Credit Opportunities Fund Investor Presentation September 2014 Version 2
Credit Opportunities Fund
Investor Presentation September 2014
Version 2
Disclaimer
This document is not a solicitation but is presented to illustrate the First Class Funds
Management – First Class Capital Master Trust investment opportunity. This document is not
intended to provide the sole or principal basis of any investment or credit decision or any other
risk evaluation and may not be considered as a recommendation by First Class Funds
Management or any other person associated with First Class Funds Management. Each
recipient should determine its interest in First Class Funds Management on the basis of
independent investigations that it considers necessary or desirable. This document does not
constitute an offer for the issue, sale or purchase of any securities. Neither does this document
nor the information contained in it nor any other information supplied form the basis of any
contract or any other legal obligation. This document has been made available to recipients for
information purposes only and is not intended to be and does not constitute a prospectus,
profile statement or offer information statement as those terms are defined in the Corporations
Act. Any invitation to purchase or subscribe for shares in the Company will be an offer that
does not need disclosure for the purposes of section 708 of the Corporations Act including, but
not limited to, subsection 708(1) of the Corporations Act (small scale offerings exception) and
subsection 708(8) of the Corporations Act (sophisticated investor exception). First Class Capital
has taken care to ensure the accuracy of the statements made in this document but it is
incumbent on the reader to assess the proposal and conduct their own due diligence before
proceeding further. Nothing contained in this document is a promise or representation as to the
future. Accordingly, recipients must make their own investigations and inquiries regarding all
assumptions, uncertainties and contingencies which may affect the future investment returns
from the First Class Funds Management Master Trust Funds. Statements and data provided are
made for illustration purposes only and must not be relied upon.
Confidentiality Undertaking
This document has been supplied to the Recipient on the basis that the Recipient treats
the contents as being strictly confidential.
The entire contents of the document, whether supplied in written or electronic form or
otherwise remains the property of First Class Funds Management. The document is not
to be disclosed to any person outside your organisation and is not to be copied or
duplicated without the prior written permission of First Class Funds Management.
All questions and dealings in relation to the contents of this document are to be directed
to Brad Prout, First Class Funds Management , Level 12, 50 Margaret Street Sydney 2000.
Should the Recipient be uninterested in participating in the business the subject of this
document, the Recipient must immediately return the document and any copies thereof,
together with any other material supplied in relation to the business the subject of this
document in an envelope marked strictly private and confidential to:
Brad Prout
First Class Funds Management
Level 12, 50 Margaret Street
Sydney NSW 2000
2
Table of Contents
3
First Class Funds Management Page 4
Experienced Team Page 5
Fund Overview Page 6
Investment Origination Universe Page 7
Investment Process & Risk Management Page 8
Capital Value Preservation Focus Page 9
Key Risks Page 10
Foundation Asset 1 – Debtor Financing Portfolio Page 11
Foundation Asset – Leased Equipment Portfolio Page 12
Fund Position After Initial Target Raise Page 13
Other Matters Page 14
First Class Funds Management
Experienced
Established Origination Network
Disciplined Process and Risk Management
Systems & Staff
4
Sydney based specialist Funds Management Company formed in 2012 with an experienced management team and board of directors.
Part of the First Class Group of companies:
Manage existing debt funds;
National Franchise Network of 140 + Franchise Bookkeepers;
24 + rapidly expanding National Franchise Network designed to originate investment opportunities.
Extensive A&L systems, infrastructure, staff and supporting services.
Extensive board and management experience in:
Establishing, managing and administering funds; and
Receivables related structuring, investment and management.
Launched Credit Opportunities Fund to acquire credit based investments.
Existing assets acquired by First Class Capital to represent “Foundation Assets” for the Fund.
Experienced Team
5
Brad Prout – Chief Executive Officer
Brad has over 23 years experience in financial markets specialising in project, infrastructure, corporate finance, capital markets and credit based portfolio management.
Brad has established and run successful asset management businesses and has held senior executive positions at Bankers Trust Australia and Swiss Bank Corporation.
Brad holds a Bachelor of Economics and a Diploma of Applied Finance and Investment.
Rodney Green (Non-Executive Director)
Rodney has 30 years Funds Management experience and has held numerous public and private company directorships. Previously MD position and then non-executive directorship at Treasury Group Ltd (2001-2008), was Chairman and non-executive director at Premium Investors Ltd (2003-2006), Chief Investment Officer of Perpetual Ltd (1995-2001) and CEO of the Investment Division at Perpetual Ltd (1998-2001).
