Investment Risk

The section of our Information Memorandum (IM) detailing these risks is reproduced below.

Please read the IM in full and consider your attitude towards risk before deciding to invest in the Fund. You should also assess, in consultation with your professional advisers, how an investment in the Fund fits in to your overall investment portfolio.

The risks in this section are not an exhaustive list. 

As with any investment, investing in the Fund involves risk. Many risks are outside the control of the Trustee. If these risks eventuate, distributions to Investors may not be as expected and may be reduced or suspended and the capital value of the Fund may be reduced. Distribution Payments are not guaranteed and neither is the return of your capital.

At the date of the IM, the Trustee considers the following are key risks of an investment in the Fund:

1. Mortgage investment risks, including the risk that investment values or incomes decrease.
2. Fund investment risks, including in relation to holding Units.
3. General investment risks, including economic and market conditions.

These risks are outlined in more detail below.

Please read the IM in full and consider your attitude towards risk before deciding to invest in the Fund. You should also assess, in consultation with your professional advisers, how an investment in the Fund fits in to your overall investment portfolio.

The risks in this section are not an exhaustive list.

Mortgage investment risks—all mortgage investments

Valuation risk

The valuation of Secured Property may be inaccurate at the time of the Loan and the amount realised on a forced sale may be less than would have been expected had the valuation been correct. There is also the risk that a valuer who provided an inaccurate valuation does not have or no longer has adequate professional indemnity insurance to cover the valuation on which the Sub Fund Trustee relied.

Interest rate risk

Fluctuations in market interest rates may impact your investment in the Fund. For example, rising market interest rates may increase the interest costs of a Borrower with a variable rate Loan, making it more difficult to make regular payments. Similarly, falling interest rates may lead a Borrower of a fixed rate Loan to repay the Loan in order to refinance at a cheaper rate. Rising interest rates may also impact a Borrower’s ability to refinance a Loan.

Default and credit risk

A Borrower or Borrower’s guarantor may not be able to meet their financial obligations. This may be for a wide range of reasons, including—

1. a change in the financial or other circumstances of the Borrower, or
2. a change in the economic climate generally that adversely affects all borrowers.

The Sub Fund Trustee will seek to manage and minimise these risks by only making Loans to Borrowers that meet the Lending Guidelines.

Investment in the Fund is not capital guaranteed. During the life of a mortgage investment, factors outside the control of the Sub Fund Trustee such as economic cycles, property market conditions, government policy, inflation and general business confidence can affect property values and a Borrower’s ability to continue to service a Loan.

If a Secured Property is required to be sold to recover a debt, capital of Investors in the Fund may be diminished or lost if the sale fails to realise sufficient funds to satisfy the Loan balance and any capitalised interest and costs. Enforcement costs may not be recoverable in part or in full, in these circumstances.

Where a Loan is not renewed, the return of investment capital may be delayed until the Loan is either refinanced or repaid. Interest is charged to the time of repayment of the Loan.

The Sub Fund Trustee manages capital risk by applying the Lending Guidelines for Loans and employing efficient collection and management systems. All Loans and valuations are subject to periodic review.

Security risk

The Secured Property may be damaged or destroyed and the insurance cover may prove to be insufficient to cover the full amount of the Loan. This risk will be managed by ensuring certificates of currency for all insurances are provided by the Borrower and that the insured sum is commensurate to asset valuation.

Given that the underlying security is real property, which is illiquid, there is also a risk that delays could occur between a Loan going into default and the sale of the Secured Property. These delays may affect the payment of distributions to Investors and the ability of Investors to receive their funds at the end of the Investment Term due to insufficient cash being available.

Term risk

A Loan may not be repaid or refinanced in a timely fashion, which may cause a delay or potential loss of capital. The Sub Fund Trustee seeks to manage this risk through the initial loan approval process as well as managing maturing loans in a timely fashion.

Enforcement risk

If a Borrower defaults, the Sub Fund may have to enforce its security to recover the Loan and any unpaid interest. Consequently, any enforcement delay may result in the Sub Fund temporarily having insufficient money to pay any or all distributions which will affect the Fund’s ability to pay Distribution Payments.

