Lending role questions

Firm denies conflict of interest at Kinloch

The lending practices of NZ Guardian Trust and Hanover Finance are under the spotlight as they await the proceeds from another mortgagee sale at the troubled Kinloch Golf Resort development on the shores of Lake Taupo.

Guardian Trust, a subsidiary of Queensland-based financial services company Suncorp Metway, provided mortgage funding in November 2006 on a tract of residential sections that are part of the Kinloch development.

At the time, Kinloch's main funder was Bridgecorp, which held a mortgage securing up to $32 million over the project. Guardian then provided additional finance with a first mortgage securing up to $8m, which meant it ranked ahead of Bridgecorp's loan in the event of a default.

However, when Bridgecorp went belly-up in July last year, Hanover stepped in and took over its mortgage on Kinloch, making it the second mortgagee on the land secured by Guardian's mortgage.

This put Guardian in an unusual position, because it also acts as corporate trustee for Hanover and has a supervisory role over that company's affairs.

Hanover also had a separate financing arrangement on Kinloch's golf course and the resort itself, plus a second tract of residential sections.

It has already been forced to sell these by mortgagee sale when open market sales at Kinloch failed to live up to expectations.

Now Guardian has been forced to follow suit and has put the 27 residential sections it is still owed money on up for mortgagee tender.

The outcome will be keenly awaited by people with money invested with Guardian and Hanover because both companies are in default of their obligations to investors. Hanover suspended repayments to its investors in July and Guardian Trust has also suspended repayments from its Mortgage Fund, which provided the money for its loan to Kinloch's developers.

Hanover, owned by Rich-Listers Mark Hotchin and Eric Watson, has been trying to stitch together a restructuring plan to put to its investors for the past four months.

That plan must first be approved by Guardian in its role as Hanover's corporate trustee.

Guardian insists there is no conflict of interest in its roles as trustee and mortgagee, citing Chinese walls within the company.

Hanover was well known as a provider of development finance but Guardian's involvement in a development project may come as a surprise to its investors.

Most trustee companies avoid lending on development projects because of the high level of risk associated with them.

Guardian's marketing material for its Mortgage Fund promoted it as a "low risk" investment and did not mention involvement in development projects.

However, the Mortgage Fund's investment mandate, which governs how its money can be invested, places few restrictions on the types of properties it can lend against.

The main restrictions are that the money must be secured by a first mortgage and cannot be more than 60% of a property's registered valuation.

But according to Guardian, it does not get involved in development lending.

Guardian's chief financial officer, Terry Tidbury, refused to discuss the company's involvement in the Kinloch development, but in a written response to questions from the Sunday Star-Times, the company said "as a matter of principle, Guardian Trust will lend on land holdings but does not provide development funding. We lend only against the value of the land itself, not the expected post-development value of the land".

But it would not say how much it was still owed on the Kinloch development, whether it has loaned money on any other development projects, how many other mortgages it has which are in default or when it expects investors to be able to redeem money from its Mortgage Fund.

- © Fairfax NZ News