CDOs cost council $38 million

Gosford Council could be $38 million better off if it had not invested in speculative instruments like Collateralised Debt Obligations (CDOs) in the market boom prior to the global financial crisis.

A returns on investments graph published on Gosford Council's website on Thursday, February 4, shows that total capital losses from investments in unsecured instruments with Lehman Brothers, Blue Gum, Torquay, Scarborough, Parkes, Kakadu, Green and Esperance totalled $19.12 million.

Only one CDO remains in the Gosford Council portfolio and it has a maturity date of June 2016.

Its current market value, according to the latest financial reports from Council was $1.29 million (December 2015).

The face value, or the original amount invested in the CDO by Council was $1.93 million so, based on current market value, the CDO will result in a further capital loss of around $700,000 when it matures in June.

According to the returns on investments data provided with the business papers for Council's February 9 meeting, in addition to the capital losses incurred due to the unsecured investments, if those losses had not been suffered, Gosford Council would have been able to earn an additional $19 million in interest or earnings.

Since 2002, according to the graph, council's investment portfolio has returned $66 million net of those capital losses; the potential interest return if those losses hadn't been suffered could have been $85 million.

Over the same period, if the council had stuck with much safer, capital stable and secure investments, it could have expected returns that tracked close to a benchmark like the bank bill rate.

The graph uses the UBS 90-day bank bill index to provide a comparison, which since 2002 would have given the council a return equivalent to about $80 million in interest and earnings.

On January 2014, Gosford Council resolved to appoint Prudential Investment Services Corp Pty Ltd at the council's independent financial advisor for a period of three years.

Investments are currently managed by council officers based on the recommendations from Prudential.

Gosford Council's current investment portfolio is now spread among the top three credit rating categories and has a face value of $130.26 million.

Of the total portfolio, $53.59 million relates to restricted assets and capital reserves and committed funds and unspent grants consit of $89.27 million.

Apart from the one remaining CDO that is due to mature in June, council's funds are now invested in 12 floating rate notes ($36.25 million), 25 term deposits ($80.5 million) and a cash account ($11.58 million).

Agenda, 9 Feb 2016

CEO.1 and CEO.2, Investment reports Nov 2015 and Dec 2015

Website, 5 Feb 2016

Investment Returns Graph, Gosford Council