Poor return likely for Provident Capital debenture holders as $5 million dividend payments investigated

Provident Capital receiver PPB Advisory is investigating dividend payments totalling in excess of $5 million paid to a company associated with Provident managing director Michael O'Sullivan dating back to 2008.

In a note to debenture holders, the receivers have commenced investigating "payment of in excess of $5 million in dividends to Provident's shareholder (a company associated with Provident's managing director Michael O'Sullivan) since 2008" as well as Provident's auditing and investor disclosure policies.

This follows preliminary assessments by PPB Advisory finding that a number of assets that Provident took control of as mortgagee in possession may have been substantially overvalued and that this was not disclosed to debenture holders, trustee AET or ASIC.

The receivers have warned Provident Capital debenture holders to expect a maximum of 35¢ back for every dollar they invested in the failed non-bank lender and mortgage fund manager.

Provident Capital receivers and managers Phil Carter, Tony Sims and Marcus Ayres from PPB Advisory say that based on “preliminary analysis of the loan portfolio” an estimated likely return “will be in the region of $0.25 to $0.35 of every dollar invested”.

This prime reason for the “shortfall” in returns to debenture holders relates to Provident’s lending and asset management policies with the receivers noting that many of the loans originated on a “pure asset basis without regard to the borrower’s ability to service the debt or repay it otherwise then from a sale of the security”.

The report is also highly critical of the behaviour of Provident Capital when taking control of an underlying asset as mortgagee in possession.

PPB Advisory says Provident Capital failed to issue legal notices enacting its power of sale as well as comply with its obligations under the Corporations Act as controller.

The latest report also says Provident Capital “appeared to lend on poor or unsuitable security on a number of cases”.

When Provident Capital collapsed in July, it was found that 85% of loans funded by debenture holder investments in fixed interest products were six months or more in arrears with a high proportion being first mortgages for risky residential development projects.

Out of a total of 55 loans in the fixed interest term portfolio, 30 were for properties in NSW worth $51.2 million with 15 in Queensland totalling $38.9 million.

The latest report shows that loans were concentrated with two “key borrowers” who were provided mortgages totalling $40 million with the administrators expecting to recover less than 50% of this amount.

The estimated maxium return of 35¢ on the dollar  is contingent on a number of assumptions, including that there are no new defaults from borrowers in the existing loan portfolio; full recovery of certain loans from existing defaulting borrowers, continued support from Provident staff and “no significant adverse changes to the Australian property market”.

PPB Advisory also added that estimate was difficult to work out with any precision and warned that there are “a large number variables outside of a receiver’s control”

Debenture holders should treat this as an estimate only that could change as more information comes to light, said the receivers, who added that there could be further returns arising from claims against the directors of Provident Capital, professional advisors and third parties.