Challenger in a fix

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Challenger in a fix

By Michael West

The Rudd Government's blanket guarantee of bank deposits is sparking an investor exodus out of funds and products which are not covered by the guarantee. It's going into the banks.

Directors of financial services group Challenger - 20% owned by James Packer - are bunkered in a meeting now to decide whether to freeze redemptions on other Challenger funds.

Last week, Challenger locked up redemptions on its high-yield fund. Today, it is expected they will announce a redemption freeze on flagship mortgage fund, Challenger Howard, which is also the country's biggest mortgage fund with $2.9 billion under management.

Much of the business is in annuities, which should be safe but a crisis of confidence has little logic, just fear. Against that,

Challenger is likely to issue a statement soon.

Meanwhile, a modest thaw in credit markets offshore last night brought some comfort to equity markets. A 4% rally on Wall Street - alongside a welcome narrowing in interbank lending spreads - has been greeted by a further relief rally today in the local bourse.

Unintended consequences


Yet the severity of the credit crisis and the necessary but ad hoc responses by government are now throwing up unintended consequences such as a run on mortgage fund products.

The way these things work is investors buy into the fund and the fund on-lends the proceeds to property developers and property investors.

While these funds enjoy strong yields in the good times they are often exposed to a mismatch on the funding front as, for instance, an investor time horizon of say three years may be out of sync with the completion and return on a property project.

The well-publicised case of Gold Coast operator, City Pacific, has already seen $1 billion worth of investor funds frozen and other Gold Coast operators are hitting the skids.

For those funds with more security via an exposure to rents on real property as opposed to development the risk is underlying tenants and financiers going bust.

That is happening a lot. The Government however is not in a position to underpin all investment products.

In fact, its guarantee on the banks alone is worth $700 billion, a lump of money it simply could not find unless it went to the bond market.

mwest@fairfax.com.au

BusinessDay

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