Wind up for Asset Backed Yield Trust

Bendigo and Adelaide Bank's wealth management subsidiary Adelaide Managed Funds has given up its attempt to find a new strategic direction for its $170 million high-yield income fund, the Asset Backed Yield Trust, and will move to wind up the fund.

AYT, which is listed on the Australian Stock Exchange, was set up in 2006 to provide investors with exposure to subordinated higher-yielding instruments within securitisation structures.

The onset of the global financial crisis and the closure of the securitisation market left it with nothing to invest in and little investor support.

Despite having net asset backing of $1.80 per unit and continuing to pay a high yield, the trust's price has traded around $1.30 a unit over the past six moths.  Default rates on 20 per cent on loans to investors in managed investment schemes of Great Southern, and which comprise 12 per cent of the portfolio, is one reason for investor disinterest.

In February last year Bendigo and Adelaide Bank announced that it would offer convertible preference shares in exchange for units in the fund. But the Australian Prudential Regulation Authority told Bendigo and Adelaide Bank that it would not allow the bank to proceed with the acquisition of the units.

The regulator took the view that the bank was providing credit support for a fund whose responsible entity was a wholly-owned subsidiary and which was holding securitised assets issued by the bank - a breach of prudential standard APS 120.

APS 120, which covers securitisation, requires that an authorised deposit taking institution must not provide implicit support to a securitisation and must "stand clearly separate" from a securitisation.

Adelaide Managed Funds chairman Anthony Baum said in a statement yesterday that a number of alternatives had been considered since then but the board came to the conclusion that a gradual return of capital and an orderly wind up was in the best interests of unitholders.

The manager will need unitholder support for the plan to go ahead and a meeting will be held within the next six months. In the meantime, the manager will not make any new investments and the on-market buyback will stop. Cash distributions will continue to be paid.

Since listing, the fund has paid distributions totalling 55 cents to unitholders, representing an average annualised yield of 9.7 per cent.

Assets in the trust's portfolio include margin loans originated by Leveraged Equities, non-conforming mortgages originated by GE Money, medical equipment finance and loans to investors in the failed agricultural scheme Great Southern.

The trust made a $16.6 million impairment provision against the Great Southern loans in February. The total value of the Great Southern loans is $21.1 million.

The portfolio manager Mark McKay said all other parts of the portfolio had credit support well in excess of actual losses.