Rodney has an in depth knowledge of the funds management industry, financial planning market and the fundamental principles of successfully building and managing a funds management business.
Rodney holds a Bachelor of Commerce and is a Chartered Accountant.
Clive Barrett – Executive Chairman
Clive is the Executive Chairman of First Class Financial Group. Clive was born in South Africa and immigrated to Australia in 1980.
He has advised on, founded, managed and sold many Direct Response Television Industry (DRTV) businesses. Clive manages a substantial investment portfolio.
Clive founded and built Victor Paul Enterprises into Australia’s leading DRTV business and was responsible for creating and distributing many household brands.
John M Thomas (Non-Executive Director)
John has been involved in banking, finance and funds management activities for over 35 years.
John began managing the Howard Mortgage Trust in 1987 with assets of $8 million and oversaw its growth through the ownership of Challenger to $2.6 billion by 2003. Under John’s leadership, Howard Mortgage Trust won the Money Management Magazine “fund manager of the year award “on 7 occasions. John has a very strong credit risk management and lending background.
John was Chairman of the (then) Investment and Financial Services Association (IFSA) mortgage trust working group from 2005-2010 with total member FUM in excess of $30Billion. John is also an experienced non-executive director and is a former honorary treasurer of the National Council of Churches in Australia. John was awarded a Papal Knighthood in 2011 for his charitable work.
Fund Overview Feature Credit Opportunities Fund
Fund Type Unregistered Managed Investment Scheme
Eligible Investors | Minimum Investment
Sophisticated and Wholesale Investors only $25,000
Trustee | Investment Manager First Class Securities | First Class Funds Management
Target (Benchmark) Returns 12% p.a +
Underlying Assets Assets sourced from SME sector. Non-Property Sector Focus. Fixed income characteristics of time and sum certain payment obligations.
Investment Term | Liquidity Locked-in 12 months | Then 30 Days Notice to Redeem
Investment Diversification Moderate to High over time
Distribution | Notice Frequency Monthly
Fund Gearing Nil on Close | Capped at 50% of Gross Asset Value for liquidity management only
Management Fees 2.0% p.a x Gross Asset Value| Expense Recovery | No Performance Fees
Fund Establishment Costs Paid by Manager | No impact on Fund NTA
Legal | Auditor | Custodian McCullough Robertson | Logicca | Australian Executor Trustees
Unitholder Consultation for Future Asset Acquisitions
Acquisitions > 10% of Fund assets declined if > 20% of respondents vote against
NTA on Close | Future Unit Issues $1.0 per unit | Monthly as required @ NTA
Fund Open | Minimum Raise 1 October 2014 | Not Applicable
6
Compelling Risk-Return Profile
Fixed Income Asset Class
Large Market
High Turnover underlying assets
Experienced Team
Origination focus on: SME Market and Special Opportunities.
2 million + actively traded SME businesses.
Non-Property Sector Focused.
Huge demand for working capital based funding amongst SMEs due to reduced credit supply from banks.
Fund will only invest in fixed income assets characterised by time and sum certain payment obligations.
Trade receivable market (invoice financing and factoring) experiencing strong growth.
SME sector (measured by unincorporated businesses) Historically attractive risk profile with low default rates.
Access to independent credit scoring via Veda assists credit decisions and sizing of Fund’s loss reserves.
First Class Capital well positioned to originate investment opportunities via Franchise Network and contain risks at a transaction level via delivery of systems and supporting services to the underlying borrower/client.
Special Opportunities investing requires credit intensive analysis and structuring bespoke solutions.
Limited competition for suitable assets.
Investment Origination Universe
Large SME Market
Time & Sum Certain Obligations = Fixed Income Assets
Attractive credit metrics
0%
2%
4%
6%
2002 2004 2006 2008 2010 2012 2014
Banks' Non-performing Business Assets*Domestic Books, share of loans by type
*Excludes lending to financial businesses and includes bills and debt securitiesSources:APRA;RBA
Incorporated businesses
All Businesses
UnincorporatedBusinesses
7
Source: Debtor and Invoice Finance Association Sep.’13
Suitable Investment Asset Categories:
Debtor Finance.
Equipment Finance.
