A small, Brisbane-based investment fund has been frozen after directors feared it would be overrun in a “run” on it by investors seeking to redeem their debentures. Controllers (similar to receivers) from PricewaterhouseCoopers have been appointed by the Trustee. They are Greg Hall and Ian England.
The fund is known as Diverseport and had around $112 million in assets, according to a circular from the controllers.
It’s another in a growing list of companies in the finance area in south east Queensland to run into trouble. The previous ones have included MFS (now Octivar), City Pacific, and ABC Learning, which was hit by high gearing, poor earnings and margin calls which drained confidence in the company and the board and forced a wholesale restructure and sale of its US interests.
It is not known what has caused Diverseport’s problems, except that it invested in “sub-investment grade products” or in long dated highly illiquid investments that could not have been sold. The controllers say 90% of the non-cash investment have maturities of 12 months or more, running out to 2017.
The controllers say that of the $112 million it had $23.6 million in cash or liquid investments, so the directors must have realised that the ‘run’ would have drained that liquidity very quickly. That gives us an indication of just how bad the fund must look to investors, as the liquidity buffer was equal to 21% of investments, which is a substantial buffer in normal times.
In it the controllers say that “a freeze on redemptions is required in order to facilitate the repayment of principal to all Debentureholders on an equal basis” and “Given the information currently available, the prospects of a relatively high level of return to Debentureholders are good.”
They explained that they were engaged by the Trustee early April 2008 to review Diverseport. “The review was primarily prompted by the Trustee’s concerns regarding the low level of equity in Diverseport.
“Prior to the finalisation of our report to the Trustee this week, the Directors contacted the Trustee on 6 May 2008 to request that a Controller (the definition of which includes a receiver) be appointed to Diverseport in order to wind down Diverseport’s business.”
“The reasons for this request, as the Directors have stated to us, are as follows:
- An analysis of outflows for April 2008 led the Directors to form the view that there may be a “run” on Diverseport debentures. The reasons for this run are currently unknown to the Directors.
- A run on debentures would likely have necessitated a material realisation of certain fixed income investments at an accelerated rate, with an adverse impact on returns.
- The realisation of these investments some of which are “out of the money” would have caused Diverseport significant loss and deterioration in equity.
- In light of this, the Directors have formed the view, notwithstanding that Diverseport currently has approximately $23.6m in cash or cash equivalents and therefore current redemptions are able to be met, that later maturing Debentureholders may be worse off if they continued to trade the business.
- Recent rating downgrades of some of the company’s investments and general market conditions also contributed to the directors’ concerns.
- Diverseport funds its investments through Debentures (currently around $107m) supported by a small Floating Rate Note issue (currently around $3m).
- Diverseport’s accounts show that it made a loss of $683k for the year to 31 March 2008. Total accumulated losses since commencing trading in early 2005 are $501k. The equity, including retained earnings as at 31 March 2008 was $751k.”
Diverseport is promoted by a company based in Brisbane called the Driven Group. The principals are, according to the website: Mr Jim Stening, Mr Greg Bates and Ms Kate Birley. The website for Diverseport explains that redemptions have been frozen and no new money is being accepted.
Diverseport was described as “Diverseport is a special purpose vehicle incorporated in 2005 to invest in fixed income financial products. Diverseport invests in fixed income financial products with funds raised from the issue of debentures and unsecured notes. Investors can invest in Diverseport debentures for terms from 30 days to five years at a fixed interest rate or a fixed margin above the relevant Bank Bill Swap Reference Rate.
Driven also referred to another, much larger fund:
“FIIG is a fixed income specialist broking business servicing mid-tier corporates, institutions and private investors. FIIG was established in 1998 and now has more than A$1 billion under advice. With one of the largest fixed income teams in Australia based in Brisbane, Sydney and Melbourne, FIIG provides its clients with access to a wealth of experience, which has been gained at some of the world’s best known investment banks. FIIG offers this experience to middle tier and retail investors, providing them with a service that until now has only been available to institutional investors. More information on FIIG can be found at www.fiig.com.au.
“By wholly owning two established licensed financial services businesses: namely, the fixed income financial product originating and investing business of Diverseport; and the fixed income broking business of FIIG; The Driven Group’s strategy is to maximise the growth for both FIIG and Diverseport and carve a niche in the Australian fixed income middle market.
“In 2006, Driven completed a capital raising to implement that strategy and to expedite the growth of Diverseport and FIIG’s businesses and positions in the fixed income market in Australia. Driven’s shareholders include directors, senior management and staff of Driven, Diverseport and FIIG along with a number of independent shareholders.”