Council loses $1.65m on $2m investment
The ongoing world financial market meltdown has left Byron Council with a $1.635 million loss from one of its investments.
After a detailed independent financial assessment of all its investments, the council has sold an underperforming Collateralised Debt Obligation (CDO) investment of $2 million in Sceptre Capital for $365,000.
General manager Graeme Faulkner said the council held five CDO investments and all were recently 'stress tested' by the council's independent investment advisor Denison Financial Advisory Pty Ltd.
“The Sceptre CDO investment did not pass the test and consequently sold for a return of 18.2 cents in the dollar. This is approximately $365,000 out of the original $2 million investment,” Mr Faulkner said.
"The challenge we faced was when to sell a 'non-performing' investment and this had to be balanced against maximising a sell price. This is not easy in during a global financial crisis.
“The alternative was to sit on the Sceptre investment and risk a high probability of the investment defaulting and zero return.”
Mayor Cr Jan Barham said the loss was 'disappointing', but given the economic climate, the council was fortunate not to have suffered greater losses.
Cr Barham said it would have to be determined how the loss would be spread across the council's operations.
Mr Faulkner said the council's investment portfolio was currently valued at about $50 million and had a 'balanced' approach.
He said the portfolio included cash, term deposits, managed funds, longer term investments and high yield credit, a portion of which had become known as CDOs.
The investments were made in accordance with guidelines issued by the Minister for Local Government and were revised as part of the council's Internal Audit Committee recommendation after consultation with Denison's in March this year, he said.
The council held about 10 percent of its investment in CDOs which was comparable with other councils. The CDO investments totalled five products.
Mr Faulkner said according to Denison Financial Advisory, the CDOs held were better 'vintages' than the bulk of the local government CDO investments, and had performed better than those of their peer group.
“The Sceptre investment was purchased in 2006 and was a five-year AAA rated investment,” Mr Faulkner said.
“The remaining four CDO investments are currently rated as investment grade and there is no need for them to be sold.
"However, they will be monitored and reported back to council on a monthly basis.”
Mr Faulkner said after the internal audit recommendation, the council had resolved in April to engage an independent investment advisor for three months to devise an investment strategy and review current investments.
A report to the council in August will recommend how the Sceptre Capital loss will be distributed across the various council funds.