Balmain (MMT) Mortgage Trust

Transcription

1 Balmain (MMT) Mortgage Trust Supplementary Product Disclosure Statement Dated 9 February 2010 This Supplementary Product Disclosure Statement (SPDS) supplements and should be read in conjunction with the Product Disclosure Statement dated 12 November 2009 (PDS) issued by Balmain Fund Administration Limited ABN AFSL Balmain (MMT) Mortgage Trust Product Disclosure Statement Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL The information contained in this SPDS is general information only and does not take into account your investment objectives, financial situation or needs. You should read this SPDS and the PDS carefully and talk to your licensed financial adviser before making any investment decision. Change of election window The Responsible Entity recognises that due to the holiday season some Unitholders may not have been able to inform the Responsible Entity of their intention to convert to FT36 Units within the Election Window. As a result the Responsible Entity has determined to extend the Election Window to 26 February Consequently, from the date of this SPDS, the PDS is amended to update the following information: Section of the PDS to which the update applies Section 3.2 on page 11 of the PDS. Section 15 on page 41 of the PDS, definition of Election Window. Section 15 on page 41 of the PDS, definition of Existing Unitholder. Update The words mid February 2010 are deleted and replaced with the following: 10 March 2010 The words 29 January 2010 are deleted and replaced with the following: 26 February 2010 The words 29 January 2010 are deleted and replaced with the following: 26 February 2010 Unitholders who have previously elected to convert to FT36 Units are bound by their election. Forms for the election to convert to FT36 Units are contained in the PDS. Effect of these changes on the operation of the Trust There will be no change to ongoing investment objectives or practices of the Trust. There are no changes to the fees to be charged by the Trust. Other than the changes outlined above, no other changes have been made to the Trust. Enquiries about this SPDS Updated information regarding the Trust will be provided on our website at For more information please contact our Client Services Department on A paper copy of that information will be available free of charge on request. Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL BMT 3922

2 ?? Balmain (MMT) Mortgage Trust Product Disclosure Statement Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

3 Important Notices This PDS is dated 12 November It relates to Units in the Balmain (MMT) Mortgage Trust ( Trust ) and is issued by Balmain Fund Administration Limited ABN , AFSL in its capacity as responsible entity of the Trust ( BFAL ). BFAL is a wholly owned subsidiary of Balmain NB Corporation Limited ABN Any statement as to the suitability of the offer made under this Product Disclosure Statement ( PDS ) is general only and does not take into account your particular needs, objectives, financial circumstances and investment preferences. This PDS is an important document and you should read it carefully and in its entirety, and consider if this investment is appropriate in light of your objectives, financial circumstances and needs. Where appropriate, you should obtain independent advice, particularly about such individual matters as taxation, retirement planning and investment risk tolerance. This PDS supersedes all preliminary information and other previous communications in connection with the Trust. Any information or representation not contained in this PDS may not be relied upon as having been authorised by BFAL in connection with the Trust. Information relating to the Trust that is not materially adverse information is subject to change from time to time. The updated information can be obtained by calling our Investor Services Team on or may be accessed from our website A paper copy of the updated information will be given on request. The Offer or invitation to subscribe for Units in the Trust under this PDS is available only to persons receiving this PDS in Australia and is subject to the terms and conditions described in this PDS. Balmain Fund Administration Limited reserves the right to change these terms and conditions. Notice will be provided before or as soon as practicable after the change occurs. We reserve the right to withdraw the offer or invitation to subscribe for Units and withdraw this PDS. This PDS does not constitute an offer of Units in any jurisdiction in which, or to any person to whom, it would be unlawful to offer the Units under this PDS. This PDS is made available in electronic form on our website The electronic form of the PDS is available to persons receiving this PDS in electronic form within Australia. The Trust is a disclosing entity and subject to regular reporting and disclosure obligations as such under the Corporations Act. Copies of documents that we lodge with the Australian Securities and Investments Commission ( ASIC ) to meet these requirements may be obtained from or inspected at an ASIC office. If you request further information, we will provide: the annual financial report most recently lodged with ASIC; and if available, any half-yearly financial report and continuous disclosure notices that have been lodged after the annual report but before the date of this PDS. BFAL advises that, in accordance with ASIC Regulatory Guide 198, it will fulfil its continuous disclosure requirements via website disclosure which complies with ASIC s good practice guidance. Investors may access material information regarding the Trust from our website Please note that the performance of the Trust, the repayment of capital or any particular rate of return is not guaranteed by Balmain NB Corporation Limited, BFAL, Balmain (MT) Pty Limited, the Registry Service Provider, the Custodian or any member company of the Balmain group of companies. Past performance is not an indicator of future performance. This PDS contains certain forward looking statements which are subject to known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Trust to be materially different from those expressed or implied by such statements. Some of the risk factors which impact on forward looking statements in this PDS are set out in section 7. Certain terms used in this PDS have defined meanings. Refer to the glossary in section 15. Unless otherwise stated, currency amounts are in Australian dollars. 2 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

