As with any investment, investing in the Funds involves risk. Many risks are outside the control of the Responsible Entity. If these risks eventuate, distributions to Investors may not be as expected and may be reduced or suspended and the capital value of a Fund may be reduced. Distribution Payments are not guaranteed and neither is the return of your capital.
The Responsible Entity considers the following are currently key risks of an investment in the Funds:
(a) Mortgage investment risks, including the risk that investment values or incomes decrease.
(b) Fund investment risks, including in relation to holding Units.
(c) General investment risks, including economic and market conditions.
The section of our Product Disclosure Statement (PDS) detailing these risks is reproduced below.
Please read the PDS in full and consider your attitude towards risk before deciding to invest in a Fund and review the Fund Target Market Determination (TMD) to consider whether you fit within the Fund’s Target Market. You should also assess, in consultation with your professional advisers, how an investment in a Fund fits in to your overall investment portfolio.
The risks in this section are not an exhaustive list.
Mortgage investment risks—all mortgage investments
5.1 Valuation risk
The valuation of a 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 provides an inaccurate valuation does not have or no longer has adequate professional indemnity insurance to cover the valuation on which the Responsible Entity relied or that an alternate means of valuation of the Secured Property was carried out in accordance with our Valuation Policy which does not have access to a professional indemnity insurance.
5.2 Interest rate risk
Fluctuations in market interest rates may impact your investment in a Fund. For example, lower market interest rates may impact the ability of the Responsible Entity to originate sufficient loans at such rates to ensure sufficient interest income in the Funds is generated to pay the Investor distributions and the relevant Fund’s costs and expenses. 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.
5.3 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—
(a) a change in the financial or other circumstances of the Borrower, or
(b) a change in the economic climate generally that adversely affects all borrowers.
The Responsible Entity will seek to manage and minimise these risks by only making Loans to Borrowers that meet the Funds’ lending criteria.
Investments in the Funds are not capital guaranteed. During the life of a mortgage investment, factors outside the control of the Responsible Entity 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 that made the Loan 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 Responsible Entity manages capital risk by applying the Fund’s lending policy and employing efficient collection and management systems. All Loans and valuations are subject to periodic review.
5.4 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.
5.5 Term risk
A Loan may not be repaid or refinanced in a timely fashion, which may cause a delay or potential loss of capital. Given the short-term nature of the Loans, the Funds generally experience a higher rate of arrears as a result of Loans not being repaid promptly on their due date. This is often caused by delays in processing refinance applications by other lenders. The Responsible Entity seeks to manage this risk through the initial loan approval process as well as managing maturing loans in a timely fashion.
5.6 Enforcement risk
If a Borrower defaults, the Fund may have to enforce its security to recover the Loan and any unpaid interest. Consequently, any enforcement delay may result in a Fund temporarily having insufficient money to pay all or any distributions. Enforcement costs will be financed by the relevant 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:
(a) any accrued but unpaid performance fee owing to the Responsible Entity
(b) the reserves maintained by the relevant Fund in the Investor Reserve Account, and
(c) from borrowings by the Fund, as outlined in section 2.12.
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
5.7 Junior lender risk
Loans will be secured by a Mortgage. However, if the ASCF High Yield 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 ASCF High Yield 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 Responsible Entity will not have day-to-day control over the Borrower’s assets. This will generally mean that the Responsible Entity cannot exercise the ASCF High Yield Fund’s security until the senior lender has been paid in full. In addition, any monies available to the ASCF High Yield Fund in these circumstances would be limited to what is recovered after the senior lender has been paid in full.
Fund investment risks
The following risks relate to an investment in a Fund and may impact the performance of a Fund:
5.8 Capital and Distribution Payments risk
Distribution Payments and the return of your capital are not guaranteed. If the Funds suffer a loss, then you may lose some or all of your capital.
Distribution Payments depend on the return the relevant Fund receives from its investment in the Loans. We seek to minimise these fluctuations by—
(a) only making Loans to Borrowers that meet the Funds’ lending criteria, and
(b) offering short-term lending of up to 12 months for the ASCF Select Income Fund and ASCF High Yield Fund and up to 24 months for the ASCF Premium Capital Fund. The short-term nature of the Loans means the Funds should be repaid in full in a shorter time period, reducing the likelihood the financial position of the Borrower and the value of the Secured Property will be affected.