Insurance Premium Funding.
Short Term Commercial Loans.
Receivable Finance.
Originate investments via First Class Network and independent channels.
Risk Framework set by the Credit and Investment Committee.
Key Risk Mitigation:
Intensive credit analysis used to structure investment terms for exposure > 1% or $80 k.
Use established Credit Criteria when smaller formulaic decisions are applied.
Use of independent (Veda and Dunn & Bradstreet) Credit Scoring and loss rates.
First Class Capital provides related services to support ongoing transaction level (granular) risk control (eg payment process & systems).
Ensure probable loss rates are covered by either: established loss reserves; access to subordinated capital base or over collateralisation of secured assets.
Achieve duration and asset diversification over time.
Align interests of transactional parties to achieve risk-return outcomes.
Use of physical asset security where circumstance warrant.
Use of independent credit scoring provides means of achieving a consistent and statistically significant means of predicting credit defaults.
Supporting services by First Class Capital affiliated companies in the areas of payment processing; trading partner credit risk management tools; electronic contract creation; arrears management and secure web based trade portals – containment of risk at granular transactional level.
Investment Process & Risk Management
8
Application Received
Initial Credit Assessment
Declined
Full Quantitative & Qualitative Assessment
Approved
Scenario 1: Direct Investment
Capital Value Preservation Focus (or combination of 3)
9
Client
Loss Reserve
Investment
Scenario 2: Indirectly Via Controlled Trusts
Credit Opportunities
Fund
Controlled Trust
Client
Equity Provider
Priority
Investment
Scenario 3: Over Collateralisation of Underlying Asset Pool
Client
Credit Opportunities
Fund
Investment
Pool of Debtors
Protection Afforded By:
• Internal Loss Reserving = > Probable Loss
Protection Afforded By:
• Capital Base provided by Equity = > Probable Loss.
Protection Afforded By:
• Value of underlying excess assets = > Probable Loss. Eg Underlying Pool of Assets = 115% of Fund Investment. Investment protected unless > 15% of underlying assets default.
Credit Opportunities
Fund
Subordinated
Key Risks | Merits
Compelling Risk-Return Profile
Fixed Income Asset Class
Large Market for Origination
Liquid underlying assets
Experienced Team
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Risk Issue Comment
Asset Quality Dilution Proposed acquisition of new assets > 10% of Fund will not proceed if > 20% of respondent unit holders vote against. Consultation via email.
Sourcing Suitable Assets Very large universe of suitable assets due to declining bank provision of bank credit to SME sector; little non-bank competition; and First Class Group 170 + Franchisee referral base.
Risk to Capital Value Each Fund investment is carefully considered through the investment process.
A strong capital preservation focus will be executed via: intensive credit analysis, diversification of underlying investments, credit enhancement structures, trade credit insurance and appropriate loss provisioning.
Client Default If the proposed Fund investment is to be greater than $80,000 or 1% of Fund assets, a full financial statement assessment is undertaken to determine the borrower’s capacity to meet the repayment obligations. Smaller investment exposures are based on statistical probabilities of loss.
Investment Liquidity A large proportion (estimated 50%) of underlying assets will be very short term. principal repaying. For example, debtor financing has a typical 30-45 day duration. These types of underlying assets are self-liquidating and support the Funds ability to meet reasonable redemption requests after lock-in period.
Debtor financing facility with IPG (Global) – a company involved in the marketing and sales of fresh produce to customers such as Coles, Woolworths, Harris Farm and large well established independent market agents.
First Class Capital has successfully funded approximately $12 million for IPG over 4 months.
IPG current turnover is $30 m p.a and expected to rapidly grow to $50 m within 12-18 months. The business model of IPG has been trading successfully for over 6 years. The CEO and associated management have been in the industry for 20+ years.
IPG has a simple business model and the net profit margins are approximately 4%.
The facility involves advancing 80%-85% against debtor invoices which are payable in 21 to 45 days. An illustrating example is provided below left.
First Class Capital has been financing the IPG debtor portfolio for approximately 4 months, consistently generating returns of 15% per annum for investors with no losses.
The Facility Size will be $3 m. The Facility is secured by a legal assignment of the funded trade debts and a General Security Agreement over all the assets of IPG.
A First Class Capital related entity has a small (10%) interest in IPG through which it has secured the ongoing rights to provide debtor financing.
