes and other operational matters took precedence.

28.4.3.6 Corporate Restructuring Committee

The Corporate Restructuring Committee, established in 1987 and chaired by Mr Barton, was to examine means of getting profitable joint venture entities onto Beneficial Finance's balance sheet. The committee was disbanded when Mr Barton retired in June 1988, although he continued to act as a consultant to Beneficial Finance on this matter for some months after his retirement.

28.4.4 THE FUNCTIONAL STRUCTURE OF BENEFICIAL FINANCE

As at 30 June 1984, Beneficial Finance had branch offices in all states of Australia, the Australian Capital Territory, and in country areas. The head office of Beneficial Finance, which was situated at 33 Franklin Street Adelaide, had the following organisational structure():

(a) Board of Directors

(b) Managing Director Mr J A Baker

(c) Corporate Secretary Mr B D Barton

(d) Australian Credit Manager Mr R A Garrett

(e) General Manager, Finance & Administration Mr J G Graham

(f) Treasurer Mr F R Horwood

(g) Marketing & Business Development Manager Mr E P Reichert

(h) General Manager - Staff Operations Mr T M Siegele

(i) Personnel & Administration Manager Mr G B Strutton

(j) Corporate Solicitor Mr G J Yelland

Beneficial Finance established a new organisational structure with effect from 14 January 1985. The key feature of the new structure was the grouping of responsibility for the existing ten branches into two divisions called the Northern division and the Southern division, under the control of their own General Managers.()

In April 1985 further organisational changes were made to accommodate what was referred to as the Beneficial Finance Group's new direction brought about by deregulation and the quickly changing and increasingly competitive financial environment. These changes followed a review of Beneficial Finance's internal structure, operational standards and computer systems.() Appendix E reflects the new structure as at 16 April 1985.

The Beneficial Finance Annual Report for the year ended June 1985 specifically referred to the organisational changes as being:

"In recognition of demands on Management as a result of growth and new business development [and] the changing direction of the company's asset acquisitions and funding activities ... (requiring) ... increased skills of specialist staff and an upgrading of management information systems to provide effective controls." ()

In or about November 1985, Beneficial Finance engaged a consultant Finance Efficiency Pty Ltd to further review the company's structure and operational standards to ensure that Beneficial Finance maintained a competitive position in the market place. As a result of the consultant's report, further organisational changes were implemented, based upon the fact that "The growth and diversification of Beneficial necessitates that we change our organisation to focus on the opportunities that exist ...",() particularly in respect of the Asset Acquisition and Control and Corporate Lending market segments. The new structure was to take effect as from 3 March 1986.()

Before this review, Beneficial Finance was organised geographically, with Northern division and Southern division established in January 1985. The new structure was product based, dividing Beneficial Finance's Lending Operations into two separate Divisions, namely:

(a) Corporate Services division headed by Mr Reichert.

(b) Retail and Commercial Services division headed by Mr Chakravarti.

Other divisions were created to complement this shift in emphasis:

(a) Finance and Operations Services headed by Mr Graham.

(b) Professional Services headed by Mr Barton.

(c) Treasury headed by Mr Horwood.

Appendix F reflects the new structure as at 3 March 1986.

The role of the Corporate Services division was "to handle the larger and more complex transactions requiring specialised staff and sophisticated systems." () These transactions were defined as being single transactions in excess of $2.0M. Corporate Service's mandate was to pursue opportunities in joint ventures, financial packaging and syndication. Specifically, this Division was to service "the middle tier of the corporate market (while) providing some merchant banking type products to this middle market." ()

The individual state operations were rationalised under the Retail and Commercial Services division, whose role was to market "the full spectrum of Beneficial's finance products, through the Australia-wide branch and representative office network," () concentrating on providing finance to small to medium size business enterprises including individuals, partnerships, companies and professional people, with an emphasis on prompt and personalised customer service.

Another review, commencing in or about October 1987, considered further changes to the organisational structure.() This review resulted in a another major organisational change on 1 July 1988 to facilitate a greater focus on Beneficial Finance's expanding joint venture investments and "to optimise opportunities in the rapidly changing and highly competitive Australian financial environment." () This re-organisation resulted in the establishment of the Investment Banking division, headed by Mr Reichert.

