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.
Appendices A-G to be inserted