Greed and governance

Posted On Friday, 11 March 2005 02:00 Published by
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A three-way row is developing over Fedbond, SA's largest participation mortgage bond company.

By Ian Fife   

Retired investors could lose out if the courts agree that Investec was a participant in scheme       
  
A three-way row is developing over Fedbond, SA's largest participation mortgage bond company. And Fedbond's 10 000 investors, most of whom are elderly, are caught in the middle of it. 

Fedbond was placed under joint management a year ago by the Financial Services Board (FSB), which will not allow it to launch new participation schemes until the issues are resolved.

Neither can Fedbond return capital until the courts allow it to do so.  But the FSB disagrees with the opinion of its own nominee as joint manager, Edwin Letty, that Fedbond can return to normal business.  Furthermore, Fedbond claims that Investec is unjustifiably trying to enrich itself by claiming that the R344m it gave to Fedbond as "bail-out" money should be treated as equal to Fedbond's R1,3bn invested by clients. 

In turn, Investec says Letty has compromised his independence and has disqualified himself from being a joint manager with Fedbond owner John Field. However, the FSB continues to employ Letty.  An application to court by Field on February 22 to remove the joint manager order was countered by an FSB application for curatorship or continuing management, as well as an application by Investec to intervene. The matter has been postponed to June 21.  A year ago, FSB CE Rob Barrow said Fedbond was "in terminal decline".

But Letty told the FM (Property July 23 2004) that "except in the event of a fire sale of properties, at no stage has there been a risk of loss to participants".  Their differing views seem to centre on the role of the Investec money, but Barrow insists that the FSB's concerns about Fedbond go beyond the question of whether Investec should be paid out at the same time as investors. 

Investec bought the Fedsure insurance group in December 2000 and Fedbond's Field, the MD, invoked a pre-emptive right to buy all the shares in the company.

Investec was forced to sell its 65% stake in Fedbond to Field for close on R10m.  Investec holds R344m of Fedsure funds as "managers' stock", which was granted to bail out nonperforming bonds and reduce investor risk.  Field says Investec has consistently refused to agree that its money will be paid out only after the other investors have been paid. 

It was the combination of Industrial Property Development' s exposure and Investec's hard-line approach that last year led to the FSB applying for curatorship, but agreeing to a joint management arrangement. 

Last year, Investec's Sam Hackner confirmed the role of the R344m (FM Focus February 13 2004), that it was attached to nonperforming properties, and that Investec had made provision for future losses.  He also said Investec was comfortable with its money being under Field's management. 

Investec's Ciaran Whelan denies that the company bought the asset at a discount, but it seems unlikely that Investec would pay the full price and then write in a loss. One source says Investec paid about R169m for it. 

Is Investec being greedy and using Fedbond's desire to get back to business as a way of negotiating more money for itself?  No, says Whelan. "Investec's money was attached to the nonperforming properties. But the Collective Investment Schemes Act came into force in 2003 and the properties had to be detached. 

"We have been asking Fedbond to clarify the role of our money in the participation scheme and which properties are backing it, and have not received an answer.  "Now we are asking the court for a declaration as to the exact nature of Investec's legal interest in the scheme and for an accounting.

We are also a financial institution and must consider our depositors' interests."  He says that a fall in Investec's profit could affect its capital adequacy and its depositors' risk.  But Field says Investec is trying to become a participant in the participation bond schemes and to enhance the value of its asset.  "This money was always backed by whatever loans were nonperforming from time to time," says Field. "There were never any specific properties backing them. The R344m backed the entire scheme at the date of purchase." 

Whelan says that the matter is sub judice and that he cannot discuss anything more than what is contained in Investec's papers before the court.  All parties seem to agree that the money was for bail-outs, but that this was not formally recorded when Fedsure owned 65% of Fedbond.  Does Investec have a legal obligation to "back rank" its money?  That will be decided by a court. But Investec may have bought an obligation to look after the interests of Fedbond's investors when it bought Fedsure. And it will not do Investec's reputation any good if investors lose because it is trying to negotiate the best return on its money. 


Publisher: Financial Mail
Source: Financial Mail

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