I’m focusing on credit risk this week, and it’s never good to have a recent example of this type of risk to refer to.
Recently a company called Gippsland Secured Investments announced they had frozen the accounts of around 3,500 of their investors, but more on them later.
Credit risk applies to term deposits, debentures and bonds.
It’s essentially the risk that the company you’ve invested your money with won’t come up with the interest payments, or worse, not be able to pay your money back.
The best way to avoid credit risk is to know the status of the company you’ve invested your money with.
If a company is a non-bank lender, there’s your first red flag because they’re not backed by the Australian Government Deposit Guarantee.
Which brings me to Gippsland Secured Investments, a similar sad story to last year’s Banksia Financial collapse.
Gippsland offered investors higher interest returns on debentures, which for yield hungry investors must have seemed a lot better than the boring (and safe) 4 per cent at the bank.
But there’s always a reason when a company can offer a higher interest rate than your local bank and that’s where credit risk rears its head.
Companies like Gippsland and Banksia were lending for property transactions that the banks wouldn’t look twice at.
So investors’ money was lent to people the banks wouldn’t touch.
Besides the better rate of return, investors were consoled with nonsense terms such as ‘rock solid’ and “no unsecured lending” to make up for the lack of government guarantee.
What was buried in Gippsland’s Product Disclosure Statement by late last year, was the fact over 14% of their loan book had started to smell like week old prawns.
Of course investors aren’t much interested in such facts when Gippsland had Dennis Walter’s dulcet tones lending credibility to the business.
And there’s another risk to watch out for – celebrity risk!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Looking for the top financial adviser in Australia?
