London Capital & Finance: Is Smith & Williamson’s softly-softly approach in the interests of investors?

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In Sunday’s interview between Smith & Williamson’s Finbarr O’Connell and Paul Lewis of BBC’s Money Box show, O’Connell made clear that the administrators would be treating London Capital & Finance’s underlying borrowers with kid gloves to ensure they didn’t damage the ability of the borrowers to repay.

PL: So again it depends on those 12 companies [the handful of companies which borrowed from LCF] succeeding in what they’re doing and not failing.

FO’C: Absolutely, and nobody amongst administrators or listening to this has any interest in those companies becoming distressed, so we want to work with them on a very co-operative basis to ensure we get back the bondholders’ money.

On the face of it, Smith & Williamson being “very co-operative” with LCF’s underlying borrowers makes sense. For starters, the administrators may not have the right to demand the money back anyway, as a term for repayment will have been agreed at outset. Even if it can call in LCF’s loans, it makes no sense to do so if the borrowers aren’t currently in a position to pay it back in full, as long as they will be later.

The other option on the table is to sell the loans to a third party, on which the administrators would certainly have to take a loss, which again makes little sense if the borrowers can be relied on to repay the capital and interest in time.

There is one glaring problem with this logic. For some of LCF’s borrowers, if they repay any capital or interest, it will be the first time they have ever done so. Research by Drew J of Damn Lies and Statistics showed that in at least one case, LCF loaned money to a dormant company, CV Resorts Limited, whose published financial results subsequently did not change for four years. This is only possible if the company was not trading, and paying no interest on its loan. Otherwise you would see movement in the balance sheet.

Smith & Williamson can be “very co-operative” with CV Resorts Limited by continuing to allow them to hold LCF investors’ money without paying anything back, and in doing so they can say that the loan is still performing. (If I’ve borrowed money on the basis that I don’t have to pay anything back for however long, and I don’t pay anything back in that time, then I’ve met my obligations and the loan is performing.) But it doesn’t recover anything for investors.

It is clearly in the borrowers’ interests for Smith & Williamson to be very cooperative with them (bearing in mind that the directors and ex-directors of many of LCF’s borrowers are ex-directors of LCF itself). Is it in the interests of investors? Only if being very co-operative means there is a realistic chance of the money eventually being paid back.

If on the other hand the money that LCF has loaned out on any particular loan is not recoverable, then it is in the interests of creditors for the loan to be written off as soon as possible, so that the administration can be brought to the swiftest conclusion possible, without the administrators racking up fees waiting for recoveries that never come, and the investors can move on with their lives.

It is therefore essential that the administrators are willing to make themselves unpopular with LCF’s borrowers if necessary, firstly to establish whether the loans are likely to be paid back, and secondly to ensure that repayment is not deferred indefinitely. Accepting their word is not good enough – accepting people’s word is what got LCF investors into this mess in the first place.

My old pa told me you could be someone’s creditor or their friend but not both. Clearly up until this point, LCF has been a very friendly creditor, given the number of close links that run between LCF and its borrowers via their directors and ex-directors. Following LCF’s admission that it was insolvent after becoming unable to raise new money from investors, this close friendship is no longer viable.

Does Smith & Williamson have the appetite to be unfriendly to the people that appointed it? Based on its public statements so far, that appears highly uncertain.