5.9 Management risk
The Responsible Entity is responsible for managing each Fund’s investments on a day to day basis. If the Responsible Entity fails to do so effectively, then this could negatively affect a Fund’s performance. In particular, there is a risk that the Responsible Entity may fail to anticipate movements in the property market, fail to manage the investment risks appropriately or fail to properly execute the Funds’ investment strategies. These factors could have an adverse impact on the financial position and performance of the Funds.
5.10 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 Responsible Entity will manage, analyse and monitor the liquidity position of the Funds and will take such action as may be required to enable the Funds to discharge their liabilities and meet its cash flow requirements in the best interests of Investors of each Fund as a whole.
In the event there are insufficient liquid assets held in the Funds, the Responsible Entity may suspend withdrawals or postpone/delay the payment of withdrawals.
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 Responsible Entity or by any other person.
5.11 New fund risk
The ASCF Premium Capital Fund is a newly established managed investment scheme (December 2019) and has limited track or past performance. However, the Responsible Entity’s management team possess mortgage asset experience gained over a number of years.
5.12 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—
(a) the Responsible Entity not being able to source mortgage investments for the Funds, and
(b) a Borrower failing to repay a Loan when due.
5.13 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 Responsible Entity.
5.14 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.
5.15 Taxation risk
Distributions to Investors may be affected by changes to taxation legislation. Changes to taxation legislation may necessitate a change to a Fund’s structure to ensure Investor interests are protected.
5.16 Sourcing investments risks
Sourcing favourable investments may be difficult and the Funds may not be able to fully invest their funds at acceptable prices. This may affect the Responsible Entity’s ability to implement the investment strategy of a Fund (or Funds).
5.17 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 Responsible Entity has 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.
5.18 Fund risk
A 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 a Fund may give different results than investing in the underlying assets of that Fund directly because of the income or capital gains accrued in that Fund and the consequences of investment and withdrawal by other Investors.
5.19 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 Responsible Entity will manage this risk by using qualified solicitors with professional indemnity cover to prepare documentation.
5.20 Regulation risk
There is a risk that the Funds may be adversely affected by changes in government policy, regulations and laws or changes in generally accepted accounting policies or valuation.
5.21 Consumer protection laws and codes
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.
National Consumer Credit Protection Act 2009 (NCCP Act)
As the holder of an ACL, the NCCP Act applies to the Responsible Entity. ACL holders are subject to ongoing obligations, including management of internal systems, people and resources, as well as complying with the conditions on their ACL and relevant laws generally. ACL holders also have more specific obligations, such as meeting responsible lending requirements (verifying a consumer’s financial situation and assessing whether a credit contract is not unsuitable) and other disclosure and conduct obligations in the National Credit Code.
Failure to comply with the NCCP Act may mean that court action is brought by the Borrower, guarantor, mortgagor or by ASIC to—
a) grant an injunction preventing a coded Loan from being enforced
b) order compensation to be paid for loss or damage suffered (or likely to be suffered) as a result of a breach
c) vary the terms of the Loan on the grounds of hardship or that it is an unjust contract
d) reduce or annul any interest rate payable on the Loan which is unconscionable
e) have certain provisions of the Loan or a related mortgage or guarantee which are in breach of the legislation declared void or unenforceable
f) obtain restitution or compensation from the credit provider in relation to any breaches of the NCCP Act in relation to the Loan, or
g) seek various remedies for other breaches of the NCCP, such as punitive remedies and revocation of the ACL.
Applications may also be made by Borrowers to relevant external dispute resolution schemes such as AFCA which generally have the power to resolve disputes where the amount in dispute is $5,000,000 or less. There is no ability to appeal from an adverse determination by an external dispute resolution scheme, including on the basis of bias, manifest error or want of jurisdiction.
Any such order (by a court or external dispute resolution scheme) may affect the timing or amount of interest, fees or charges, or principal payments under the relevant Loan.
5.22 Social and health risks (e.g. COVID-19)
As at the date of this PDS, 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 Funds and distributions to Investors.
5.23 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:
(a) The state of the Australian and world economies.
(b) Inflation movements.
(c) Negative consumer sentiment, which may keep the value of assets depressed.
(d) Natural disasters and man-made disasters that are beyond the control of the Responsible Entity.
(e) The illiquidity and cost of capital markets.
The performance of the Funds, the repayment of capital or of any particular rate of return, is not guaranteed by the Responsible Entity, its 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 a Fund will not decrease in value and that Investors will not suffer losses.