There has been quite a bit controversy in the press regarding Brisconnections in the last few months and for good reason, the situation really is astounding. What seemed like a safe, income stock to many retail investors was actually an instrument carrying huge liabilities.
Brisconnections (BCSCA: ASX) began trading on the ASX on July 31st 2008 at 0.65 as an Instalment Offering created to build and operate a much needed toll road linking Brisbane Airport to the city centre. Instalments are described on the ASX website as, “popular with investors because of their ability to offer geared exposure to shares.” Popular certainly isn’t a word associated with Brisconnections.
Chart 1 - BCSCA
click to enlarge
It appears that few retail investors realized what they were getting themselves into. Take the man who bought $600 worth of units at 0.003 and later found he owed another $400 000. Or Fang He, the house wife who managed to purchase 8% of the fund to accidently become the biggest share holder.
While the biggest shareholder title now belongs to Macquarie Bank at 9.53% and second retail investor held the crown after Fang He. Nicholas Bolton, who according to the age sunk roughly $47, 600 into the Brisconnections unit trust, owed $95,286,332 in instalments! Bolton later confirmed he did not have these funds. He also created headlines attempting to wind up the fund up through a series of motions as the biggest shareholder to avoid the future instalments. Finally though, he sold his voting rights to Leighton Holdings who are building the Airport Link’s Tunnel.
No doubt there are countless other stories from smaller investors, who didn’t realize what they were investing in. This has prompted a number of enquiries to our office on how best to avoid anything similar in the future.
Before we get to that, let’s take a brief look at the history of Brisconnections. It was initially offered at $1 with a further two instalments of $1 each. Most of the parties that invested at this point understood what they were getting into. However, once BCSCA began trading on the secondary market it quickly plummeted as Institutional Investors bailed out, concerned about the debt structure. Units fell all the way to 0.001, the lowest possible prices that can be traded on the ASX. It was around these levels that many penny dreadful investors dived in, not knowing the full story.
From initial inspection it seemed to like a solid investment offering a good yield from a project that is very necessary for the city of Brisbane. The problem is, how does a toll road that isn’t built yet generate revenue to pay dividends? It doesn’t! Dividends were to be paid through debt. Something that probably would have been accepted in the boom times was punished by Institutions as the Global Financial Crisis took hold.
With that in mind, there are some fairly straight forward rules that can help avoid this situation. First and foremost diversification! Don’t put a large percentage of your funds into one stock, especially a penny dreadful.
Second, fully paid ordinary shares have a 3 letter code. Anything longer, like BCSCA or BCSCB, is a warning sign it is not a fully paid ordinary share and requires further investigation. When in doubt, get professional advice.
Last, especially for something that has more than a 3 letter code, read the Investor section of the website. In this case, while there are some questions over the Product Disclosure Statement from certain parties, it definitely states on the first page that there are future instalments required.
I’m sure most would agree that buying huge amounts of a stock without proper research is something people need to take responsibility for. However, with it being so easy to open an online trading account and buy shares without consultation from a Broker, you have to ask if it is appropriate for such an investment to be available by default?
When opening an options trading account there are hoops that you need to jump through before being able to sell naked options, including confirming you understand the risk and have appropriate levels of education and experience. Shouldn’t this be the case for instruments whenever the ongoing cost is significantly more than the initial outlay? 2000 times more in this case!
So as much as I am a believer in taking responsibility for your own actions, in cases like this I think some of us need to be protected from ourselves.