A large shareholder in Allco Finance Group, the troubled Australian-listed investment company, is heading for voluntary administration after failing to secure agreements with two margin lenders, who are now seeking to claw back shares in AFG.

Allco Principal Investments, which is the main investment vehicle of several prominent AFG executives, will be put into the insolvency procedure after failing to reach a standstill agreement to cover an estimated A$150m (US$139.8m) of margin loans owed to National Australia Bank and Bank of Scotland International, a unit of HBOS in the UK.

National Australia Bank had provided a margin loan facility of about A$110m to Allco Principal Investments, which was secured by shares in AFG. NAB said on Thursday it would now take a provision against that exposure.

Trading in AFG shares was halted ahead of the announcement from Allco Principal Investments. They last traded at 63 cents – a fraction of their record high last year of A$13.23. NAB said it had appointed Paul Billingham, of Grant Thornton, as an agent to take possession of shares from Allco Principal Investment, including about 34m shares in AFG.

The problems that have beset AFG and other Australian companies such as ABC Learning Centres have been compounded by senior executives using large amounts of leverage to buy shares in their own companies that have subsequently become subject to “margin calls” once those shares fell below a certain threshold.

The issue has been made worse as hedge funds, sensing an opportunity to exploit exposed investors, aggressively shorted those stocks in a strategy that helped push the shares down even further.

Australia’s federal government is looking at amending corporation law to address issues surrounding share lending and short selling, Wayne Swan, the country’s Treasurer, said on Thursday.

Meanwhile, the Australian Stock Exchange and the Australian Securities Investments Commission (ASIC) on Thursday warned investors about their obligations when it came to share lending and short-selling.

ASIC said it was looking into the matter because of concerns “that some individuals may be spreading false and misleading information about listed securities to artificially provoke sales of securities and reduce their market prices”.

Allco Principal Investments sparked a rout in AFG shares in January when it was forced to sell stock in the group after margin calls were triggered from two other lenders.

AFG has since taken a hammering on the market, amid fears it might be unable to refinance about A$1.1bn of debt.


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