Finance provider Heartland New Zealand yesterday raised questions about fees paid by the Victoria Property Fund to its management company before the fund's recent collapse.
The Victoria fund, which folded with losses of about $5 million to investors, was managed by Dunedin-based Britannia Management Ltd, whose directors are Craig Myles and Roger Bridge.
Heartland said in a statement yesterday it was "with some reluctance" that it did not in April refinance a subdivision development near Nelson by the Victoria fund and called in its $7.5 million debt for full repayment after having "lost confidence" in Britannia Management.
"Heartland had effectively lost confidence in the performance of the manager [Britannia Management Ltd] and sought control to protect the value of the asset from further erosion," Heartland said.
It is understood the original debt of about $7.5 million has since risen to about $8.5 million as interest accrues.
Mr Myles was sent a copy of Heartland's statement yesterday and responded that it was the first time any loss of confidence had been expressed.
Heartland said the viability of the Richmond subdivision was compromised by several factors, including consenting delays, litigation with section buyers and a downturn in demand for commercial sites.
Heartland said despite these issues, fund manager Britannia "continued to exercise, until the 1 July 2011, its full entitlement to the management fees", as permitted by the Victoria fund's trust deed.
It was unclear at what stage the loss of investors' funds became apparent to the manager, and if they ceased withdrawing management fees immediately it became apparent, Heartland said.
Mr Myles said yesterday fees charged by Britannia were in accordance with disclosures in the prospectus and its investment statement and subject to audit and oversight by Perpetual Trust as trustee.
He said in a statement that, contrary to Heartland's assertion, Britannia did not charge its full fee in the year ended June 2011 and had offered before July to waive fees, on the basis the banking facility was successfully renegotiated.
Mr Myles did not respond to questions about total fees paid to Britannia.
Heartland said yesterday that before calling in the debt, it had worked with Britannia and trust managers to "identify a viable business plan", but there were subsequently "several failures to deliver on the proposed strategies".
Heartland said it was "in the face of continued requests for additional funding from the manager, with no clear ability to recover such increases" that it exercised its right under security agreements to take over the Richmond property.
Mr Myles said assistance was sought from "various professional advisers and financiers" and there was a structure to protect some investor value from the project, but negotiations for refinancing with Heartland did not reach agreement.
In an investor update earlier this month, Mr Myles said Heartland had continued "to charge interest [now at penalty rates]".
Heartland yesterday said interest-only had been accruing since April 30, when the debt was called in.
"Interest has continued to accrue since that date at the same non-penalty rate".
Mr Myles yesterday said Britannia was told by Heartland in June that interest was 9%, plus 2% default interest, and that Heartland only later advised penalty interest had not been charged.
"During the course of the time when the manager had ceased charging its fees, Heartland charged a further $756,950 in interest plus its own very significant legal and valuation costs, which have also been added to the loan balance," Mr Myles said.
"As it turns out, the only beneficiary of Britannia ceasing to charge its fee turned out to be Heartland, because Britannia continued to negotiate sales of further sections and work tirelessly in pursuing the [legal] case against the Tasman District Council," he said.
The Victoria fund began to unravel in April when Heartland demanded payment of an outstanding debt held against the light industrial subdivision in Richmond, which was the last remaining asset of the Victoria fund.
The proceeds from the sale of the final eight Richmond sections, from an original 23, are not forecast to be enough to pay Heartland in full, likely leaving no cash available to investors.
Britannia told investors in its update this month the debt was greater than land value, because land values had declined and costs had risen, a buyer had defaulted, there were legal costs and additional interest to pay, "as well as additional management costs".
Heartland said yesterday it was "settling outstanding issues" surrounding the subdivision before marketing it to recover its security, including principal, interest and costs.
"In the unlikely event there is any surplus, this will be made available to the trust for the payment of creditors and investors."
Heartland inherited the Richmond development debt following its $2.2 billion merger with several other finance operators in late 2010. Its asset base is now approaching $3 billion.
