Estate Unit Holders Face Loss Of $250m
Sydney Morning Herald
Monday June 18, 1990
Investors in the Estate Mortgage trusts stand to lose about $250 million of their $620 million investment in the event the trusts are liquidated, according to a draft report on the embattled group by KPMG Peat Marwick.
Estate Mortgage's 46,000 unit holders in the six trusts face a return of an average of less than 60c in the dollar because of the problems faced by many of the second-tier developers financed by Estate Mortgage.
Unit holders, who were due to meet on July 11 and 12 in Melbourne to vote on a number of changes to the trust deed, will be shocked by the deterioration in the value of their investment. The final motion on which they are to vote is whether to wind up the trusts.
These meetings may be postponed because of delays in preparing the Peat report in a form suitable for unit holders.
Given the apparent decline in Estate Mortgage's underlying assets, unit holders may be tempted not to push for liquidation of the trusts in the hope that a new manager can restore value to their investment. Any advice to unit holders from the trustee or the new manager is likely to reflect a view that investors' best interests would be served by stable and orderly management. The ability of Estate Mortgage to liquidate its loan portfolio depends, in turn, on the scope of developers who have borrowed money to sell developments or refinance, both difficult tasks in the weakening commercial property market. A number of the developers, such as George Hercu's Hersfield Developments and John Avram's Interwest group, are in difficulties themselves.
The Peat report includes valuations by registered valuers of those developments funded by Estate Mortgage.
Completion of the draft report awaits further discussions between the audit firm, the trustee and the Victorian Corporate Affairs Commission, which is investigating the troubled trusts.
The report was ordered by trustee Burns Philp Trustee Co after the former manager, Estate Mortgage Managers (EMM), sought to delay payment of the $28 million March distribution to unit holders. Peat is understood to have delivered a preliminary draft on Friday.
Burns Philp removed EMM as manager last Wednesday after seeking advice from a senior Melbourne QC, who said the trustee could and should remove EMM "in the interests of unit holders". The trustee nominated Macquarie Investment Management as agent pending the formal appointment of a replacement manager.
On Friday, EMM lost a bid in the Victorian Supreme Court to have its sacking reversed. Justice Smith said he was not persuaded the trustee had acted improperly. When read without the double negative, the judge appears to have endorsed Burns Philp's action.
The six Estate Mortgage trusts reputedly have assets totalling $790 million, comprised of the $620 million invested by unit holders plus borrowings of $170 million from a banking syndicate led by HongkongBank. Other banks in the group include ANZ, Commonwealth, National Australia and State Bank of NSW.
The banks stand at the head of the queue and in the event of a winding-up would be confident of receiving all of their money. On June 4 they wrote to Burns Philp's solicitors asking the trustee to instal an "acceptable" manager, implying dissatisfaction with EMM.
Any crystallisation of losses on Estate Mortgage's investments would be borne entirely by unit holders. Among the biggest losers, however, would be the Melbourne families associated with EMM who are believed to have invested between $20 million and $30 million in the trusts.
Estate Mortgage ran into trouble early this year following a rush of redemptions in the wake of unfavourable reports by investment advisers such as Moneylink Financial Planning. The trustee is suing Moneylink over a letter to its subscribers late last year in which it said Estate Mortgage had developed a "high-risk profile". Unit holders cashed in more than $100 million during the March quarter before the Victorian CAC froze redemptions on April 11.
Few institutions would survive a run of that magnitude. It raises questions, however, about the claims made by the manager in its persuasive advertising, in which it promoted Estate Mortgage as being "Not a bank, or a building society, but even better". In terms of security, no institution is"better" than a bank.
© 1990 Sydney Morning Herald