Orchard Childcare Property Fund

07 November 2008

ABC Learning Centres Limited (ABC), the major tenant of the Orchard Childcare Property Fund (the Fund), yesterday confirmed reports that the company has gone into voluntary administration.

In an official statement released to the Australian Securities Exchange the Directors of ABC confirmed the appointment of Ferrier Hodgson as its voluntary administrators and the appointment by ABC’s banking syndicate of McGrathNicol as receivers.

A copy of ABC’s statement is available for download from the ASX website – please click here. For information on voluntary administration and receivership published by the Australian Securities and Investments Commission, please click here.

The announcement follows months of speculation regarding the company’s financial situation and the announcement on 30 September that ABC's founder and chief executive, Eddy Groves, had left the company.

Shares in ABC have been suspended since 21 August 2008 after the company failed to lodge its financial reports for the year ended 30 June 2008. The protracted delay only served to fuel concern over ABC’s future.

Orchard Childcare Property Fund

The Fund currently owns 219 ABC centres, including 189 of the 1,200 ABC centres nationally.

Given the recent uncertainty regarding ABC’s future, we have been considering contingency plans for the Fund. These plans include discussions with:

  • Ferrier Hodgson, the administrator;
  • McGrathNicol, the receiver appointed by ABC’s banking syndicate;
  • state governments, as they issue the child care licenses;
  • the Federal Government, as it provides funding for child care; and
  • Bank of New Zealand Australia (BNZA), debt provider to the Fund.

As the Fund is a landlord of many of ABC’s centres, it is a 'creditor' of ABC. For this reason the administrator Ferrier Hodgson will engage with Orchard in the administration process.

Implications for the Fund

Below we explain the potential impact of ABC being put into administration and our plans to minimise the impact on the Fund.

Leases

We have reviewed and will continue to be guided by each of the lease agreements for the Fund. Under each lease with ABC, the appointment of an administrator to ABC is considered an ‘Event of Default’ which gives the Fund the right to terminate the lease.

We will work closely with the administrator to continue operation of the centres to achieve the best lease and rental outcomes possible. The Fund’s ABC centres are modern and well located which means they should be attractive business premises for other child care operators, should ABC be unable to continue their operation.

Debt facility

The implications of ABC going into administration, under the Fund’s debt facility with BNZA are as follows:

  • Orchard is required to notify BNZA of any event of default under the lease (including the appointment of an administrator to ABC);
  • if ABC ceases to pay rent on a particular property, this property will be removed from the security pool (the loan to security pool value has a maximum allowable of 65%);
  • if a child care license is removed from a property by the relevant government department, this property will also be removed from the security pool; and
  • if ABC ceases to be the major tenant, BNZA can trigger a review of all facilities.

We have been in discussions with the Fund's banker BNZA about the current debt facility of the Fund. The Fund has recently received an offer from BNZA to extend the Fund's facility to June 2009. 

Currently the Fund’s loan to value ratio (LVR) is 49% which comfortably sits within the facility limit of 65%.

Government licensing

Government support for the child care industry is significant and is an integral part of the Federal Government's ‘Education Revolution’.

We have been in contact with the Victorian State Government Department of Education and Early Years. The Department has informed us that continued care of the children is its priority and it would seek to work with the appointed administrator in order to keep the child care licenses and the centres operating.

In relation to the Federal Department of Education, lines of communication are open with the head of the child care taskforce that has been set up to investigate ABC and the implications of a collapse of ABC. They are aware of the role of Orchard as major landlords and as each government policy announcement or decision is made, have expressed a willingness to engage with us. We expect further government announcements in the next week about ABC.

Practical implications

Firstly, Government has a policy of keeping continuity of child care services in Australia and we believe they may intervene to achieve this outcome.

Secondly, the real estate leases (being the right to occupy that child care centre) are a precondition to achieving the child care licence from the relevant state authority. These leases are a key asset of ABC and as such, it is likely that any entity that is in control of ABC would attempt to ensure that rents are paid so that this key asset is preserved.

ABC has a syndicate of banks. This syndicate comprises domestic as well as foreign banks. Banks in the syndicate include Commonwealth Bank of Australia, Westpac, ANZ, NAB (BNZA), Bank of America, Mizuho Bank, BankWest and Citigroup. ABC may be in breach of some of its obligations to these banks which may trigger a requirement for one or more banking facilities to be repaid.

Given that government and domestic banks have a strong interest in the continuity of child care services, an arrangement may be reached whereby one or more of the key financiers are repaid so that they exit the syndicate and are no longer a threat to the operations of ABC.

Further information

We will continue to monitor the situation and provide updates as further information becomes available. We will be working hard to ensure the best interests of all investors in the Orchard Childcare Property Fund are looked after during these uncertain times.

In the meantime, if you have any questions or if you require further information, please call Orchard Investor Services on 1800 008 494 or speak with your financial adviser.