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Mike Ross Law Blog: 01/12/10

Mike Ross Law Blog: 01/12/10

Just because a commercial transaction runs at loss doesn’t mean that it is an “oppressive” transaction justifying court intervention. And it is not for lenders to research the commercial wisdom of a debtor taking out that loan, where the borrower has received 3rd party advice particularly. In exactly what is a test case on the legality of funding lines set up to finance investments promoted by the Blue Chip Group, the Supreme Court has ruled mortgages securing loans can be enforced. This will result in elderly investors shedding their family homes following a collapse of prices in the Auckland CBD apartment market. Blue Chip targeted asset rich/cash poor seniors traders in what it described as joint venture development tasks.

Investors were inspired to home loan their family homes, buying into deals whereby they financed the structure of internal city Auckland apartments. The “profit-share” formula buried in the small print noticed Blue Chip eligible for some 90% of any realised capital gain on the sale of completed apartments, without sharing in any capital losses.

Touted apartment valuations proved to be grossly optimistic. There is proof completed apartments selling for under 50 per cent of pre-construction valuation. Realisations didn’t cover loans elevated by investors to invest in the construction. As a total result, investors’ homes were pressured into mortgagee sales. The Supreme Court was asked to reopen loan contracts under the Credit Contracts and Consumer Finance Act 2003 on the foundation that the loans were “oppressive”.

This required evidence that the loans did not measure to reasonable criteria of commercial practice. Specifically, it was argued that it was not realistic to enforce contracts where older pensioners on limited income experienced taken out considerable mortgages for terms of 25 to 30 years. The Supreme Court, in this case, ruled there was no evidence of oppressive behaviour. Asset based funding (as specific from cashflow based funding) is a flawlessly genuine form of funding.

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There was nothing at all in the documentation provided to GE Finance in cases like this which signalled that the deal was anything other than a normal commercial application from an investor seeking to profit from a real estate development. The Supreme Court said there is no obligation on a financier to exceed the information provided to investigate the commercial soundness of the suggested development or the personal circumstances of the debtor. To do so, said the court, would be inefficient economically.

Buck-busters cited the record low short-term interest rates, with the given funds focus on rate at 0-0.25%, even less than in Japan. This made the greenback the most well-liked funding currency for the carry trade where it is borrowed and then sold for other higher yielding currencies with rising interest levels. The falling money against those currencies enhances the profitability of those investments. Despite all its disadvantages, however, the dollar remains the world’s reserve currency and safe haven, regardless of suggestions by the others and Chinese that the dollar should eventually be replaced by a global currency. This status for the buck is apparently reemerging and will grow if we’re right and hopes for a rapid financial recovery are dashed.

We favor selling British sterling because the U.K. U.S.– a ratio to GDP of 404% in 2008 compared to 95% in this country, which has caused bond ranking companies to threaten a downgrade of U.K. Also, the troubled British financial sector makes up about 21% of total jobs weighed against 14% in the U.S. The U.K. was almost by itself among advanced countries in struggling a falling economy in the 3rd quarter of last year. The euro is vulnerable, in our view, because the eurozone has a one-size-fits-all financial policy but its economies differ in power from Germany and the reduced Countries at the very top to Portugal, Italy, Spain, Ireland and Greece at the bottom.

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