3-19-08, 10:40 am
Original source: The Guardian (Australia)
When a company has a whopping $2 billion debt and the markets believe it is worth only $1 billion, they act. And that is what happened to ABC Learning Centres and its CEO Eddy Groves. 'Fast Eddy' built an empire on the backs of a low paid workforce, huge debts and $1 million a day in government subsidies. Insatiable greed and a finance sector too willing to lend, combined to build ABC as the largest private childcare operator in Australia and then over-extend its capacity by moving into the USA, Britain and New Zealand.
The future of the company still hangs in the balance. A deal has been reached to sell a majority share of its US assets to the private equity arm of the investment bank Morgan Stanley for $70 million. This will assist in meeting the demands of the banks as they call in part of their loans.
ABC had borrowed heavily to purchase the US and other centres. The loans contained special 'margin lending' terms, a practice that is becoming more common but rarely declared by its practitioners.
Under margin lending, if the share price falls below a certain amount the banks may call in part of the loan to cover the fall in the value of the assets that are used as security. The company sells off assets to raise that money.
The avalanche was triggered when ABC handed down its half-yearly report last month. The markets looked at the fall in profits and huge borrowings on assets in the USA and decided that the company had over-reached itself.
The price of ABC’s shares plunged, knocking $750 million off the value of shareholders’ shares in one day. When share trading in ABC was eventually suspended by the stock exchange the shares had fallen from around $7 each to $1.15.
The fall was so great that the financiers began exercising their right to make margin calls. CEO Eddy Groves had borrowed heavily to buy enough shares to gain greater control of the company. He and his wife were forced to sell $45 million of shares to meet the demands of their banks and ABC set about finding buyers for some of ABC’s tangible assets.
Hedge funds
Groves is blaming the hedge funds for driving the share price down. The virtually unaccountable hedge funds move vast sums of speculative money between stocks. As their name suggests they gamble with other people’s investments, and can manipulate share prices by the movement of large sums in and out of different stock.
They are extremely aggressive, care nothing for the workers whose jobs are lost, nor for workers’ retirement savings in superannuation funds that might be invested in that company. The extent to which they contributed to the present situation is unclear.
The hedge funds 'sell short', a practice of selling shares which they do not yet own. As the price falls further they quickly buy the shares which they have already sold. This is done on a falling market. Large sales of stock can panic markets and result in other shareholders rushing in to get rid of their shares, fearing the price might keep tumbling. These manipulations have little to do with the real world, they are more akin to a casino.
ABC is not the first and will not be the last to suffer the ravages of the market and a financial system that recklessly lends and never hesitates to take back. As director Glenn Rufro of the crashed Centro Properties Group commented: 'We’re in a capitalist system [and] it’s a tough system. If you’re wounded, people will try to eat you.'
Unfortunately it is workers and their families who also stand to get eaten — and that applies to the provision of childcare as long as the private sector is involved. Instead of pouring billions of dollars of subsidies into the private sector — Labor has just promised an additional $1.5 billion — government funding should go directly into the provision of quality, affordable child care in not-for-profit community centres.
From The Guardian (Australia)
