Summary of Conference Call with Mike Simpson - 1st June 2009

Posted 04/06/2009 - 21:46 by frog

Dear all,

Here is the summary of the call I had with Mike Simpson on Monday.

General Questions

  1. What is the current cash balance for the bank?
    A: £159M – Booker shares will increase this by £94M and be in the bank but not be available to distribute until Christmas time. Therefore it will not be in the first distribution. The Booker shares were part of the £154M repo agreement which was cancelled when the bank went into Provisional Liquidation. The LP was under considerable pressure to sell the shares for about £40M but managed to hold out until after Booker’s good results announcement last week. The JJB shares have also been sold, but he cannot disclose the amount received yet.
  2. How much interest has been earned so far?
    A: On the cash, £670K – loan book just under £7M. Some people had been holding out for paying interest awaiting setoff, but that these issues are being resolved.
  3. Any news about the KSFUK dividend from E&Y?
    A: Edging closer with E&Y – the main issue left is that there are some swap agreements where there is some discussion over the mark-to-market valuation. Most of the set-off has been sorted out and these swap agreements will not be significant. Mike Simpson is hopeful that E&Y will pay out the dividend based on what parts of the claim have been agreed and maybe hold off on the parts that may be in dispte. E&Y have said that they will make a distribution within two months, but Mike Simpson hasn’t heard any news about this. He is hoping that they will pay it in time for the KSFIOM first dividend. E&Y have said that the dividend is expected to be at least 10%
  4. What is the latest status on the sale of the loan book and any other interest in the purchase of the bank?
    There are some parties interested in both the bank and the loan book – nothing to report yet. This is an improvement on the last call where there was no interest. Mike Simpson couldn’t be drawn on whether the IOM Government is actively involved in the discussions regarding the gap. He agreed that the time window for a sale would close once the first dividend is paid as the liquidity of the bank would disappear.

Open Questions

  1. Have you submitted costs in developing the SoA to the court or directly to the Treasury – as we discussed on the last call?
    At the SOA town hall meeting on 11th May, Peter Spragg confirmed that IOM Treasury sponsored the SOA. Creditors have rejected the SOA yet a very considerable quantum of creditors' assets (I estimate £2-3 million) has been expended on drafting the SOA. Given that the Liquidator is required to act in the creditors' interests, will Mike Simpson please confirm that he will invoice IOM Treasury for each and every cost incurred on behalf of the creditors to KSFIOM in connection with the SOA.
    At the SOA town hall meeting, Peter Spragg appeared to confirm that the Liquidator Provisional had not first agreed that IOM Treasury would pick up all costs associated with the SOA before PWC agreed to devote the estimated £2-3 million of creditors funds to this project.
    A: About £600K will be put forward to the IOM Treasury for the costs in respect of developing the SoA. There are further costs for May, which PWC are still calculating. Mike Simpson believes that the bulk of the costs over the last 7 months have been down to running the bank and recovering money, so there would be little extra to bill the treasury for – he will look at what else he can bill the Treasury for.
    This Week’s Questions

  2. Can you lead us through the timetable for liquidation – what happens when, and in what order?
    A: The general process is such that upon passing of a liquidation order, a creditors’ meeting is called. Following that proof of claim forms are sent out to all creditors and then the notice to pay a dividend is issued – and then a dividend is paid. This can take some time. This process has been concatenated is to send out along with the notice for the creditors’ meeting the proof of debt forms plus the notice of dividend at the same time – this will allow a payout more quickly. The process should be quite straightforward due to the company being a bank and the debt will be whatever is on the depositors’ statements. This process is different to the one undertaken just before Christmas, which was just to ensure the bank records were up to date.
    PWC are still working on how the Creditors’ Committee will work but the voting for members of the Creditors’ Committee will be based on the number and value for the candidates. The process to get nominations for members of the Creditors Committee (CC) still need to be clarified. Normally the committee is voted on at the first creditors’ meeting (much like what happened in the KSFUK case).
    The fully protected creditors are likely to be paid out in the next few months (if you believe IOM Government statements) and PWC are aware that they have to define a process on how to handle that, but they have every right as anyone else to be represented on the CC. Only creditors can be on the CC – not any legally appointed representative of the creditor. The rules are in the 1934 winding-up rules, but they aren’t terribly helpful in this case.