4 Table of Contents 1. Balmain (MMT) Mortgage Trust 4 2. Key features of FT36 Units and FT18 Units 9 3. Options for Existing Investors Portfolio Diversification The Trust s Lending Principles Redemptions from the Trust Risks Portfolio and Performance Fees Tax and your Investment Balmain Fund Administration Limited The Constitution Our Service Providers Administrative Information for Investors Glossary Directory 43 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

5 1. Balmain (MMT) Mortgage Trust 1.1 What is the Balmain (MMT) Mortgage Trust? The Balmain (MMT) Mortgage Trust ( Trust ) is an unlisted Australian unit trust which is a registered managed investment scheme. It offers investors a fixed term, variable return investment that has been designed for investors who want to achieve returns greater than cash rates and receive regular monthly distribution payments generated from their investment in the Trust. Your distributions will generally move in line with the official RBA cash rates. The responsible entity of the Trust is BFAL, a member of the Balmain group of companies. Our staff and our service providers have significant expertise in commercial and investment lending and in the management of mortgage trusts. The Trust, like all managed investments, accepts money from many different people who have individual amounts to invest. These people pool their money in the Trust so that collectively, they are able to gain access to more investment opportunities than if they invested on their own. 1.2 Key benefits of investing in the Trust The main benefit of investing in the Trust is that you are likely to receive investment returns greater than cash account returns which are paid to you monthly Conservative Investment Policies We strictly enforce our conservative investment policies and guidelines which have resulted in; The unit price (i.e. capital value) of $1.00 being maintained during the global financial crisis thereby maintaining the capital value of Unitholders invested funds; No exposure either directly or indirectly to the US sub-prime market or to Collateral Debt Obligations (CDOs); The Trust continuing to pay monthly distributions to Unitholders; No gearing within the Trust; and No related party lending Other Benefits Other benefits include: Minimum investment of $1,000; You can elect to invest for fixed terms of up to either 36 months or up to 18 months; Your distributions will generally move in line with the prevailing Australian interest rate environment; You will pay no entry fee to invest in the Trust, although there are Exit Fees in respect of Special Hardship Redemptions (see sections and 9); You will receive regular reporting and have easy access to information about your investment; You will have the services of a skilled and experienced team of commercial mortgage and investment management professionals (see sections 1.2.3, and 11 for more information about our experience in sourcing mortgages and processing loan applications); and, Your investment will be pooled with those of other investors in the Trust and collectively you will achieve greater diversification and gain access to investment opportunities that most investors could not obtain on their own Our People John Thomas, the CEO of Balmain (MT) has been successfully managing mortgage trusts for the past 22 years. He is considered by the mortgage trust industry to be one of the most experienced mortgage trust fund managers in Australia. John works closely with a highly experienced credit team that has very clear credit protocols and procedures in place. 4 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

6 Properly servicing our investor s requirements remains an in house function. We retain a full complement of suitability trained and qualified staff who are available to answer Unitholder enquiries either over the phone or in writing. Information technology within the group is of high quality with sufficient capacity to not only service the existing needs of the business but to allow it to expand rapidly (where necessary) making communication with Unitholders timely, precise and reliable Our Relationship with Balmain The Responsible Entity of the Trust is part of the Balmain group of companies. Balmain NB Corporation Limited (Balmain) has been involved in the mortgage trust and fund management industry for over 30 years and has been the largest originator to the $20 billion plus mortgage industry. Balmain is also Australia s largest non-bank commercial loan manager, administrator and originator to the finance industry at large. In the last three years Balmain originated nearly $10 billion of commercial mortgages to mortgage trusts in Australia and New Zealand. The combined experience in both the management and operational staff is considerable. Balmain is a major shareholder in AMAL Asset Management (AMAL), which is a specialist mortgage administrator and currently administers in excess of $7 billion of mortgage portfolios. AMAL manages funds for many of Australia s largest financial institutions and has been ranked as an above average commercial loan servicer by Standard & Poor s 1. Balmain additionally provides asset management services (including credit and special servicing) to numerous programs. Balmain operates from 8 offices throughout Australia and New Zealand and has 130 staff. For further information regarding the Responsible Entity and Balmain see section Assets of the Trust The Trust invests primarily in a portfolio of registered first mortgages over a diversified selection of properties in Australian capital cities and regional centres. The Trust lends money to business and investment borrowers, who offer real property as security. The real property is generally commercial in nature and includes office, retail and industrial assets and also residential premises. These borrowers make interest payments which create a regular and stable income stream for the Trust s investors (called Unitholders). The Trust also invests in cash investments to meet day-to-day needs. Details in relation to the Trust s portfolio are contained in section 8 of this PDS. The loans are primarily secured by registered first mortgages which may be supported by additional security such as personal and corporate guarantees. If a borrower defaults on a loan, we can sell the security property on behalf of the Trust and use the proceeds of the sale to repay the loan made by the Trust and to cover interest payments and other costs. If the sale proceeds are inadequate to repay the loan and where there is a guarantee, we can call on the guarantors which may enable further recovery of the loan to repay the outstanding balance. Given that the primary assets of the Trust are loans, the lending guidelines of the Trust (see section 5) are important to ensure proper quality control of these loans. The Trust s lending guidelines specifically provide that we must: obtain a property valuation; only lend up to a maximum of 70% of the valuation of any property; not lend on any construction or development projects; not lend money to any related parties; and diversify the Trust s portfolio (by location, loan type and borrower). These Lending Principles provide a base for proper mitigation of the risks inherent in the management of a mortgage portfolio. For further information regarding key risks see section 7. 1 A Standard & Poor s servicer ranking is a statement of opinion, not a statement of fact or recommendation to make, hold or divest any investment. Servicer rankings may be changed, withdrawn or suspended at any time. Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

