28/04/2011 - 00:00

Arafura collapses, adds to MIS weakness

28/04/2011 - 00:00

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The near-terminal managed investment scheme sector took another blow last week when stock exchange-listed Arafura Pearls Holdings was placed into voluntary administration.

Arafura collapses, adds to MIS weakness

The near-terminal managed investment scheme sector took another blow last week when stock exchange-listed Arafura Pearls Holdings was placed into voluntary administration.

Arafura joins more than half a dozen other players in the MIS sector to have collapsed over the past two years, starting with Timbercorp in April 2009, followed soon after by sector giant Great Southern and then Rewards Group in May 2010.

Arafura’s collapse marks the culmination of a tumultuous few months for the company, which has conducted an internal inquiry into accounting irregularities and undertaken a complete overhaul of its board of directors.

The company announced last Thursday it was appointing voluntary administrators after failing to secure a standstill agreement with its lenders.

The administrators – KordaMentha partners Stephen Duncan and Chris Powell – said the pearl farming business owed creditors about $6 million while investments in the various managed investment schemes totalled about $35 million, with some 600 members.

Arafura’s operations were tiny compared to the likes of Great Southern and Timbercorp.

In the sector’s heyday between 2006 and 2008, MIS projects attracted about $1.2 billion each year from investors who were lured by tax breaks and the promise of attractive returns from timber plantations, olive groves, tropical fruit orchards and pearl farms.

The handful of MIS survivors have restructured their funding so they are primarily using wholesale or institutional markets.

TFS Corporation, which operates Indian sandalwood projects in the Kimberley region, has attracted substantial support from two offshore institutions.

A US-based AAA-rated institution agreed last year to invest $20 million and has exercised an option to make a similar further investment.

That was a followed a “Middle Eastern sovereign fund”, which has paid $27 million in establishment fees and will pay a further $13 million in annual fees over the life of its plantation investment.

TFS has recently launched its 2011 Indian sandalwood project but acknowledges that investor demand will be affected by the state of the MIS market.

“TFS is budgeting for modest outcomes although TFS is in a strong position to benefit from reduced competition, with seven key operators no longer competing,” the company said in a statement. “TFS’ overall position is not impacted by sector conditions due to its diversified business model that includes a wholesale investor base and production revenues via Mount Romance Australia.”

The company recently strengthened its balance sheet through a $27 million share placement and $10 million rights issue.

The proceeds were used to pay out $20 million of bank debt, which was repayable by April 30, and $10 million of shareholders’ loans, leaving the company debt free.

In a letter to shareholders, chairman Frank Wilson said TFS was continuing to explore the issue of new debt through Clarkson Investment Services in Dubai.

“The total size of this potential raising is uncertain at this point and may be more or less than the $75 million previously announced,” Mr Wilson wrote last month.

Another survivor in the agricultural investment sector is AACL Holdings, which developed a unique co-production product for farmers and investors.AACL negotiated a $50 million funding deal last year with international commodity trading group Glencore, for the planting of the 2011 grain crop.

The company announced earlier this year it planned to raise additional capital from the retail market via a Grain Co-Production Project that was due to be launched in April.

Meanwhile, the fate of investors in most of the collapsed MIS projects remains uncertain, with various asset sales, restructuring schemes and legal cases still under way.

Listed litigation funder Hillcrest Litigation Services struck an agreement earlier this year with the liquidators of Great Southern Managers Australia.

They have agreed to provide funding to enable the liquidators to compete investigations into the affairs of the failed group and to pursue recovery actions deemed appropriate.

 

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