Enforcement costs will be financed by the Sub Fund and shall form part of the amounts recoverable by these parties from the amounts recovered from the enforcement action. The source of funding for any enforcement costs will come from the following sources:

1. any accrued but unpaid performance fee owing to the Trustee
2. the reserves maintained by the Sub Fund, and
3. from borrowings by the Fund.

The funding of enforcement costs will proceed in the above order.

Enforcement costs may not be recoverable in part or in full if the value of any recovered amounts from the Borrower are insufficient to fully pay these costs.

Mortgage investment risks—second ranking mortgage investments

Junior lender risk

Loans will be secured by a Mortgage. However, if the Sub Fund is a second mortgage lender, then its Mortgage will rank in priority behind a senior lender’s mortgage. Therefore, in the event of a default by the Borrower, the ability to recover the amount owing under the Loan agreement will be affected by the actions of the senior lender.

Generally, the senior lender will have the right to take possession of, and deal with, the security property and assets of the Borrower if various covenants of the senior lender’s loan facility are not met. Because the Sub Fund’s security will rank behind the senior lender, if the Borrower defaults under any of the loan facilities and the senior lender exercises its security, then the Sub Fund Trustee will not have day-to-day control over the Borrower’s assets. This will generally mean that the Sub Fund Trustee cannot exercise the Sub Fund’s security until the senior lender has been paid in full. In addition, any monies available to the Sub Fund in these circumstances would be limited to what is recovered after the senior lender has been paid in full.

There may be delays in the Sub Trustee obtaining production of the title documents or consent to registration from the senior lender, which could delay or, in limited cases under which such consent is not forthcoming, prevent the registration of the Sub Trustee’s second mortgage. In these circumstances, the Sub Trustee will register a caveat over the Secured Property immediately after settlement, in order to prevent dealings in the Secured Property pending registration of the second Mortgage.

A caveat is a statutory injunction which effectively prevents the registration of most dealings in the property (without consent) until the caveat is formally withdrawn, removed or lapses. A proportion of the Loans will be secured by unregistered second Mortgages that are subject to these caveat arrangements until the relevant Loan has been repaid.

If a Borrower defaults under a Loan secured by an unregistered second Mortgage, the mortgagee’s enforcement powers are more limited than it would have if it were enforcing a fully registered second Mortgage.

Mortgage investment risks—Indirect Loans

Indirect investment risk

The Sub Fund may invest in Loans indirectly through ASCF Premium Capital Fund, ASCF Select Income Fund and/or ASCF High Yield Fund, other funds, corporate bonds or warehouse facilities. In such cases, the Fund is exposed to the underlying risks facing these lenders.

ASCF Premium Capital Fund, ASCF Select Income Fund and ASCF High Yield Fund are pooled mortgage investment schemes operated by the Trustee and a copy of the Product Disclosure Statement for these schemes is available for download at ascf.com.au/pds.

Conflict of interest

In case of related party transactions, the Trustee may have conflicting duties due to its role as responsible entity of ASCF Premium Capital Fund, ASCF Select Income Fund and ASCF High Yield Fund and its role as Trustee of the Fund. In this situation the Trustee would be acting in different capacities and would need to balance the interests of Investors in the Fund with the interests of investors in ASCF Premium Capital Fund, ASCF Select Income Fund and ASCF High Yield Fund.

Fund investment risks

The following risks relate to an investment in the Fund and may impact the performance of the Fund:

Capital and Distribution Payments risk

Distribution Payments and the return of your capital is not guaranteed. If the Fund suffers a loss, then you may lose some or all of your capital.

Distribution Payments depend on the return the Fund receives from the Sub Fund’s investment in the Loans. The Sub Fund Trustee seeks to minimise these fluctuations by only making Loans to Borrowers that meet the Lending Guidelines.

Management risk

The Trustee is responsible for managing the Fund’s investments on a day to day basis. The Sub Fund Trustee is responsible for managing the Sub Fund’s investments on a day to day basis. If the Trustee/ Sub Fund Trustee fails to do so effectively, then this could negatively affect the Fund’s performance.

