The liquidators of the ARM Asset Backed Securities life settlements fund have revealed a funding shortfall of almost £80m following a review of remaining assets in the portfolio.
In a presentation to investors in London on February 3, liquidators Mark Shaw and Malcolm Cohen from accountancy and business advice firm BDO said the ARM fund had a total of £62.6m in assets, including £22m frozen in UK bank accounts by the FSA in 2011.
But the fund issued bonds to investors worth an estimated £142m, the liquidators said, based on their research, leaving a shortfall of £79.4m.
The revelation comes as the FSCS has begun processing compensation claims from the hundreds of UK investors in the fund and follows the announcement last month of a £105m interim levy on investment intermediaries, chiefly to cover expected costs of compensation.
The FSCS is set to take a significant stake in the ARM fund through the compensation process, as the scheme assumes all rights to an investment when it pays out to an individual investor. Illustrations from BDO’s presentation indicated that roughly £40m worth of bonds – 28 per cent of the estimated total – is attributable to individuals who invested less than the scheme’s £50,000 limit.
The liquidators said in their presentation that “the FSCS may become the largest single bondholder of ARM and hence influence [BDO’s] strategy”.
The FSCS previously took a significant stake in Lifemark, the Luxembourg-based life settlements fund that backed the majority of failed Keydata investments, for which advisers were also billed heavily through the compensation scheme.
In 2011, the scheme proposed a $10m (£6.1m) loan to Lifemark to aid its administrator in the maintenance of the portfolio of life settlements. Although the loan was eventually accepted, at the end of last year the FSCS admitted that the administrators had salvaged just 10-15 per cent of the value of the fund when it was wound up.
Elsewhere, the liquidators of ARM are also continuing to seek legal advice over the status of the £22m of “pending” investments frozen in Natwest and HSBC accounts since 2011.
The uncertainty relates to the legal ownership of the money – effectively whether it can be considered to have been ‘invested’ or still belongs to the investors. This is further complicated by the potential that some of the money had already been passed to ARM before it entered administration.
Having investigated the material relating to the bonds sent to investors by ARM and its main distributor in the UK, Catalyst Investment Group, BDO described the bond documentation as “voluminous, complex and contradictory”.
It said “the documentation does not provide for a clear, certain and consistent bond priority schedule”, making it difficult to prioritise who should receive payouts from the liquidation.
