What is “subordination”?

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Olivia and Jess, from our Investor Services team, have recently received a few requests from investors to explain ‘subordination’, a term mentioned in our Supplementary Product Disclosure Statements (SPDS). GPS deals with terms like these on a daily basis. Questions from investors has highlighted to me the need to explain what we at GPS take for granted.

Leaving my old lawyer hat in the cupboard, a subordinated investor is an investor who doesn’t get paid until all GPS retail investors, in other words ‘you’, have been repaid in full.

In very general terms, the subordinated investing at GPS is by entities which are linked to the Woodhead family. It is not a form of investment offered to our retail investor base.

Subordination started as a way of GPS putting ‘skin in the game’ and assisting with keeping LVR’s for GPS retail investors at comfortable levels.

It has been used to deal with issues in loans to limit prejudicing the interests of the GPS retail investors.

Unlike some other lenders, GPS acknowledges that not all our loans are perfect. I hold the view that if you haven’t had a difficult loan, then you either haven’t done much lending, or you are lying.

In 25 plus years of lending, GPS has had problem loans. We put our money where our mouth is, look after the best interests of our investors and get it sorted out. This is a key reason why GPS is still in business.

Subordination has evolved over the years to fund a ‘project reserve’ in loans. This is effectively a pre-approved overdraft for use by the borrowers should the unexpected arise during a project. Subordination is used to ensure that any unexpected events do not prejudice the interests of the GPS retail investors.

The use of subordination at GPS will continue to evolve to deal with regulatory and market requirements. We are in the process of establishing an ‘asset management reserve’ to take the pressure of this investing away from private ‘Woodhead’ family entities.

I view subordinated investing at GPS as a cost of doing business. It most certainly isn’t a form of investing I would voluntarily choose. Overall, the returns are not brilliant. You win some. You lose some. The name of the game is to win more than you lose. So far, I have won more than I have lost.

It needs to be emphasized that using subordination is not a guarantee. The regulatory requirements for providing a formal guarantee would make it prohibitive to carry on business.

I think it is fair to say that when you see the word ‘subordination’ in any GPS documents that you can take it to mean that GPS is acting in your best interests.

Richard Woodhead – Managing Director

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