7 1.4 Structure of the Trust The Trust pools funds from investors and lends to borrowers with the security of a mortgage over the borrower s property. Borrowers pay interest to the Trust which is distributed to Unitholders on a monthly basis after fees and expenses are deducted. INVESTORS Invest Income Balmain (MMT) Mortgage Trust Interest Lends Residential Retail Industrial Office BORROWERS 6 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

8 1.5 What is the Offer? You are being offered the opportunity to invest in two new classes of Units in the Trust: FT36 Units; and FT18 Units. Each of these new classes of Units is intended to give you a fixed term investment in the Trust. By investing in FT36 Units, your investment is intended to be fixed for a period of up to 36 months and by investing in FT18 Units, your investment is intended to be fixed for a period of up to 18 months. The rights and terms applicable to these Units, including the conditions relating to the redemption of your Units, are set out in detail in section 2 of this PDS. 1.6 Why are new classes of Units being Issued? The Responsible Entity of the Trust has determined to issue new classes of Units and make changes to the operation of the Trust in response to the current state of the market for mortgage assets and mortgage trust investments generally. The Trust was previously operated as an at call type of investment whereby investors could withdraw their funds in the Trust within a few days from making a redemption request (subject to certain criteria being met). Following the announcement of the Federal Government guarantee, the Australian mortgage trust industry received numerous redemption requests from mortgage trust investors who wanted to access their funds from mortgage trust investments and move these funds into Federal Government guaranteed deposits. To meet these requests it would have been necessary to sell assets of the Trust. However, the assets of a mortgage trust are long term mortgage secured loans and are incapable of being sold quickly. Consequently many Australian mortgage trusts, including this Trust, froze redemptions from their mortgage trusts. The freezing of redemptions from mortgage trusts affected investors who wished to withdraw money from their mortgage trust investment. As mentioned before, the reason redemptions from the Trust were frozen is that redemptions were required to be met in the short term whereas the assets of the Trust were long term assets and not readily sold. This is what we refer to as the asset-liability mismatch or Liquidity Mismatch (Liquidity Mismatch). We do not believe that any lender (including a mortgage trust) can be successful long term unless the Liquidity Mismatch is significantly resolved. In other words, the term of the investments is more closely matched to the term of the loans made by the Trust. Our resolution to the Liquidity Mismatch is that going forward the Trust will only offer new investments for fixed terms of either up to 36 or up to 18 months. This will ensure that the term of the investments is better matched to the term of the loans in the Trust. The possibility of unexpected redemptions is removed (there being no at call investments in the Trust) and the likelihood of any further freezing of the Trust is significantly diminished. The re-opening of the Trust in this manner has been designed to significantly reduce the Liquidity Mismatch. 1.7 Distributions Unitholders income entitlements are calculated daily. The Responsible Entity s intention is to distribute the net income earned from the Trust s assets on a monthly basis. The Responsible Entity is focused on preservation of the Unitholders capital and as such, it is not intended that the Trust will make distributions from capital. As mentioned above, distributions will be paid monthly in arrears. If you are a holder of FT36 Units or FT18 Units, you may elect to have your distributions reinvested in the Trust or paid directly to Unitholders bank, building society or credit union accounts (within 14 days of the end of the month). If you do not make an election, 100% of your distributions will be automatically reinvested. Each FT36 Unit and FT18 Unit issued pursuant to the reinvestment of distributions will be issued at a unit price of $1.00. Holders of Existing Units (see section 3) are not able to reinvest their distributions and will have their distributions paid directly into their nominated bank, building society or credit union account. Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

