Provident Capital signed new mortgage fund investors in months prior to receivership

Mortgage fund manager Provident Capital was signing on small investors to its fixed-term mortgage fund with promises of returns above 9% in the months before it was placed in receivership yesterday.

Receivers from PPB have taken over the running of the company due to concerns debenture holders could be left short-changed.

Property Observer understands that 3,500 small investors have about $30,000 each invested in fixed-term products that mature at different times, with fears that Provident could run out of money to pay investors with later maturation dates.

The $120 million fund is invested in first mortgages covering residential, commercial and rural properties principally for property development.

In the December 2011 newsletter, Provident Capital managing director Michael O’Sullivan told clients: “We have recently launched a ‘lock in your rate’ campaign for our three-year and five-year fixed term investments, so that you can take advantage of our higher rates of returns before they are reduced.”

As of December 1 2011, Provident was offering new investors an annual return on maturity of 9.2% for a three-year fixed interest term and 9.55% for a five-year term.

In the December letter O’Sullivan added that Provident had a “proud track record of meeting all our investor payments on time, every time, there’s never been a better time to lock in your rates and take another fresh look at Provident Capital”.

In the same newsletter, Provident advertised its monthly income fund as offering an average annual return of 10.61% over the previous 12 months to October 2011 as well as it having previously been voted best-performing mortgage fund by Morningstar.

In its previous September newsletter, O’Sullivan told investors Provident “continues to go from strength to strength” and highlighted its “proud track record of meeting all our investor payments on time, every time during this entire period”.

Six months, later, in an information booklet published in April this year Provident said that as of December 31  the arrears rate across  its $176 million loan portfolio was 59.4% by value, of which the arrears rate for the fixed term investment funded component was 90.2%, “much of which was more than 180 days in arrears”.

The lender continued to advertise its low-doc lending products through the mortgage broker channel this year, with an advertisement appearing on page six of Mortgage Professional Australia’s June 2012 issue.

The ad says Provident is offered low-doc non-conforming loans of up to $1.5 million for residential, commercial and rural purchases and promises brokers weekly commissions and no-commission claw-backs.

Non-conforming loans are generally provided to borrowers with poor or impaired credit history.

SQM research withdrew its rating and report of the Provident Capital Monthly Income Fund on June 14 a day before Provident’s $120 million debenture fund was frozen by federal court order.  The monthly income product is a seperate product to the debenture offering.

SQM withdrew its rating after downgrading the fund from 3.75 out of five to 3.25 in April, “a direct result of ongoing deterioration in the manager’s financial position and a lack of satisfactory communication from the manager on the current status of the responsible entity managing the monthly income fund”. 

SQM managing director Louis Christopher said at the time “the ongoing decline in the financial health of its manager cannot be ignored” 

A rating of 3.25 indicates that “caution is required”. 

On January 6 SQM had upgraded its rating of the fund from 3.5 to 3.75, a “good” rating and suitable for inclusion on investors’ approved product list – based on financials to June 30.

Christopher tells Property Observer SQM acted to downgrade the rating of the monthly income fund “the moment” it became aware of problems at Provident.

Provident results for the six months to December 31 (released in April 2012) reveals a loan portfolio worth $176 million

There are 95 residential loans worth just under $100 million, with 24 commercial loans worth $22 million and 17 rural loans worth $33 million.

The company made a half-year loss after tax of $9 million compared to profits of $800,000 in the previous corresponding period.

“The current economic climate presents a number of challenges. In particular, it is taking longer to recover all amounts owing where loans are in arrears and property values may not be sufficient to repay the amount owing,” says Provident

As of December 31 2011, the company’s equity capital ratio was 2.73% as compared to the benchmark ASIC ratio of 20.

The booklet notes that the “loans are designed to meet the needs of borrowers who do not fit the lending criteria of Australia’s traditional financial institutions or who simply choose not to borrow from them”.

 The Australian reported PPB Advisory partner and joint receiver Marcus Ayres as saying it would seek to recover funds by repossessing houses of defaulting borrowers and slowly releasing them into the market or by selling the defaulting loans if an investor could be found.

“This won’t be a fire sale and we won’t be putting all these properties out on to the market at the same time,” Ayres said.

Provident has raised more than $1 billion of investor funds for investment in portfolios of registered first mortgages since 1998.

Have you invested in Provident Capital debentures or do you have a Provident Capital mortgage? Send an email to Property Observer with any news or thoughts:news@propertyobserver.com.au

This article first appeared on Property Observer.