Creditflux Newsletter

Plaintiff law firm Maurice Blackburn is on track to launch an AUD 200 million class action against National Australia Bank over an alleged delay in writing down AUD 1.2 billion portfolio of CDOs, the Age reported today.

A spokeswoman for the law firm is quoted as saying that the litigation team led by principal Bernard Murphy faced a deadline of 12 June for shareholders who purchased NAB shares between 1 January and 25 July 2008 to register interest in the class action.

According to the article, the legal team alleges that NAB in 2008 failed to disclose to shareholders the true value of its 10 CDOs of ABS held by NAB Capital. The CDOs formed part of a AUD 5.7 billion structured credit portfolio of cash and synthetic CDOs, corporate bonds and CMBS.

NAB made an AUD 181 million provision for the CDOs in its first half accounts ending 31 March 2008 and announced the detail on 9 May 2008. An AUD 830 million write-down followed on 25 July, bringing total provisions to 90 per cent of the CDOs' face value. This year, the bank made another AUD 160 million overlay for its conduits and derivatives to reflect deteriorating economic conditions and said further defaults in its synthetic CDOs were increasingly likely.

The Age says that Maurice Blackburn contends the first provision announced in May 2008 was only about 15% of the face value of the CDOs, at a time when other banks were engaging in much more significant write-downs. NAB reported the May provision to included the use of some bleak assumptions in its models, but the bank later said that a much higher probability of loss on the CDOs had emerged between May and July from a series of developments. These included a rapid rise in defaulted mortgages, US housing foreclosures leading to a large unsold property overhang and weakness of monoline insurers increasing the likelihood CDO noteholders would liquidate their holding.

But Maurice Blackburn says these conditions existed from January to May 2008 and alleges the bank's full provision in July was a delayed reaction that breaches its continuous disclosure obligations to shareholders.