Frozen mortgage fund cuts values

00:18, Nov 26 2012

Warnings to Kiwi investors that the value of their holdings in a frozen mortgage fund would be cut when the fund manager finally published its overdue financial statements have been proved correct.

LM Funds has cut the unit price of its LM First Mortgage Income Fund from 73 cents to 59 cents reflecting, it said, “a true and realistic reflection of sales pricing in the current market”.

In all, the fund, which lent to Australian property developers before the Global Financial Crisis, made a loss of A$88.6 million in a financial year to the end of June. Some A$13.989m was taken in fees and expenses by LM, though it has promised to cut its fees since Australian fund manager Trilogy launched a takeover bid at the invitation of institutions including ANZ and BT Funds Management.

The drop in unit price is largely a result of A$99.14m of loan impairments during the year, and as a result, the value of its assets has dropped from just over A$454m to just under A$344m.

LM, founded by Kiwi insurance broker Peter Drake, is locked in a battle with Trilogy to retain control of the fund. That fight which was put on temporary hold by Trilogy after it secured control of one of the two feeder funds which channelled investor cash into the LM Fund.

While the tussle with Trilogy continues, LM remains in control of the fund, which was frozen in 2009.

Nearly 90 per cent of the fund's loans are in default, over A$119m of interest due on loans has gone unpaid, and LM is winding it down after investors rejected a plan that would have dragged that process out.

In the first stage of the fight for control, news leaked out that LM was telling New Zealand advisers that the 73 cents a unit price would likely be cut when it finally published its financial statements to the end of June.

But only the final sale of assets will show what their true value is, and auditor Ernst & Young put three qualifications on its audit opinion.

The first was to note there was “material uncertainty” regarding the fund's continuation as a going concern as its financing facilities terminate at the end of June.

The second was that there was uncertainty about finding finance to complete certain projects on which loans and receivables are secured. The third was that the fund declared a distribution despite making a loss. These distributions have been reinvested in the scheme by the two feeder funds, but declaring them involved LM making a “significant” legal judgement, which the auditor felt needed to be highlighted.

Drake issued a statement saying the orderly sales process for assets was going “full steam ahead”, and would soon result in a capital distribution to investors.

Loans made to the fund during its frozen period were being repaid, and LM had avoided having to firesale assets, Drake said, who sought to distance other LM funds from the troubled First Mortgage Income Fund.

“LM is a diverse multi-fund manager currently managing nine Australian funds with total assets under management with a realisation value of A$3 billion. The LM group is solid and financially sound and the LM funds and their assets are healthy”, says Drake.

Each LM fund is a legally separated entity, with assets held separately to one another in a unit trust on behalf of investors in each fund. The closed LM funds have no association with the open LM funds, which currently received investments via a financial intermediary network spanning more than 70 countries.