Collapsed Victorian non-bank lender Banksia Securities Limited may have traded and written new loans whilst insolvent, according to a creditors report from receivers McGrath Nicol, which attributes its collapse in part to high-risk loans secured against rural property and land that had not received development approval.
The report paints a picture of a poorly managed business, which at the time of its collapse had an equity to debt ratio of just 3.5%, around $146 million of loans in arrears, but was still writing new loans up until the end of September.
The non-bank lender was profitable in the past three years – though profits had declined from $2.8 million in 2010 to $881,000 in 2012 - but it had underestimated bad debts by about $34 million.
The receivers have made their first distribution to debenture holders representing 20 cents for every dollar invested and have estimated a total repayment to debenture holders of between 50 and 65 cents in the dollar.
The first distribution was made from cash holdings of around $136 million.
A second distribution of between 5 cents and 10 cents in the dollar is expected to be repaid by June 30.
Banksia, incorporated in 1968 collapsed in October putting $660 million of small investor debenture funds at risk.
Over 16,000 small investors invested in Banksia’s fixed interest debenture funds.
The receivers report that due to a current lack of liquid assets they can make no immediate repayments to investors in a smaller Banksia-managed fund, Cherry Fund Limited, which began in 2003 and raised $10 million, but estimate a future return of 55 cents to 70 cents in the dollar.
“From our analysis of Banksia’s loan book…it is clear that the company is insolvent and may have been insolvent for some time prior to our appointment,” report McGrath Nicol joint receivers Tony McGrath, Joseph Hayes, Matthew Caddy and Robert Kirman.
They add that Banksia was “thinly capitalised throughout the period examined with an equity ratio of approximately 3.5%” and was exposed to “immediate solvency concerns in the event of even minor losses on its loan portfolio”.
The report notes that there was a “decrease in cash from 30 June 2012 to 30 September 2012” due to Banksia advancing funds to third party borrowers as loans (increasing its loans receivable)”.
“These loans were made in the ordinary course of business” with the report noting that while Banksia raised much of its money through its nine office regional Victoria branch network, it used mortgage brokers to source borrowers throughout Australia.
At the same time as Banksia was advancing loans, the report notes that “in broad terms if more than 3.5% of total assets were unrealisable as at 30 September 2012, the company would have insufficient resources to meet its total obligations to debenture holders”.
Among the matters being investigated by McGrath Nicol receivers is whether the directors traded the companies at a time when they were insolvent or likely to become insolvent; whether there were any uncommercial transactions entered into with related or unrelated parties; and whether company directors and officers complied with their statutory obligations “to exercise care and diligence, discharge duties in good faith and avoid conflicts of interest”.
The receivers report that at the time of their appointment, Banksia’s main asset was its loan portfolio totalling approximately $527 million.
This consisted of a portfolio of 956 loans made to third party borrowers throughout Australia and being generally secured by first ranking real property mortgages.
The bulk of the lending was done in Victoria ($260 million, 548) followed by NSW ($167 million, 243 loans), South Australia ($50 million, 94 loans) and Queensland ($48 million, 56 loans).
Just over a quarter (28%) of loans in the Banksia portfolio were in arrears with 6% of loans in the Cherry Fund portfolio also arrears.
However, the receivers note that while the remainder of the companies’ loan books are classified as performing, “we understand that a number of loans are subject to capitalised interest (or interest funded with the facility)”.
“Once capitalised facilities are fully expended, this may lead to further loans entering into arrear.”
The receivers attribute the collapse of the non-bank lender as due to relatively high risk lending to borrowers where the underlying security property is “in a rural or regional location (where the general decline in the domestic property market has been most significant)”.
In addition, loans were advanced for vacant land that in some cases had not yet received development approval and so did not generate an income stream to support interest/loan repayments.
Other reasons for its collapse were high levels of loan arrears (around $146 million), a substantial number of mortgagee in possession properties (around $112 million), low equity levels as well as global credit and property market conditions making it harder for borrowers to refinance upon maturity of their loans.
The receivers will hold an information session for debenture holders in Kyabram, Shepparton and Ballarat on Friday (December 14).
Debenture holders need to register their interest in attending by calling 1800 722 079.
The information sessions will also be webcast on the McGrathNicol (www.mcgrathnicol.com) and BSL (www.banksiagroup.com.au) websites.