The IPG Debtor Facility is a high yielding, short duration, secure and liquid investment. Accordingly, it provides an excellent seed asset for the Credit Opportunities Fund.
Foundation Asset – Debtor Financing Portfolio
Short Term
High Turnover = Liquidity
Diversified Portfolio of High Credit Quality Debtors
Trade Receivables
11
Example: Debtor Invoice Amount 100,000
Fund Investment (85,000)
Discount Fee (Interest) 1,200
Fund Repaid in 30 Days # 86,200
Effective Gross Return (p.a) 17.00%
(#) Additional Discount Fees are payable to preserve return where debtor pays > 30 days.
A diversified portfolio of farming and food processing equipment has been acquired under a sale and lease back arrangement from one of Australia’s largest growers of tomatoes.
Assets have been valued by Hymans as at 29 May 2014.
The assets are being acquired for $2.85 m which is considered conservative and based around liquidation values.
Structured lease involving the following enhanced credit characteristics:
Lease rate of 18% p.a. Cash secured interest service reserve account equal to 3 months.
Payment obligations under the lease are with 3 parties. First Class Capital has assessed all three and concludes that any 1 of the 3 could meet the lease obligations.
Covenants include forward looking, rolling minimum serviceability tests.
The portfolio represents an attractive foundation asset for the Credit Opportunities Fund due its high yield, asset value protection and strong repayment serviceability.
Foundation Asset – Equipment Lease Portfolio
Asset Value Secured
Acquired @ Liquidation Value Delivers High Yield
Multiple Parties to Secure
Lease Repayment Servicing
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Fair Market
Value Ordinary
Liquidation Forced
Liquidation FCC Value
Produce Handling Equipment 2.85 2.21 1.33 1.77
Truck | Trailers | Gen. Farm Equipment 2.17 1.76 1.34 1.76
Total 5.02 3.97 2.67 3.53
Less GST 0.46 0.36 0.24 0.32
Less Estimated Sale Costs 0.50 0.40 0.27 0.35
Net Value 4.06 3.21 2.16 2.85
Calculations:
Fund Investment (2,850,000)
Monthly Repayment x 48 83,718
Total Repayment 4,018,000
Effective Return (p.a) 18.00%
Fund Position After Initial Close
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Asset %
Portfolio Invested Income
Yield Gross
Income Management
Fee Apportioned
Fund Expenses Net Income Net
Return Loss
Provision Est. Dist.
Yield
Debtor Financing 37.5%
3,000,000 17.00%
510,000
60,000
15,000
435,000 14.50%
30,000 13.50%
Equipment Portfolio 35.6%
2,850,000 18.00%
513,000
57,000
14,250
441,750 15.50%
28,500 14.50%
Invested Cash (1) 19.4%
1,550,000 13.75% (1)
213,125
31,000
7,750
174,375 11.25%
15,500 10.25%
Cash Held 7.50%
600,000 2.50%
15,000
12,000
3,000 - 0.00%
- 0.00%
Total 100%
8,000,000 15.64%
1,251,125
160,000
40,000
1,051,125 13.14%
74,000 12.21%
Spread of Underlying Risk
Lease Amortisation &
High Turnover of Debtors
= Fund Liquidity
Attractive Yield
Table below provides indication of the Credit Opportunities Fund over a 12 month timeframe based on an initial raising of $8 million.
Invested Cash assumes approximately 20% of the funds raised are held in cash for 3 months ahead of investment into higher yielding assets.
A core cash position of 7.5% is assumed. This will be replaced with a modest line of credit for capital and liquidity management efficiency.
(1) Assumes cash is held for 3 months ahead of investment into higher yield (17% p.a) assets.
Other Matters
14
Ongoing Issuance @ NTA
Expected Fund Size in 12 Months
= $50 million
FCFM Administration Capability
FCFM will pay approved parties a fee for introducing eligible investors.
The Trustee will continue to issue units at NTA each month where suitable assets can be sourced by FCFM.
FCFM will provide Valuation, Administration and Registry Services until the Fund size justifies a third party provider of such services.
Management and directors investment in Fund not less than $600,000.
Fund open for investments from 1 October 2014.
Available documents:
Information Memorandum.
Trust Deed.
Custody, Administration and Registry Services Agreements.
Management Agreement.
THANK YOU For further information contact
Brad Prout 0414 331 104
Clive Barrett 0407 667 782