26th October 2012
$1 billion Banksia group collapse
The recent appointment of McGrathNicol as receivers of the troubled $1billion Banksia
Group based in Kyabram, Victoria has again brought to the investing public’s attention the risks
that can be associated with some debenture investment schemes. Recent losses now in the
debenture sector alone exceed $1.5billion (excluding Banksia) after the failure of other
debenture schemes such as ACR, Fincorp, Bridgecorp, Provident Capital and others. The unique
risks associated with debenture investments have been well documented by the national
regulator the Australian Securities & Investments Commission (‘ASIC’) in the past.
A question you may ask is... what makes La Trobe Financial different?
La Trobe Financial is a business built on conservatism and quality asset selection for its
investors, both retail and some of the biggest institutional investors in Australia and overseas.
La Trobe Financial has been around for 60 years and has invested and managed on behalf of
others over $10billion. However most importantly, and unlike the recent sad news for Banksia
investors, La Trobe Financial is not a debenture investment scheme and provides investors with
a vastly different legal investment structure by way of security and underlying risk profile when
compared with the collapsed Banksia’s debenture scheme.
Some of the important differences for investors are:
- Banksia operated two investment arms. First, a standard mortgage Fund operation with
circa $300m, and secondly, a debenture company with $700m of investor funds. It is the
second entity to which the independent trustee had requested the appointment of a
receiver – McGrathNicol.
- We have no reason to believe any of the assets in the standard mortgage Fund are in
jeopardy. This is confirmed by Banksia’s own media release.
- Unlike La Trobe Financial’s processes, debenture investments are loans by investors to a
company without direct collateral security. The company issuing the debenture is liable to
repay a specified amount but the debenture is not directly secured over a particular asset.
Investors in debentures are therefore relying upon a promise by the company issuing the
debenture to repay the debt. The strength of that promise relies on the financial solvency
of the company itself and its ability to recover from borrowers. Debenture holders rank
with all other general creditors of the company and are subordinated behind secured
company debt. This is very different from the La Trobe Australian Mortgage Fund ("La Trobe Fund"). Under the La Trobe structure,
investments are held in trust for the sole benefit of investors, who are members of the
La Trobe Fund. The investments are secured against the underlying properties through
mortgages registered on the property title. Therefore, the financial solvency of La Trobe
Financial has no direct bearing on the security of an investment. Accordingly, the security
for investments in the La Trobe Fund is the actual mortgage secured against real property
and not a corporate guarantee.
- Banksia also appears to have operated at a different end of the risk spectrum from
La Trobe Financial. For Banksia to offer debentures returning above 10%, it was clearly
lending to borrowers prepared to assume higher risk. The mortgage lending practices
undertaken by La Trobe Financial are inherently different from that of Banksia. La Trobe
Financial’s primary target market for asset origination is the smaller residential loan
asset market. La Trobe Financial also has conservative loan to valuation practices and
maximum loan sizes while ensuring our La Trobe Pooled Mortgage Option carries broad
loan diversification by sector and geographic location. The La Trobe
Fund is among the most diversified in Australia. Banksia’s concentration risk was primarily
in non residential loans and a large exposure to vacant development land. The La Trobe
Fund has an average loan size of $316,000 compared with Banksia’s
reported average loan size of $2.8m.
- In regard to solvency, it appears that Banksia had been operating with a net asset
deficiency for some period of time before the appointment of the independent receiver
on Thursday 25 October. La Trobe Financial has no such deficiency. La Trobe Financial has
over 60 years investment experience, and La Trobe Financial’s Pooled Mortgages Option
is the highest rated mortgage fund in Australia by Zenith Partners; SQM Research and
Lonsec. Moreover La Trobe Financial’s Pooled Mortgages Option has a proven history of
performance with no loss of investor capital or interest since inception.
- The Banksia loan book was allowed to deteriorate to the extent that arrears exceeded
industry acceptable standards and an independent review for their Board of the loan
portfolio established loan losses of $30m which exceeded net equity in the group of $24m.
Ultimately it is these differentiating factors which provide La Trobe Financial investors with
greater certainty and understanding in relation to investments and greater certainty of return.
The following award and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund
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La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 145 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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