First Step investors told money shaky

Around 7000 investors who had $457 million locked up in six investment trusts in 2006 have been warned by the trustee more than half of their money may now be at risk.

The First Step investment trusts were sold exclusively through financial advisory group Money Managers.

But when more investors began to pull out than join the trusts, the decision was made to wind up the funds and sell off the assets over a two-year period.

That began in October 2006 and investors have so far received $223.5 million.

But late last week First Step's trustee company Calibre Asset Services wrote to investors warning them of the "significant challenges in realising the remaining assets".

Investors were initially told to expect repayments on a regular basis but now the trustee says it is difficult to say when and how much investors will get back.

"The managers are confident of further capital repayments over time but it is only appropriate to emphasise that there is also growing potential for further loan defaults by borrowers and, as a consequence, for further writedowns or losses to occur."

Almost all the remaining loans are either to a geothermal project or are property loans, mainly on Auckland apartments.

In January the trustee said a buyer had been found for the Taupo geothermal development which the trusts are thought to have loaned $79 million to.

But the trustee now says the sale is unlikely to go ahead after the buyer was unable to get finance.

"We are now extremely disappointed to advise that the intended purchaser has not been able to secure financing and, despite ongoing discussions, the outlook for this sale is doubtful."

The trustee said general economic conditions had seen a reduction in the number and capability of potential asset buyers.

"Those that are purchasing are tending to look for fire-sale prices - but even then, the numbers of buyers are low."

The trustee said some buyers were now reneging on their legal obligations and in some cases unconditional property buyers who had paid deposits were simply walking away.

"In other cases, developers are failing to deliver on company and personal guarantees, with a number of developers being declared bankrupt."

The trustee also warned that half of the trusts' property loans were not first mortgages.

"In normal market conditions it was customary, in multi-unit residential projections, for the first and second security holders to share proceeds as sales occurred.

"Now banks are often requiring full repayment of their principal and interest before repayments can be made to parties sitting in subordinated security positions."

One of the managers of the property loans, Structured Finance, owed $30 million to the trusts and has said it will be unable to meet the repayment timeframe because borrowers are having difficulty repaying their loans.

The trustee is also assessing legal action against car finance company Club Finance, which is half-owned by Doug Somers-Edgar, the founder of Money Managers, through holding company F&I Holdings.

The legal action is not expected to be taken against Somers-Edgar.

Calibre chairman Edward Russell said the company had decided to write to investors as a forewarning.

"We are just highlighting that the remaining assets are hard to sell given the deterioration in market conditions. Looking forward, the market doesn't seem to be improving."

One investor, who did not wish to be named, described it as another "kick in the teeth" for investors. Since the end of 2007 the trusts have been forced to make numerous writeoffs as a result of loans gone bad.

In January Calibre wrote telling investors $59.7 million in "non-recoverable investment losses" had been accounted for in the 2008 year. That was on top of a $38 million loss reported for the 2007 financial year.

AT STAKE

What's been lost so far
* $59.7 million in investments last year.
* $38 million for the 2007 financial year.

At risk
* More than half of $457 million in six investment trusts.