Frozen fund's unit price fall revealed

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Predictions that the unit price of the LM First Mortgage Income Fund would be slashed when its long overdue accounts were released have proved correct.

Tuesday, November 27th 2012, 7:15AM 2 Comments

LM Investment Management, late on Friday, released the financial statements for the frozen fund and announced the unit price had fallen from 73c to 59c.

LM Chief Executive Peter Drake said it “is a true and realistic reflection of sales pricing in the current market”.

The manager is conducting an asset sales programme, and warns the unit price could fall further.

“The market value at the future point of actual sale will determine the unit value ultimately realised by investors, receiving pro-rata progressive capital distributions,” Drake says.

LM is currently battling for control of the fund after fellow fund manager Trilogy attempted to gain control of the two funds which feed into the LM First Mortgage Fund.

It has managed to gain control of one fund and is still attempting to gain control of the second which has many New Zealand investors.

The LM First Mortgage Fund was frozen in 2009 and currently 90% of its loans are in default and A$119 million in interest remains unpaid.

Since the Fund’s 2009 closure, LM’s prime focus has balanced selling Fund assets, whilst maintaining, enhancing and positioning the assets it controls, ready for sale.

“During this time, 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”, says Drake.

Liquidity generated through the sale of 31 assets to date (28 sold as at 30 June 2012 and a further 3 assets this financial year) has seen the Fund continue its operations, maintain and enhance assets whilst progressively reducing the line of credit facility by almost A$105 million.  The Fund’s current A$29 million facility balance is forecast to further reduce to A$17 million by month end.  Under the terms of the current agreement, LM expects the remaining balance to be repaid to its financier in the first quarter 2013, based on the current sales pipeline.

However the fund’s auditor, Ernst & Young, tagged the accounts saying thre was “material uncertainty” about the fund's continuation as going concern as its financing facilities end in June.

"There is siginficant uncertainty whether the Sceheme will continue as a going concern, and therefore whether it will realise its assest and extinguish its liabilities in teh normal course of business and at the amounts stated in the financial report."

The second was that there was uncertainty about finding finance to complete certain projects on which loans and receivables are secured.

The auditors also say there is "material uncertainty" over A$16.9 million of declared distributions made while the fund was making a loss. These distributions have been reinvested in the scheme by the two feeder funds, but declaring them involved LM making a “significant” legal interpretation, which the auditor felt needed to be highlighted.

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