9 1.8 Borrowings The Trust may borrow money to increase the amount it has to invest or increase the diversity of its investments. The Trust may also borrow to cover short-term cash flow needs, or if emergency or extraordinary situations arise. As at the date of issue of this PDS the Trust has no borrowings and we have no current intention of causing the Trust to borrow. Any updates or changes to our position in respect of the Trust s borrowings will be provided on our website at 8 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

10 2. Key features of FT36 Units and FT18 Units Pursuant to this PDS, two different classes of fixed term Units, FT36 Units and FT18 Units, are being offered. The use of a fixed term investment structure helps us to resolve the Liquidity Mismatch. The key terms attached to these different classes of Units are summarised in the table below. Feature FT36 Units FT18 Units Section Term Fixed term investment of between 30 and 36 months. Certain limitations and restrictions apply to redemption at the maturity of the term. Fixed term investment of between 12 and 18 months. Certain limitations and restrictions apply to redemption at the maturity of the term. 6.2 Investment Timing You will be able to invest in the first Series of FT36 Units from 12 November 2009 through to 28 February The first series of FT36 Units will mature on 1 September You will be able to invest in the first Series of FT18 Units from 12 November 2009 through to 28 February The first series of FT18 Units will mature on 1 March Unit Price $1.00 $ Minimum Investment $1,000 $1, Distributions Unitholders income entitlements are Unitholders income entitlements are 1.7, 14.3 calculated daily and distributions will be paid monthly. There is no fixed rate of return on your investment. We will publish the Trust s current rate of return on our website at calculated daily and distributions will be paid monthly. There is no fixed rate of return on your investment. We will publish the Trust s current rate of return on our website at Distribution Reinvestment You can reinvest your distributions. You can reinvest your distributions. 1.7, 14.3 Maturity of the Investment Annual Redemptions Annual Redemption Timing Special Hardship Redemptions We will write to you four months prior to the maturity of FT36 Units to enable you to elect whether to redeem your units or continue your investment in FT36 Units or FT18 Units. If you fail to make an election, your investment will automatically continue for another 36 month term (as if you had invested in a new Series of FT36 Units). Certain limitations and restrictions apply to the redemption of Units at expiry of the term. You can redeem 10% of your Current Balance in year one, 10% in year two and 10% in year three, non-cumulative. Certain limitations and restrictions apply to redemptions. The opportunity to request your first Annual Redemption does not commence until the next Series of FT36 Units opens on 1 March Available from 3 months after your investment is made (Exit Fees apply). Certain limitations and restrictions apply to redemptions We will write to you four months prior to 6.1 the maturity of FT18 Units to enable you to elect whether to redeem your units or continue your investment in FT18 Units or FT36 Units. If you fail to make an election, your investment will automatically continue for another 18 month term (as if you had invested in a new Series of FT18 Units). Certain limitations and restrictions apply to the redemption of Units at expiry of the term. No Annual Redemptions. 6.1 Not applicable. 6.1 Available from 3 months after your investment is made (Exit Fees apply). Certain limitations and restrictions apply to redemptions. 6.1 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

11 Future Series Commencement Dates There will be two FT36 Unit Series every 12 months, i.e. a new series investment term will commence once every six months and continue in subsequent half year periods. For example: Second Series commences : 1 March 2010 There will be two FT18 Unit Series every 12 months, i.e. a new series investment term will commence once every six months and continue in subsequent half year periods. For example: Second Series commences : 1 March Third Series commences: 1 September 2010 Most investments involve some risk. Some of the key risks involved in investing in the Trust include: distributable income may decrease; capital investment may reduce; and redemptions may be deferred or suspended. Certain fees are payable in respect of FT36 Units. Further details in relation to the fees and commissions relating to an investment in FT36 Units set out in section 9. We pay commissions to financial advisers from our management fee. Section 10 of this PDS contains some general information regarding the tax consequences of investing in the Trust. Tax can be complex and you should obtain professional advice on your specific circumstances. Third Series commences: 1 September 2010 Most investments involve some risk. Some of the key risks involved in investing in the Trust include: distributable income may decrease; capital investment may reduce; and redemptions may be deferred or suspended. Certain fees are payable in respect of FT18 Units. Further details in relation to the fees and commissions relating to an investment in FT18 Units set out in section 9. We pay commissions to financial advisers from our management fee. Section 10 of this PDS contains some general information regarding the tax consequences of investing in the Trust. Tax can be complex and you should obtain professional advice on your specific circumstances. Risks 7 Fees 9 Commissions 9 Tax Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

