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Auditors of an Australian mortgage fund favoured by Kiwi investors say it might go bust.
Ernst & Young partner Paula McLuskie says there is "significant uncertainty" whether the LM first mortgage fund, now valued at $A344 million, can continue as a going concern.
In her opinion on the annual report of Kiwi-born Peter Drake's fund, Ms McLuskie says the scheme's financing facilities expire in June and there is material uncertainty whether it can sell developments for the sums estimated or repay debts in the amounts stated.
Ms McLuskie says LM is negotiating with external financiers to get enough money to complete developments on which loans and receivables are secured.
Forecasted cashflows from these projects are "subject to significant risks", she says.
"There is significant uncertainty whether the scheme will be able to complete these projects and realise its assets at the amounts stated in the financial report."
Notes to the accounts say: "In the event that funding beyond 30 June 2013 is unable to be obtained from financiers, or cash receipts from assets sales are delayed and/or less than currently envisaged and the scheme is unable to continue to comply with repayment obligations, the scheme may not be able to continue as a going concern."
Frozen since GFC
LM's currency protected fund – a feeder into the first mortgage fund – has been favoured by about 2000 Kiwi investors, to the tune of $A82 million.
Mr Drake's fund, which backs Australian property developments, has been frozen for three years, since the global financial crisis hit.
It has 27 loans outstanding, down from 55 in 2009.
Disgruntled investors have complained of LM's "high" fees while the fund's size has been shrinking. Concerns have also been expressed over loans to related entities.
Earlier this month several large Australian institutions backed a successful bid by rival fund manager Trilogy Funds Management to displace LM as the responsible entity for its so-called wholesale management fund, a feeder to the first mortgage fund.
Now Trilogy is responsible for LM's former wholesale fund it has to sign off on the accounts, which are due soon, with Ernst & Young as auditors.
Trilogy managing director Philip Ryan says the accounts leave questions over the unit price's true value.
"It's so speculative in a mortgage fund to turn around and say, we've actually got to complete this project to get the value but we don't know where we're going to get the money from."
Mr Drake said in a media release last week: “An intensive repayment of all loans has been critical to create the necessary cash flow to enable the progressive repayment of the fund's line of credit facility, and to realise distribution of investor capital.
"LM has successfully avoided unnecessary fire sale of assets, managing and maintaining assets for best value outcomes on behalf of all investors when ultimately sold.”
The release says the market value of developments when they're sold will determine the fund's unit value.
LM declared a $A16.9 million distribution to unit holders in the feeder funds in 2012.
However, Ms McLuskie says this was reinvested back into the scheme.
Compliance with laws covering such distributions are a matter of interpretation, she says, and LM "believes it has an arguable position to support the declaration of these distributions as being fair and reasonable".
Millions of dollars in fees
In LM's accounts, the directors have valued developments assets as if they were completed, while finishing them is based on funding negotiations still under way.
Loans on incomplete developments are being repaid through cashflows generated by those projects.
LM's accounts show total assets under management have dropped from $A454.7 million in 2011 to $A344 million in 2012.
The fund posted a net operating loss of $A88.6 million in 2012, up from its $A77.4 million loss a year earlier, and the unit value has dropped to A59 cents from A72 cents.
LM claimed management fees and loan management fees of $A13.9 million for the year, down from the $A16.4 million claimed the previous year.
The directors have assured investors fees will return to "historic" levels.
LM wrote off $A99 million in mortgage loans for the year, up from $A84.8 million the previous year.
Interest-bearing loans dropped from $A62.4 million in 2011 to $A39.6 million, but cash and cash equivalents have dropped almost $A10 million to $A8.1 million.