  3. What is the timetable for the first dividend – and any ideas on how the DCS would work?
    A: The DCS is not run by the government, but by the scheme manager. It is being looked at how this would be financed and it is possible that the first distribution will be at the same time as the liquidation first distribution. The first dividend for liquidation will likely be the end of August – the figure is 14.5% but can change as more cash comes into the bank.
  4. Can you clarify why the balance with KSFUK dropped by £128M from one balance sheet to the next?
    a. Is the £241m now quoted as due back from KSFUK – a net figure? I.e. The previous net book value figure shown on Oct 2008 was £401.8m. So are we now saying the £241m comes from £401.8m - £241 = £160.8m of a difference?
    b. If so what has caused this difference of £160.8m? 
I saw one explanation that it was due to KSFUK (E&Y) getting their initial figures wrong due to the complexity of untangling the situation. Any truth in that?
    c. Does the Liq Prov still expect10p in the £ back from KSFUK in June/July this year?
    d. What is happening with the CDs – has the first £10M come back – how about the rest?
    A: This was due to the complexities of the relationship between KSFIOM and KSFUK. The bulk of the difference was due to what was thought to be regular bank deposits were actually ties up with the repo agreements. Normal bank deposits came to about £350M then there were Swap Agreements and Repo agreements and the set-off due to the sub-participations. There was double counting which got reversed out.
    With regard to the UK distribution, if the UK money comes back in time for the KSFIOM dividend then this would increase the payout to almost 20% (3% for the KSFUK distribution and another 3-4$ for the CDs if they come back in time)
    The money from Newcastle BS is expected soon. They are still in negotiation with the other building societies. Whether the costs associated with bringing the test case will be awarded to KSFIOM has not been finalized yet.
    With regard to the in-flight case, we are still waiting for the judgement.
  5. With the UK balance, how much is in clearly identifiable cash deposits? What financial instruments is the rest denominated in? Why is their valuation uncertain? You have previously talked about offsets and put the total at £164.3m. Exactly what are those offsets?
    A: The normal cash deposits are about £350M – with the swap agreements, Mike Simpson did not have the approximate value to hand.
  6. With regard to the sales of collateral in the repo agreements; how much has been realised, when can he provide more info?
    A: The amount on the repo agreement was about £140M and the realizations are in line with that. He can’t answer specifically apart from the £93.5M realized from the Booker sale due to the JJB embargo.. They have only sold JJB and Booker shares. If a profit is made on the shares, the bank can keep it for distribution.
  7. What claim have you put into KSFUK, as the deadline is 18th June, and can we see the accounting for it?
    A: The KSFIOM claim has not been put in yet. When the claim will go in, then Mike Simpson will disclose the value of the claim.
  8. Has Mike Simpson received proceeds from the sale of shares in Booker Group plc sold following the liquidation on 27th May? The sale involved 324.7 million shares at around £0.29p per share. Unless I am missing something, that produces the sum of approximately £94 million. Can we ask Mike Simpson to confirm the amount realised?
    Ref: See - see
 http://www.londonstockexchange.com/LSECWS/IFSPages/MarketNewsPopup.aspx?...
    And

