Tuesday 27 September 2016

Crucial covenant was the 'gun' that shot down Belfry funds, investors say

Published 29/05/2016 | 02:30

'The funds were promoted and sold by AIB from 2001 to 2006. ' Photo: Reuters
'The funds were promoted and sold by AIB from 2001 to 2006. ' Photo: Reuters

A covenant which contributed to the collapse of funds sold by AIB was not revealed to investors until years after they bought in, the High Court has heard.

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Details of an allegedly "hugely significant" loan to value (LTV) covenant emerged this week in cases taken by investors in UK property funds known as the Belfry funds.

The funds were promoted and sold by AIB from 2001 to 2006. The first was a major success, generating a large return, but Belfry funds 2 to 6 collapsed.

A private banking manager who sold them for the lender and invested himself is among some 350 investors who are suing. A select number of test or lead claims came before the High Court last week.

Covenants built into the funds permitted assets which they were invested in to be sold, if their value fell below a certain amount, which occurred as prices plummeted during the recession, counsel for investors claimed in the High Court last week.

"The LTV covenant isn't the bullet, it's the gun. The LTV covenant is what destroyed these investments," the court heard.

"The covenant is a key fact, the existence of which was not disclosed.

"The LTV covenant is the microchip which turned these investments into pulp because the LTV covenant didn't simply reduce the value of the investment, the LTV covenant was the mechanism by which the underlying components on which the investment is based were taken away forever, so that you could never get your investment back.

"There wasn't a default in payment. This wasn't a situation where they fell behind with payments. What happened here was that the LTV covenant was triggered because the values of the properties dropped.

"And once that happened, the lender swoops in and ultimately takes away all the assets and sells them in a forced asset disposal programme."

The plaintiffs were not made aware of any such covenant until 2008 at the earliest, instead informed that "there was no guarantee that the security granted will not be enforced in the event of a default by a subsidiary company with its obligation to repay its borrowings", they claim.

"It is true that the [funds'] Prospectus warned of enforcement in the event of default," counsel for the investors John O'Donnell SC conceded. "But it did not warn of the LTV covenant or its implications and it did not warn that the implications of the LTV covenant could arise even if there was no default.

"That's something that really, really should have been explained to people," Mr O'Donnell said.

AIB disputes the plaintiffs' claims and argues that the cases should not progress on statute of limitations grounds.

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