12 3. Options for Existing Investors 3.1 Existing Investors Options Currently your investment in the Trust is frozen indefinitely. In unfreezing your investment in the Trust we are giving Existing Investors two options for continuing their investment in the Trust. You can choose to either convert your holding to FT36 Units or retain your Existing Units which have a new, clearly defined redemption plan. Existing Investors are required to inform us during the Election Window of their intention to either convert to FT36 Units or to retain their Existing Units. These two options allow us to better manage the Liquidity Mismatch that existed before the changes were made to the Trust as there is certainty now regarding when Unitholders will be redeeming Units in the Trust. As a result of the changes to Existing Units, the former Regular Savings Plan (RSP) and the former Regular Payment Plan (RPP) have been suspended indefinitely across all classes of Units. The key terms regarding the Existing Investors choices are summarised below. 3.2 Existing Investors who wish to Convert to FT36 Units Existing Investors have the option to convert their Existing Units to FT36 Units. If an Existing Investor converts to an FT36 Unit that Existing Investor can apply and will be entitled to the Annual Redemptions (10% of your investment each year for the next three years, subject to limitations) and be entitled to fully exit the Trust on 1 September 2012 when your investment matures (subject to limitations). For more details regarding the terms of FT36 Units see section 2. We expect that the conversion from Existing Units to FT36 Units should take approximately three weeks after expiry of the Election Window (i.e. the conversion will occur by mid February 2010). We will send you confirmation of any conversion of your Units in the mail. 3.3 Existing Investors who wish to Retain Their Existing Units Existing Investors also have the option to retain their Existing Units. If you choose to retain your Existing Units the terms applying to your Existing Units going forward will be as follows: Term Distributions Distribution Reinvestment Redemptions Commissions We expect that the full payment of your total investment amount will take approximately six years and three months from the payment of Compulsory Redemptions. This period may be reduced if we pay Supplementary Compulsory Redemptions to Existing Unitholders during this time. Unitholders income entitlements are calculated daily and distributions will be paid monthly to your nominated bank, building society or credit union account. Existing Unitholders can not elect to reinvest their monthly distributions in additional Existing Units however they can elect to invest their distributions in FT36 Units or FT18 Units provided they meet the minimum investment requirement of $1, Each FT36 Unit and FT18 Unit will be issued at a unit price of $1.00. You will be eligible to receive the Compulsory Redemption and the Supplementary Compulsory Redemption. These redemption types provide for the payment to you each calendar quarter of 4% of your Opening Balance for a maximum of 25 calendar quarters and the payment to you twice per year of your share of 25% of the increase (if any) in the Trust s Funds Under Management for the preceding six month period. The redemptions are subject to conditions and limitations which are set out in section 6.1. All upfront and trail commission rates payable to licensed financial advisers will remain the same (refer to section 9 fees). Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

13 3.4 Existing Investors Should Notify us of their Intention Regarding their Existing Investment The changes made to the Trust affect Existing Investors and if you are an Existing Investor, you will need to decide in which form you wish to hold your investment in the Trust. You can inform us of your intentions by completing the Election Form located at the end of this PDS and sending this form to us at the following address: Balmain Fund Administration Limited GPO Box 804 Melbourne VIC 3001 If we have not received a duly completed and executed Election Form from you by 29 January 2010, you will be defined as an Existing Unitholder and will continue to hold Existing Units. 3.5 Wholesale Investors who Hold Existing Units Existing Investors who previously qualified as a wholesale client and who continue to hold Existing Units will not lose any of their rights regarding their preferred wholesale fee reductions. We will write to all wholesale clients about them electing to retain their Existing Units and their wholesale fee reduction status. 12 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

14 4. Portfolio Diversification The following tables relate to the assets of the Trust as at 30 September Updated information will be provided monthly on our website Portfolio Information Number of mortgages 172 Number of mortgagors 143 Average loan to value ratio 59.88% Average loan size per mortgagor $733,787 Largest loan size $4,729, Undrawn loan commitments $0 The following charts provide a breakdown of the Trust s assets as at 30 September 2009 by number and by value. These charts demonstrate the portfolio diversification of the Trust. 4.2 Sector Spread By Number - 30 September 2009 commercial, 42.66% industrial, 23.08% residential, 23.78% retail, 7.69% vacant land, 2.8% By Value - 30 September 2009 commercial, 38.79% industrial, 22.26% residential, 29.84% retail, 5.79% vacant land, 3.32% 4.3 Geographic Spread By Number - 30 September 2009 ACT, 0.58% NSW, 47.09% NT, 0% QLD, 20.35% SA, 5.23% TAS, 1.16% VIC, 16.28% WA, 9.3% Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