    http://www.bloomberg.com/apps/news?pid=20601102&sid=aCTlN4aSf_gw&refer=uk
    A: Answered above
  9. It was stated in court that ‘in the next six weeks Mike Simpson will undertake immediate duties: distribution of claim forms, collation of data from claimants...' Can you confirm that you will accept electronic copies of the documents (as long as they had a signature) in order to deal with the voting of matters at the first creditors meeting?
    A: Yes. The forms can be downloaded from the bank website as well as being sent out.
  10. How does the change to Liquidation affect your powers – and can you provide more information to depositors in the future?
    A: The LP role was only designed to be a holding role to protect the assets temporarily – with full liquidation, the new powers enable the liquidator to have wider powers and they are described in the court order. He now has the power to investigate the downfall of the bank including the activities of various parties involved (the FSC for instance). The collection of evidence has not yet started. He is wary of generating large legal fees unless he is sure legal action is worthwhile.
  11. Will LP please detail the number of ksfiom staff still employed by the liquidator at the date of this conference call? I understand from staff that continues to be employed there that staff have been awarded a contract that gives them a 50% bonus if they stay until the end of the new contract. In addition, most if not all the remaining staff are to be retained until at least October with a number already having received contracts to October 2010.
    A: There are 25 staff employed by the bank right now. There were initially 60 last October. Having the premises and the bank staff are essential for a bank sale to occur, so that, along with the processing of the proof of claims, the staff number is unlikely to go down until after the first distribution. The staff costs are peanuts compared to the overall bank position.
  12. Are any of these staff former directors of the bank? Why is Aiden Docherty still employed? Now 8 months later surely MS is up to speed and does not need him as all his knowledge will have been secured over 8 months.
    A: Mike Simpson feels that he is still providing value for money and so he is still employed. He understands that some depositors are unhappy with him being there due to the assurances he gave that the bank was safe prior to the default. Mike Simpson pointed out that he was probably told the same thing by the group right until the last minute.
  13. If MS cannot provide full answers at the time of the conference call will he agree to provide a full written answer within 7 days following the conference call?
    A: These conference calls may become redundant once the CC is set up – the CC has to decide how communication will be effected. Mike Simpson agreed that, subject to the nature of the question, he will do this. It really depends if we have more calls.
  14. The KSFIOM depositors' website has undoubtedly proven an invaluable communication tool to many depositors. Given the willingness of the manager of this website to set up a separate section of this site for official communications from the Liquidator, would Mike Simpson confirm in principle that assets from KSF IOM can be used to fund reasonable costs associated with this website?
    A: Mike Simpson sues the bank website for communication and all creditors pay for this. He is unsure about all creditors paying for a facility used by only some of the creditors – but is willing to hear reasons why the bank should support the site. I took an action to ask on the site for reasons – there is a thread open for this.
  15. Insofar as the offset between KSF UK and KSFIOM is concerned, why is it the case that KSFIOM now in liquidation is expected to return the full amount invested in its subsidiary by KSFUK, whereas KSFUK itself is only proposing to return a minimum of 50%? Surely as a creditor of KSFIOM, KSFUK should only get a percentage of the realisable assets achieved by PWC on behalf and as such the balance sheet should carry a "prudent" return figure?
    A: As KSFIOM is a creditor of KSFUK, the setoff works in the KSFIOM bank’s favour. There is no update on the projections of recoveries yet – it is anticipated that there would be a new set in time for the first creditors’ meeting.
  16. Can we have an indication of the projected interest on the loan book over the next 3 to 4 years?
    A: 2009 £8M (looking VERY approximately)
    2010 £7.5M
    2011 £5.5M
    2012 £2.5M
    2013 £1,5M
    Total would be about £26M assuming base rates stay as they are and payments are made as planned. Most are on interest only.
  17. What progress have the UK government made in terms of negotiations with Iceland regarding return of lost funds/parental guarantee /
    A: There has been a political hiatus due to the fact that there hasn’t been a government in place recently who could deal with it. The IOM Government is pushing the UK Government to represent our interests, but he hasn’t heard any news.
    A claim HAS been put in against the parental guarantee but the resolution committee is not in the position to agree or disagree with the claim. They are not the people who would be responsible for this – when the moratorium is lifted, the people running the insolvency will be the ones responsible for the claim.
    The moratorium can only be extended in six-month chunks and they have indicated that they don’t want the moratorium to extend to the full two years.
  18. When can we expect Ernst and Young to provide a payment profile for the funds owing to KSFIOM?
    A: Mike Simpson agrees that the 50% recovery is likely to be conservative – there is no new information from E&Y about this
  19. Will creditor claims include lost interest on depositors funds up to the date the SOA was defeated and liquidation was confirmed? Also what about lost interest on funds going forward?
    A: Interest was paid up until the 9th October – no interest will be paid post that date unless the depositors are paid in full – which is unlikely unless there is a sale of the bank.
  20. What action does Simpson propose to take against KSF auditors. The fact that there was a parental guarantee in place was critical to this business continuing as a going concern. If it did not have one it would not have been licensed. It is obvious from the position that we are in now that this guarantee was worthless. The auditors KPMG must be negligent, but to what extent. Did they carry out any risk assessment or check the validity of the guarantee. Serious consideration should be given to attacking KPMG's indemnity policy. What is he going to do about this?
    A: All options are open, but with regard to the auditors, when a company becomes insolvent, it isn’t necessarily true that the auditors are liable.

With regard to the parental guarantee – the bank operated for some years without this – the reason the guarantee was put in place was because of the acquisition of the Derbyshire and all UK Building Societies have to give such a guarantee. When the Derbyshire IOM depositors were moved over, they had to also have the same guarantee from the parent bank – in this case Khf. Mike Simpson does not expect a great return from the guarantee in any event.

  1. Can Mike Simpson now tell us if there was a D&O policy in place? If Yes, who was it placed with and what action is he taking against the insurers. Has he made a claim? If there was not then why not? All serious businesses have D&O policies, why did the auditors sign off without there being one in place?
    A: Typically, D&O policies specifically contains clauses that make the policy worthless if details are disclosed – he will not say anything that would increase the risk of that happening.
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