THE Warrnambool-based Southern Financial Group has responded boldly to the Australian Securities and Investments Commission’s (ASIC) decision to investigate the unlisted debenture sector following the collapse of Banksia Securities.
Southern general manager Ashley King said he welcomed ASIC’s decision to review the regulation of the debenture sector.
The collapse of Banksia has highlighted the low equity ratio of many debenture issuers in Australia and Southern was among six listed this week in The Australian Financial Review as having an equity ratio that did not meet ASIC-recommended benchmarks.
The equity ratio measures the proportion of the total assets financed by stockholders and not creditors, and provides a buffer in the event of financial difficulties.
Southern makes clear in its 2012-2013 prospectus that its equity ratio, as at March 31, this year was 1.99 per cent, well below the 20 per cent benchmark recommended by ASIC when more than 10 per cent of the funds from debenture products were invested in property development.
Southern’s prospectus states the 20 per equity ratio applies to its investments.
Banksia had an equity ratio of 3.6 per cent at the end of June 2011, well below the minimum eight per cent ASIC-recommended equity ratio for debenture investments that did not have more than 10 per cent invested in property development.
The ASIC-recommended benchmarks are only recommendations and do not prevent company operating below them.
Southern’s equity capital of 1.99 per cent, or $5.7 million at March 31 this year, was part of a continuing reduction in its equity ratio. The ratio was 2.1 per cent, or $5.8 million at December 31 last year, and 2.56 per cent, or $6.2 million, at December 31, 2010.
“While past performance of its loan portfolio may not be indicative of future performance in all circumstances, the company notes that in its business, it has never defaulted on a payment of principal or interest to a Southern Note holder since it commenced trading in 1990,” it says.
Mr King also responded to The Australian Financial Review’s note that the company had loans to parties related to the company.
He said one of those loans was $22 million to Southern’s wholly-owned subsidiary, Southern Leasing.
“Importantly, this loan is to a subsidiary which has fully guaranteed the obligations of Southern Finance and there is a first-ranking charge over all of its assets and undertaking that is held by the trustee for our Southern Notes holders, Trust Company,” Mr King said
“The subsidiary is an important part of our business.
“Southern Leasing uses the funds to make facilities available comprising lease finance, chattel mortgage, operating lease or rental or hire purchase agreements to its clients and the local community.
“The second loan of $480,000 on commercial terms to a director of the company has security of a registered first mortgage.”
Southern offers investments, mortgage loans, equipment finance, financial planning and share broking.
The company’s 2011-2012 annual report showed the company made an after-tax profit of $1.13 million for the past financial year and that deposits held increased during that financial year by $33.3 million to $289.5 million.