15 4.3.2 By Value - 30 September Proportion of Loans in Arrears ACT, 0.48% NSW, 53.98% NT, 0% QLD, 21.23% SA, 2.71% TAS, 0.65% VIC, 10.33% WA, 10.62% The Trust classifies a loan in default where interest on the loan is more than 60 days in arrears By Number - 30 September 2009 Days Arrears (30-60), 2.1% Days Arrears (60-90), 0.7% Days Arrears (90+), 2.8% Performing Loans, 94.41% 4.5 Nature of Security of the Trust s Loan Portfolio It is the Trust s policy that the security for all of its loans is via first ranking mortgage over property. We do not accept second ranking mortgages as this provides a reduced level of security and presents a greater risk for the portfolio and for Unitholders. 4.6 Proportion of the Portfolio Lent to 10 Largest Borrowers Borrower Profile % of total assets (loan portfolio) Top 10 Borrowers 31.27% Largest Borrower 4.51% 4.7 Undrawn Loan Commitments Currently, the Trust does not have any outstanding commitments on loans which have not been drawn. It is not our policy to provide loans on a drawdown basis to fund construction or development projects. If in future there are any approved loans which have not been fully drawn down, they will be taken into consideration in preparing the Trust s liquidity forecast at that time. We have adopted this policy as a risk mitigation strategy for the benefit of Unitholders. 4.8 Maturity Profile of the Loan Portfolio Variable By Number By Value < 3 months 36.36% % $39,684,761 >= 3 months and < 1 year 13.99% % $14,544, years 5.59% % $4,681, years 13.29% % $16,736,171 > 3 years 30.77% % $29,285,332 Total: 100% % $104,931, Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

16 4.9 LVR Profile of the Loan Portfolio The LVR range is based on the total of principal outstanding and arrears of interest only. LVR Range No. of Loans % of Portfolio (by value) Loan Value 0-10% % $12, % % $990, % % $642, % % $140, % % $5,393, % % $20,970, % % $70,433, % % $5,330, % % $1,018,666 Total: % $104,931, Interest Rate Profile of the Loan Portfolio All of the Trust s loans earn a variable rate of interest, that is, currently no loans are agreed at fixed rates. However, it is within the Trust s Constitution to offer fixed rate loans up to a maximum of 5% of the total loan portfolio. Interest rate % of total (by number) % of total (by value) Less than 6% 2.10% 6.30% 6% to 8% 32.87% 33.53% 8% to 10% 65.03% 60.17% In excess of 10% 0.00% 0.00% Total: 100% 100% 4.11 Loan where the Interest is Capitalised It is the policy of the Trust not to allow the capitalisation of interest payments for any of its loans and borrowers are required to pay interest monthly in advance. An exception to this rule will apply in the event of redraw loans where interest is payable monthly in arrears. In certain circumstances the Trust may capitalise interest but only where the borrower is not in default and the LVR after the capitalisation of interest would not exceed 70% Use of Derivatives A derivative is a financial product that has a value derived from another asset (such as a security, index or commodity). Investors can use derivatives in a number of ways including to manage many of the risks associated with investing. Derivatives include such financial products as futures and options contracts and interest rate swap agreements. While we do not intend to make extensive use of derivatives in managing the Trust s investments, we may use them to reduce transaction costs, adjust or implement investment decisions and help manage interest rate risk. We do not intend to use derivatives to gear the Trust and we intend to manage the Trust so that it will have sufficient cash to meet any derivative obligations it acquires. The Trust does not currently use any type of financial derivative for any purpose Non-loan Assets As well as holding registered first mortgages over real property the Trust also holds cash and liquid assets which are invested in deposits with financial institutions rated A or better by Standard & Poor s (or an equivalent rating from another ratings agency), or financial institutions which are ADIs which are considered to be investment grade. All cash and liquid investments are, and will be for a maximum term of 12 months. Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

17 4.14 The Trust s Current Bad and Doubtful Debt Position If a borrower defaults on a loan, we can sell the security property on behalf of the Trust and use the proceeds of the sale to repay the loan made by the Trust and to cover interest payments and other costs. We may also use personal and corporate guarantees as additional security for the Trust. In the event that the sale of a security property is not sufficient to repay the loan then we will generally call on these guarantees, where they have been provided, to cover any shortfall. The use of personal guarantees is favoured by us as it ensures that the borrower is personally liable for the debt which is an important factor in ensuring the borrower honours their obligations to the Trust. As at the last audited financial statements of 30 June 2009, the Trust had a provision for bad and doubtful debts representing less than half of one percent of all loans in the Trust. This provision does not impact on the $1.00 Unit price which has been maintained during the global financial crisis and from the Trust s inception. This means that no Unitholder has historically lost capital value in respect of their investment in the Trust. The Trust is also providing additional provisioning for bad and doubtful debts of 0.55% p.a. of daily income which will build an additional buffer against any potential future (and currently unknown) losses. We can change the level of additional provisioning at any time The Trust s Current Proportion of Loans in Arrears The Trust classifies a loan in default where interest is more than 60 days in arrears. As at 30 September 2009 the total percentage of loans in arrears by number of loans is 3.50% of the total loan portfolio (also see section 4.4). We believe this result is due to our conservative investment policies and the strict enforcement of our lending guidelines. This arrears position also does not impact on the $1.00 Unit price. 16 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

