Debentures may sound as safe as houses, but I wouldn't touch them with a barge pole

LET me confess to you my all-time career lowlight. It happened a few years ago when I got a gig hosting talkback radio.

LET me confess to you my all-time career lowlight. It happened a few years ago when I got a gig hosting talkback radio.

My contract stipulated that I had to voice a number of "live promotional advertising reads" each hour: one for a junk removal company, another for a low-cost mobile phone provider, and strangest of all, one for an Indian tractor manufacturer who I later found out were about as reliable as strapping a harvester on the back of my golden retriever, Buffett.

The whole process made me feel grubby. Yet in my defence, I knocked back every script from a financial advertiser.

Another talkback radio announcer, crooner Denis Walter, however does not knock them back.

Walter seems to know as much about finance as I do about Indian tractors, and a few years ago he decided to put his name, face, and reputation to endorsing a safe-sounding company called Gippsland Secured Investments, a company that lends out money to property developers.

This week GSI announced it had frozen the funds of around 3500 investors.

Here's what Denis said back in 2010 when he announced the venture:

"When you're in my position, you don't take endorsing a business in such a public way lightly and I certainly haven't.

"I did my research on GSI and how they operate and am pleased to be associated with them as they celebrate their wonderful 40-year history."

This isn't a hatchet job on Walter. God knows there are angry farmers who would quite happily run me over in their tractor if given the chance (thankfully they have trouble starting them).

Even if Walter had read through GSI's Financial Services Guide (which by law they have to give to every investor), he'd have been rightfully confused.

Let's have a flick through, and I will showcase the handiwork of some high-priced lawyers.

Under the headline "Your Questions Answered", the group states "GSI has no unsecured lending, ie. GSI will not lend unless it has a mortgage over freehold property and therefore does not deal in personal loans, hire purchase, credit cards etc".

So your money is secured by property, right?

Wrong. You're the owner of a "note" - an IOU - which in turn is secured by the loans, but not specifically the properties themselves.

In the event of a windup, it's unclear where note holders rank when getting paid back - but you'd think they'd be closer to the back of the line, than the front.

Under the headline, "Are GSI Notes a 'safe' investment?"

GSI says that it restricts its lending to a maximum of 70 per cent of the value of its freehold property, and claims that other institutions including banks "often lend up to 80 per cent, 90 per cent and even 100 per cent of the value of the security property".

Which makes it sound like they're safer than a bank, right? Wrong. If you have money in the bank your money is secured by the government deposit guarantee.

With GSI (and other debentures) you're not covered - and that's precisely why I wouldn't touch any of these debentures with a 10-foot barge pole. This week the chief executive of GSI told its investors: "The fund has been frozen after an external review of the company found that as the result of recognising the loan impairments, GSI may have a deficiency in its net tangible assets and may not have equity equal to the shortfall." Huh?

On behalf of the 3500 investors with their life savings caught up in this outfit, let me decode the above management babble for you: "We lent your money out to risky property developers who the big banks wouldn't touch. That explains how we could afford to pay you much higher interest rates than the banks.

"Now some of the loans have gone bad - which of course, isn't all that surprising given that the billion-dollar banks wouldn't touch these developers (it was too risky for them - but not your life savings, I'm afraid).

"So, we're terribly sorry but we've had to stop you from getting your money out, otherwise there'd be a run on our fund and we'd have to sell the secured asset at fire sale prices.

"Basically, we're stuffed - and now you're stuffed."

Question of the week

Can I buy an investment property through my SMSF and move into it after I retire?

Hi Barefoot,

Here's my plan. I'm sick of the bloody cold in Melbourne, and I'm toying with the idea of purchasing an investment property on the Sunshine Coast through my SMSF.

I'll rent it out for a few years, sell my current joint, and then move into the apartment when I retire. I've spoken to a few people about this but no one can give me a definitive response on whether I can do it.

Can you?

Best, Dave

Hi Dave,

Yes you can do it.

There's a catch though: you can't live in a place that's owned by your super fund, so you're SMSF would have to sell it to you.

Honestly, it's going to cause a fair bit of buggerising around.

The banks still make it hard (and expensive) to lend in your SMSF, and your accountant will take his kids to Disneyland with all the compliance fees you'll pay.

So here's something I'd run by your accountant: buy the investment property in your own name, and claim the deductions while you're still working.

Then sell your current home when you retire, and pay down the debt on your investment property.

Anything you have left over you can put back into super.

Best, Barefoot

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