In particular, there is a risk that the Sub Fund Trustee may fail to anticipate movements in the property market, fail to manage the investment risks appropriately or fail to properly execute the Sub Fund’s investment strategies. These factors could have an adverse impact on the financial position and performance of the Fund/ Sub Fund.

Liquidity risk

Investments may become illiquid due to market developments or other factors (that is, they cannot be readily converted to cash, either at all or quickly enough to meet liabilities).

The Trustee will manage, analyse and monitor the liquidity position of the Fund and will take such action as may be required to enable the Fund to discharge their liabilities and meet its cash flow requirements in the best interests of Investors of the Fund as a whole.

All redemptions from the Fund will be undertaken on a reasonable endeavours basis. In the event there are insufficient liquid assets held in the Fund, or where the Trustee considers that redemption at the time is not in the best interest of the Investors, the Trustee may suspend redemptions or postpone/delay the payment of redemptions.

There is no established external secondary market for the sale of Units. Investors may arrange for their own private sale. There is no right for Investors to require their Units to be purchased by the Trustee or by any other person.

Investment term

There is no guarantee that Investors’ capital will remain invested for the expected Investment Term. There are circumstances which may result in the Investment Term being shorter or longer, including—

1. the Sub Fund Trustee not being able to source mortgage investments for the Sub Fund, and
2. a Borrower failing to repay a Loan when due.

Due diligence risk

In all investments there exists a risk that material items that could affect the performance of individual investments are not identified during the investment analysis process and that these risks are not mitigated by the Trustee or Sub Fund Trustee.

Market risk

Market risk is a generic term to describe the risk factors affecting the securities markets generally that could adversely affect the value of investments in the Fund. These factors include inflation rate increases, real or perceived unfavourable market conditions, investor behaviour, economic cycles and climate, movements in interest rates and foreign exchange rates, changes in domestic and international economic conditions which generally affect business earnings, political and natural events and changes in governments monetary policies, taxation and other laws and regulations.

Taxation risk

Distributions to Investors may be affected by changes to taxation legislation. Changes to taxation legislation may necessitate a change to the Fund’s structure to ensure Investor interests are protected.

Sourcing investments risks

Sourcing favourable investments may be difficult and the Fund may not be able to fully invest its funds at acceptable prices. This may affect the Trustee’s ability to implement the Fund’s investment strategy.

Operational risk

There is a risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Adverse impacts may arise internally through human error, technology, or infrastructure changes, or through external events such as third party failures or crisis events. The Trustee and Sub Fund Trustee have procedures in place to manage these risks and, as much as possible, monitor the controls within these procedures to ensure operational risks are adequately managed.

Fund risk

The Fund could terminate, or the fees and expenses paid from the assets of the Fund could change. There is also the risk that investing in the Fund may give different results than investing in the underlying assets of the Fund directly because of the income or capital gains accrued in the Fund and the consequences of investment and withdrawal by other Investors.

New fund risk

The Fund is a newly established managed investment scheme and has no track record or past performance.

Documentation risk

There is a risk that a problem in Mortgage and other relevant documentation could, in certain circumstances, adversely affect the return on an investment. The Sub Fund Trustee will manage this risk by using qualified solicitors with professional indemnity cover to prepare documentation.

Regulation risk

There is a risk that the Fund may be adversely affected by changes in government policy, regulations and laws or changes in generally accepted accounting policies or valuation.

Counterparty risk

In cases of joint loans, the Sub Fund may be adversely affected by a counterparty (such as the joint lender) not honouring its financial commitment upon settlement of a transaction or by breaching loan covenants.

Related party risk

There are risks involved given the Sub Fund will lend to related parties of the Trustee or invest in other investments originated or managed by the Trustee or its related parties, such as ASCF Premium Capital Fund, ASCF Select Income Fund and ASCF High Yield Fund.

Other key risks

Indirect management risk

The Sub Fund may invest in Loans indirectly through ASCF Premium Capital Fund, ASCF Select Income Fund and ASCF High Yield Fund, through corporate bonds issued by a related or third party, through a related entity (through the provision of a loan, acquisition of share capital or a joint venture arrangement) or through an SPV.