Investment Banking handled all receivables-based lending in excess of $10.0M, and all tax-based transactions.() Its primary objectives were to:

(a) identify and develop investment banking opportunities for the Beneficial Finance Group;

(b) manage, direct and enhance the major corporate equity investments of the Beneficial Finance Group, particularly Campbell Capital Limited, IBIS Information International Ltd and Pacific Rim Leisure Pty Ltd;

(c) oversee the strategic management, head office liaison, policy formulation and expansion or divestment of all joint venture companies within the Beneficial Finance Group;

(d) manage the public company share portfolio held by Beneficial Finance; and

(e) identify and develop fee income and new product opportunities for the Beneficial Finance Group.()

In broad terms, the Investment Banking division was to be responsible for existing and new major equity investments, and was to provide debt financing facilities for non-property transactions. Specifically, and in conjunction with the affiliated companies of Campbell Capital Limited, IBIS Information International Limited and Pacific Rim Leisure Pty Ltd, the Investment Banking division was to provide a comprehensive range of services to the Beneficial Finance Group and to the Group's clients in three main areas:

(a) Merchant Banking Services;

(b) Corporate and Strategic Advice; and

(c) Debt and Equity Funding.

These services were specifically to include advice on mergers and takeovers, company restructuring, divestments, strategic planning, management buy-outs and risk assessment and management.

The activities of the Lending divisions (Corporate Services, and Retail and Commercial Services (by then called Commercial Services)) were consolidated, and geographical divisioning was re-introduced with the establishment of new Southern and Northern Business divisions. The two new divisions were to be responsible for receivables based lending up to $10.0M.()

The Southern Business division was responsible for core business activities in Victoria, Tasmania, South Australia, the Northern Territory and Western Australia. The Northern Business division was responsible for New South Wales, the Australian Capital Territory and Queensland.

Appendix G illustrates the structure at 1 July 1988.

In July 1989, the Investment Banking division was split, and a new division called the Structured Finance and Projects division was established. The fastest growth of the Beneficial Finance Group in the prior twelve months had been, in large, structured transactions relating to major construction and property development finance. These typically involved high exposure risks, with transactions in excess of $10.0M.()

The Investment Banking division, headed by Dr R Sexton, Chief General Manager, retained responsibility for "control of corporate equity investments, certain investment banking functions and non-real estate joint ventures." ()

The Structured Finance and Projects division, headed by Mr Reichert, Chief General Manager, was responsible for "... all structured facilities, client exposures of more than $10 million, overseas operations and selected major customers' accounts." ()

Appendix H illustrates the structure at 1 July 1989.

In December 1989, the Real Estate Projects Services department was established.() The function of this department was to "... assist in resolving any major delinquencies that can become very time consuming for line management, and potentially detract from customer service." ()

The organisational structure changed again on 1 May 1990(), with the resulting structure remaining in place up until 1 February 1991. The reasons given for the major divisional and management restructure were to "re-focus the Company on its core business, which has been very profitable in the past,"() to "reflect the changing business focus of Beneficial in a tough market", and to "ensure we focus even more strongly our efforts towards improving customer service." () The "tough market" was the subject of some comment in Beneficial Finance Management Information Bulletin 376, dated 2 April 1990, where the Managing Director stated that:

"Due to the changing economic environment, Beneficial has planned a re-organisation to meet the change in business conditions. The economy generally and, in particular, Beneficial's exposure to a very soft real estate sector have deteriorated faster than expected. The new organisation structure will ensure that we are able to handle the challenges to the next two years."

The Asset Management division was created to manage all non-performing loans, focusing on the account management of larger real estate and project transactions and selected investments.() The Structured Finance and Projects division was disbanded, with its major functions being shared by the newly created Australian Business division and the Investment Banking division.() The Northern and Southern Business divisions were merged into the Australian Business division "concentrating on commercial and business finance" and handling "only positive cash flow business".()

The Australian Business division also assumed the responsibility of managing most of the large debt funding previously the responsibility of the Structure Finance and Projects division.()

The Investment Banking division assumed responsibility for structured finance and packaging services as well as equity investments, although, within the division itself, two business units were established in July 1990 as a result of the refocussing of the activities of the division. These units were:

(a) Financial Services Unit.

(b) Structure Finance and Packaging Unit.()

Appendix I illustrates the structure at 1 May 1990.

A Treasury and Capital Markets division operated throughout the period 1984-1991. In addition to the operating divisions, various other service divisions were created and re-arranged under different names and were responsible for corporate planning, accounting, taxation, internal audit, credit policy, human resources, EDP systems and legal services.

 

28.5 APPENDICES

 

Appendices A-G to be inserted