18 5. The Trust s Lending Principles 5.1 Lending Principles The Responsible Entity s policy on lending, referred to as the lending principles, is summarised below Loan to Value Ratio Security No single loan to exceed 5% of value of trust Credit History Check Debt servicing assessment Loan renewals Specialised, Development & Construction Loans Related Parties Diversification For all new loans and property types, our maximum loan to valuation ratio will not exceed 70%. This is calculated using a recent valuation as described below. The Trust will only make loans that are secured by a registered first mortgage over real property (including residential, commercial, retail and industrial). This means that we have the right to sell the property and recoup the amount owing if the borrower defaults. An independent qualified valuer must value the property being used as security for the loan and the valuation must not be more than three months old when the loan is advanced. Valuations are completed on an as is basis or current state (i.e. without any further improvements). It is a policy of the Trust to use a panel of valuers which have all received proper accreditation. As an added qualification, no one particular valuer is allowed to conduct more than one third of the Trust s valuation work at a time. Searches are conducted on the property title by approved panel lawyers to ensure there are no encumbrances on the title. When initially advanced to the Borrower no single loan or collection of loans to an associated group exceeds 5% of the value of the Trust. The applicants for the loan have their credit history checked by an independent credit monitoring service provider and the results of that credit history must satisfactorily establish the credit worthiness of the borrower. We use a variety of measures to assess a borrower s capacity to repay interest on their loan. These measures include (but are not limited to) assessing and verifying a range of current and historical financial data of the borrowers and reviewing lease and/or rental income from the property to be mortgaged. It is not our policy to automatically offer a renewal on a loan which has reached maturity. If a renewal is requested by the borrower, a further credit assessment is made to ascertain whether, and on what terms, the Trust will provide that renewal. In offering any renewal we will consider the likely consequences to the Trust of not offering a renewal. We may allow some latitude to be granted in respect of the lending principles in respect of a renewal to protect the interests of the Trust. The Trust does not lend on specialised property (such as hotels, motels, nursing homes, petrol stations and squash courts for example) nor does the Trust provide loans over property which require construction or development funding. Consequently the Trust does not have any outstanding commitments on loans which have not been drawn. We do not make loans to related parties. The Trust diversifies loan types, locations and borrowers to help protect the Trust from significant losses because it reduces the inherent risks associated with a concentration of assets into a single category (such as a single geographic location or a single borrower). It would be impossible for most individual investors to match that diversification of the Trust by investing on their own. The status of the Trust s current diversification is explained more fully in section 4. Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

19 5.2 Enhanced Treasury Function to Monitor Trust Liquidity In addition to the enhancement of the Trust s lending principles (as set out above), we have also instituted an enhanced treasury function to monitor the liquidity of the Trust by: Managing the term of the loans offered by the Trust to borrowers; and Managing the liquidity of the Trust to allow for payments of both distributions and projected redemptions. We have initiated this enhanced formal treasury function because of the changes we have made to the structure of the Trust from accepting at call investments to accepting term investments. As previously stated, historically mortgage trust investments have been at call. This made it impossible for a mortgage manager to accurately project likely redemptions. The changes to the structure of the Trust, which require investments to be for a fixed term and not at call, allow us to more accurately project future redemptions. We are consequently able to better manage the term of the assets of the Trust (by shortening and lengthening loan terms offered to borrowers) to reduce the Liquidity Mismatch. Additionally the required liquidity to meet distributions and redemptions can be more accurately projected so we can better manage the Trust s assets (cash and loans) to provide sufficient liquid funds to satisfy the payment of distributions and redemptions. 18 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

20 6. Redemptions from the Trust 6.1 Important New Defined Terms Regarding Liquidity and Redeeming Units in the Trust Throughout this PDS we refer to the four available types of redemption being Compulsory Redemptions, Supplementary Compulsory Redemptions, Annual Redemptions and Special Hardship Redemptions. These redemption types mean the following: Compulsory Redemption Compulsory Redemptions are only applicable to Existing Units. This is a calendar quarterly payment to a holder of Existing Units of 4% of their Opening Balance. If, for example, your Opening Balance is $10,000, this equates to $400 per quarter. These payments continue until the investment is fully redeemed. The redemption price per Existing Unit will be $1.00. Quarterly redemptions will be processed on or about the 15th day of March, June, September and December in each year and will generally be paid on the third business day following the processing effective date (i.e. on or about the 18th day of March, June, September and December in each year). Holders of Existing Units do not need to apply for a Compulsory Redemption, these redemptions will occur automatically. Compulsory Redemptions do not apply to FT36 Units or FT18 Units. If we do not consider there are sufficient liquid assets, or if it would not otherwise be in the best interests of the holders of Existing Units (or the holders of any other class of Units in the Trust), we may scale back, defer or suspend Compulsory Redemptions at any time Supplementary Compulsory Redemption Supplementary Compulsory Redemptions are only applicable to holders of Existing Units. The Supplementary Compulsory Redemptions reduce a holder of Existing Unit s invested funds in the Trust. This is a six-monthly payment that may be paid to a holder of Existing Units. The amount of the payment will be the investor s share of 25% of the increase in Funds Under Management of the Trust in that previous half year less the Compulsory Redemption already payable to the investor during that half year (i.e. the two preceding quarters). If there is no, or low, growth in Funds Under Management the Supplementary Compulsory Redemption may be nil. This is because the cost of paying an insignificant redemption does not warrant such an insignificant redemption being made. In addition, even in circumstances where there is a growth in Funds Under Management, if we do not consider there are sufficient liquid assets, or if it would not otherwise be in the best interests of the holders of Existing Units (or the holders of any other class of Units in the Trust), we may scale back, defer or suspend Supplementary Compulsory Redemptions at any time. The redemption price per Existing Unit will be $1.00. The Supplementary Compulsory Redemption will be processed on or about the 25th of February and the 25th of August each year and paid approximately 15 days after the repayments are processed which will be around the 10th of March and 10th of September each year. The holders of Existing Units must accept the Supplementary Compulsory Redemption each half year. These payments will be deposited directly into Existing Unit holder s nominated bank, building society or credit union accounts. The Supplementary Compulsory Redemption is in addition to, and does not affect, the 4% redemption payment to be paid each quarter. As for Compulsory Redemptions, any Supplementary Compulsory Redemptions will occur automatically. It is anticipated that the first opportunity for a Supplementary Compulsory Redemption will be June Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL

21 Supplementary Compulsory Redemptions will be calculated on the current Existing Unit balance at June and December each year, i.e. the balance as at the date the amount of the Supplementary Compulsory Redemption is calculated (refer to the worked example below). The payment of Supplementary Compulsory Redemptions will reduce the number of quarterly standard 4% redemptions cycles from 25 to a lower number. The following worked example describes the position of Ms Jane Unitholder: 1. We are considering an hypothetical half year from 1 January 2011 to 30 June 2011 ( Half Year ); 2. We assume that there are 40,000,000 Existing Units on Issue; 3. We assume that Ms Jane Unitholder: owns 80,000 units (0.20% of the Existing Units); receives two 4% quarterly redemption payments of $3,200 each which total $6,400 during the Half Year. 4. Funds Under Management increased by $48,000,000 during the Half Year, there are sufficient liquid assets available and there is no reason to believe it would be in the best interests of Unit holders to not reduce, delay or suspend redemptions; 5. The total available for Supplementary Compulsory Redemptions of $12,000,000 (25% times $48,000,000); 6. Ms Jane Unitholder s 0.20% share of the total Supplementary Compulsory Redemptions is $17,600 (being 0.20% times $12,000,000 less $6,400); and 7. Ms Jane Unitholder s closing investment at the end of the quarter is $56,000 (being $80,000 less the two quarterly redemption payments totalling $6,400 less the Supplementary Compulsory Redemptions $17,600). As can be seen from the worked example the timing of Ms Jane Unitholder s entire investment being redeemed is dependent upon the quantum of the Supplementary Compulsory Redemptions. In the event that there is no, or minimal, growth in Funds Under Management, there are insufficient liquid assets or it is not in the best interests of holders of Units to satisfy redemptions, the Supplementary Compulsory Redemption will be nil and her $80,000 investment will be fully redeemed in 25 quarters. In the event that Funds Under Management increase sufficiently enough for a Supplementary Compulsory Redemption to be paid, then the resulting payment of Supplementary Compulsory Redemptions will reduce this term accordingly Annual Redemption Annual Redemptions are only applicable to FT36 Unitholders. Annual Redemptions do not apply to Existing Units or to FT18 Units. Annual Redemptions allow FT36 Unitholders the option to redeem 10% of their Current Balance in year one, 10% of their Current Balance in year two and 10% of their Current Balance in year three. This entitlement is not cumulative, i.e. if an Annual Redemption is not paid in year 1 it cannot be claimed in any later year. The redemption price per FT36 Unit will be $1.00. The 10% Annual Redemption request window will be available once each month until such time that the redemption right for that year is exercised by the FT36 Unitholder. The Annual Redemption period for the first series of FT36 Units does not commence until the next series of FT36 Units has opened. This means that the first FT36 Unit 10% annual redemption window is available from 1 March 2010 so FT36 Unitholders can only lodge their first 10% annual redemption request from 1 March Redemption requests must be received by the 20th day of each month; will be processed on the following business day (usually the 21st day of each month) and will be paid three business days after the processing date. Any redemption request must be for an amount equal to 10% of Current Balance and can only be made once each year. If we do not consider there are sufficient liquid assets, or if it would not otherwise be in the best interests of FT36 Unitholders (or the holders of any other class of Units in the Trust), we may scale back, defer or suspend Annual Redemptions at any time. 20 Responsible Entity and Issuer Balmain Fund Administration Limited ABN AFSL