La Trobe Financial must seek quick resolution to ASIC interim stop orders to rescue confidence
La Trobe, a $20bn asset manager, may survive the severe ASIC action but Longo would have been aware of the danger he was creating. If not resolved quickly, it could shatter confidence in the deposit base.
It was ironic that Longo made his move two days before the AFL preliminary final where 96,000 watched Collingwood lose to Brisbane. La Trobe is a key sponsor of Collingwood, and its brand was on prominent display.
Just as ASIC was too slow in taking action in the First Guardian superannuation saga, if action was required in La Trobe, it should have been taken well before billions in deposits were raised.
In essence, subscribers to La Trobe products are exposed to property lending investment trusts and not to a conventional financial institution, like a bank.
Accordingly, as a trust, interest is normally only payable if cashflow permits. This situation may be mentioned in the La Trobe borrowing documentation but it is not part of the extensive advertisements undertaken by La Trobe.
ASIC believes current promotional material is inconsistent with the legal situation, and so has moved to prevent new deposits attracted this way. But it was similar promotions that attracted this enormous deposit base and no objections were raised.
If the matter is resolved quickly, the damage may be contained, but if it extends too long then the eventual redemption requests will jump and new deposits will slump.
La Trobe attracted some 115,000 depositors, led by retirees, because it offered interest rates above bank rates and that attraction has recently multiplied because of lower bank rates.
It also offered its Australian depositors the opportunity to invest in US mortgages at even higher interest rates than Australia.
Those who took the 12-month term a year ago are due for almost immediate redemption.
One of the linchpins in La Trobe gaining such enormous deposits in recent times was the fund research firm SQM Research which reported that La Trobe’s investment rating was ‘outstanding’. It has now put out a caution.
Over the decades, Australia has been studded with large non-bank deposit-taking institutions that found themselves in a situation where deposits slumped and redemptions rose. Of course, La Trobe offers investment accounts, not deposit products.
The danger facing La Trobe is a reminder of the $2bn Pyramid Building Society, which in 1990 was crippled by a fall in new deposit funds and escalating redemption requests. Paradoxically in 1990 Pyramid was a sponsor of the Geelong Football Club.
In the case of Pyramid, the Victorian government put a levy on petrol to cushion the worst of the depositor suffering.
But to gain the balance of the principal, depositors had to wait until the assets in Pyramid were realised. Prime depositors waited until 1995. For others it was even longer.
Hopefully La Trobe will avoid that situation and the extreme suffering of depositors. But if as a result of the Longo action the deposit base breaks down, then the final returns to depositors will depend on the value of the mortgages that La Trobe has entered into.
The ASIC orders are interim in nature, and La Trobe said it has paid the advertised distributions in full on every account since inception.
La Trobe has emphasised many times the strong security behind these mortgages. Given the size of the portfolio, almost certainly commercial real estate will be a part of the $20bn.
If the worst happens, then it will impact the entire economy. Again, Longo will be fully aware of the dangers he was creating in taking the action he did.
If the worst occurs, those that have borrowed from La Trobe will not find it easy to gain replacement finance, which will put a further cloud over large sections of the community at a time when enterprises are struggling.
La Trobe is owned by Brookfield. Brookfield bought its stake from Blackstone for around $1.5bn in 2022 and has recently been looking to sell it for $3bn. That high price was based on the substantial earnings that the private equity fund has been enjoying from La Trobe. The sales talk will presumably now end.
La Trobe says those that are entitled to withdraw their money can do so.
More Coverage
When ASIC chairman Joe Longo blocked new applications to two account products run by the La Trobe Australian Credit Fund and to the La Trobe US Private Credit Fund, he created the risk of a return to aspects of the 1989 property crisis.