The on-going battle between Fedbond, the largest participation mortgage bond manager in South Africa, and the Financial Services Board (FSB), which regulates the financial services industry, continued this week with the FSB losing another court action in its attempts to have Fedbond placed under curatorship.
John Field, the managing director of Fedbond, has now accused the FSB of making "a mistake in its actions against Fedbond".
He says the FSB's actions "have resulted in substantial damages being suffered by the company and the scheme's participants".
Capital withdrawals by Fedbond's 10 000 investors, who are mainly pensioners, are still limited to hard-luck cases where investors can prove they need the cash.
However, Fedbond investors may sell their units to other investors.
The scheme has maintained a positive cash flow from interest and rental payments and has not defaulted on interest payments at any stage since it was placed under joint management by the Pretoria High Court in February 2004.
The court granted the joint management order after the FSB became concerned about the status of the values of the scheme's underlying properties and an unsecured debt to Investec of R344 million.
The R344 million claim by Investec was resolved last year, but the issue of the large number of previously bonded properties owned by Fedbond remains unresolved. Fedbond took possession of the properties, which were initially financed by Fedbond investors through participation bonds, after the developers failed to meet their mortgage bond repayments.
At the time when Fedbond took possession of the properties, the FSB doubted the value placed on the properties by Fedbond, implying that the scheme could face bankruptcy if all investors were to withdraw their money.
The property market has since recovered, and Field believes that there is no longer a valuation problem.
However, Jurgen Boyd, the head of collective investment schemes at the FSB, says the FSB remains concerned about whether Fedbond's assets, including the properties in its possession, are sufficient to meet all its liabilities to investors.
Fedbond estimates the current value of the properties in its possession at R619 million and the value of registered mortgage bonds at R717.8 million, while Fedbond values its liabilities to investors at R1.34 billion.
Field says that apart from the assets in the scheme there is an additional cushion of R290 819 331 of which R35 788 625 are manager's funds (these funds consist of assets held by the company and do not belong to the scheme). This, Field says, means that Fedbond meets the FSB's capital adequacy requirement of 7.2 times its liabilities.
Boyd questions the method of calculating the cushion.
"While there could be R717.6 million in registered bonds, the amounts owing by mortgagors is R350 million and the properties in possession must sell for at least R987 million to cover the scheme's R1.9 billion owed to investors," he says.
Fedbond faces an additional problem. In terms of the Collective Investment Schemes Control Act, participation mortgage bond schemes must comprise mainly of mortgage bonds over properties. Currently, Fedbond's mortgage bonds only account for 28 percent of the scheme's assets.
Field says Fedbond is in the process of selling off the properties and hopes to have the situation in order soon.
Boyd rejects Field's claims that the FSB's actions are damaging the scheme. He says the FSB has always acted in the best interests of Fedbond's investors and that its actions have not been criticised by the court.
In this week's court action, the FSB applied for leave to appeal against a December 2005 judgment handed down after it failed to convince the Pretoria High Court to place Fedbond under curatorship.
Field has applied to the FSB to have the hold on new investments lifted. Boyd says this application is currently pending and that further information has been requested from Fedbond.