In such cases, the Sub Fund is not the legal lender nor does it manage the Loans portfolio directly. It must therefore rely on ASCF Premium Capital Fund, ASCF Select Income Fund and ASCF High Yield Fund, or the issuer/manager of the corporate bonds to enforce any security and recover the Loan proceeds in an event of default. Where ASCF Premium Capital Fund, ASCF Select Income Fund and ASCF High Yield Fund, or the issuer/manager are unable to enforce the Loans successfully, the Sub Fund may incur losses which may result in the Fund incurring losses.

Liquidity risk of indirect investments

The investments in which the Sub Fund has invested indirectly, or any related party or third party, may become illiquid. This could have a detrimental effect on the value of the investments, or may impact an Investor’s ability to withdraw from the Fund.

Subordination risk

Where the Sub Fund contributes to Loans jointly with another funder or SPV or participates in Loans provided by third party financial institutions, the repayment of the Sub Fund’s contribution may be subordinated to repayment of contributions of other participants. Accordingly, if insufficient funds are received from Borrowers, full payments of interest and full repayments of principal to the Sub Fund may not be able to be made when due because payments to the other participants are made in priority to the Sub Fund.

Imperfect assignment

Existing loans may be acquired from third party lenders. The Sub Fund Trustee may not take all steps necessary to perfect its legal title in the security relating to the Loans. The consequences of the Sub Fund Trustee not holding legal title of the security relating to the Loans include—

1. until a Borrower has notice of the Sub Fund Trustee’s interest in the Loans, such person is not bound to make payment to anyone other than the relevant third party lender, and can only obtain a valid discharge from the third party
2. rights of set-off or counterclaim may accrue in favour of the Borrower against its obligations under the Loans which may result in the Sub Fund Trustee receiving less money than expected from the Loans
3. the Sub Fund Trustee’s interest in those Loans may become subject to the interests of third parties created after the assignment but prior to the Sub Fund Trustee acquiring a legal interest, and
4. the third party lender may need to be a party to certain legal proceedings against any Borrower in relation to the enforcement of those Loans.

Consumer protection laws

Unfair Terms

Under the Australian Consumer Law and the Australian Securities and Investments Act 2001 (Cth) (ASIC Act) any term of a standard-form consumer contract will be unfair, and therefore void, if it causes a significant imbalance in the parties’ rights and obligations under the contract, is not reasonably necessary to protect the supplier’s legitimate interests and it would cause detriment to a party if applied or relied on.

The provisions in the Australian Consumer Law and ASIC Act regarding unfair contract terms will apply to a term of the Loans to the extent that those contracts were entered into, are renewed, or the term is varied, after the commencement of those provisions.

If any term of a Loan is found to be void, it may affect the timing or amount of interest, fees or charges, or principal repayments under the relevant Loan.

General risk factors

In addition to the specific risks identified above, general risks can affect the value of an investment in the Fund. These include the following:

1. The state of the Australian and world economies.
2. Inflation movements.
3. Negative consumer sentiment, which may keep the value of assets depressed.
4. Natural disasters and man-made disasters that are beyond the control of the Trustee or the Sub Fund Trustee.
5. The illiquidity and cost of capital markets.

The performance of the Fund or the Sub Fund, the repayment of capital or of any particular rate of return, is not guaranteed by the Trustee or the Sub Fund Trustee, their directors or associates. Mortgage investment, by its nature, carries a level of risk and no guarantee is or can be given that an investment in the Fund will not decrease in value and that Investors will not suffer losses.

Social and health risks (e.g. COVID-19)

As at the date of the IM, the outbreak of what is now known as the COVID-19 pandemic has continued to spread, resulting in significant volatility within the Australian and global economies as well as Government imposed social distancing practices and business shutdowns.

The risks described in this Section 5 may be exacerbated by COVID-19, and any number of unknown risks may arise as a result of COVID-19, which may adversely impact the Fund and distributions to Investors.