Opaque investments recommended by a Perth advisory firm are unravelling, leaving clients with multi-million dollar losses.
PROMINENT Perth-based advisory firm, Oakvale Capital, will be forced to defend itself against its public institution and commercial clients, as complex investment products it recommended start to fall apart.
The City of Perth has lost $4 million following the default of an Oakvale-recommended collateralised debt obligation (CDO) called Helium, with millions more under threat.
An independent auditor checking the books of Oakvale client, the City of Cockburn, found it could not obtain support for the valuations on the city's balance sheet for six structured investments, which included the Merrill Lynch-arranged Helium.
Details of the investment defaults have emerged as Melbourne-based Ceramic Fuel Cells prepares to take legal action against a series of firms, including its adviser Oakvale, after a $25 million write-down on the value of its investment portfolio.
It's believed the Ceramic portfolio is invested in the same or similar synthetic CDOs that other Oakvale clients are exposed to. Oakvale has a long list of public institution and commercial clients.
An investment professional familiar with the advisory market described Oakvale as an avid supporter of CDOs, alongside the now defunct Lehman Brothers Australia (formerly called Grange Securities).
"What can be done; not much," the trader said. "Investors with those sorts of CDOs can't lose their money because they've already lost it."
A CDO is a bundle of loans or bonds designed to pay regular income, and repay capital when they mature. Synthetic CDOs, which many council investors hold, gain credit exposure through credit default swaps, making them a highly complicated investment product.
Former Lehman Brothers clients, such as the City of Melville, were recently advised that they would only recoup a few cents in the dollar after their Lehman-advised portfolios were ravaged by the economic downturn.
Former clients may, however, move to have the deed of company arrangement - a legally binding document between a company, its creditors and the administrator - set aside, and pursue compensation through legal action.
WA councils have lost well over the $60 million contained in local media reports, which have focused on losses of Lehman-advised councils and not those of Oakvale.
Oakvale managing director Jim Cunningham said the banks that constructed the CDOs and the rating agencies that gave them high ratings were to blame for the poor investments.
"In most of those situations we were asked for our opinion on the CDOs. We were guided by the ratings," Mr Cunningham said.
"We are nothing like Grange, who were taking profits on the securities. If you are going to give true independent advice you can't be getting anything out of the instruments you advise on."
Mr Cunningham said every investor had lost money recently, and that Oakvale clients were, in general, much better off than others.
He declined to comment on how many clients invested in Helium, or how much they invested, and declined to name any other CDOs on the brink of collapse. Mr Cunningham said Ceramic was still an Oakvale client and therefore he could not comment on the Melbourne company's investments or potential legal action.
But the City of Perth has already accepted a product called CLEAR, in which it invested $1 million, would default soon, and it is understood the council is holding a couple of other CDOs that are under pressure.
City of Perth finance manager Ian Berry said the knock-on effect of the collapse of General Motors was a concern for some of the city's investments.
"We are definitely not investing in any more CDOs," Mr Berry told WA Business News.
It's understood a CDO called Momentum, to which some Oakvale clients are exposed, is also in trouble.
Cockburn disagrees with the findings of its auditor, Grant Thornton, stating the methodology used to value its CDO investments had not been questioned in previous years.
