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Debenture providers in Australia have been described as being a reflection of a regulatory regime that has struggled effectively to deal with a shadow banking system that has operated unimpeded for decades. It is a sector that is worth $4bn today – down from $8bn a few years ago – and largely funded by retail investors
The rates of return offered by debenture providers are high – but rarely do they give a true reflection of how much risk they represent. The types of investors attracted to the attractive headline rates may not be sophisticate enough to be interested in metrics like capital ratios and ratings. While debenture issuers may seem like a bank they are not a bank and so the government guarantee on deposits does not apply.
Recently a number of these debenture providers have run into trouble or gone under, including:
- Gippsland Secured Investments
- Banksia Securities Limited
- Angas Securities
Gippsland Secured Investments
3,500 investors caught up in Gippsland Secured Investments meltdown: millions of dollars from unsuspecting investors frozen after being poured into unsuitable property developments. GSI disclosed in a prospectus from March 2012 that its equity ratio was 4.17 per cent – approximately one quarter of the recommended amount for a company that lends primarily to property developers. Distributions on the $150m invested in GSI are presently frozen – its March 2012 prospectus indicated that 14.2 per cent of its loan book by volume ($16.9m) was in arrears and likely to be revised upwards.
Banksia Securities Limited
Banksia collapsed in October 2012, had a capital ratio of less than half that recommended by ASIC and spelled this out in its product disclosure statement. It still attracted more than $650m from 3,000 small investors. Banksia investors hope to receive 85¢ in the dollar from their investments after the receivers have strong interest in the Banksia’s $270m loan book.
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