A wholly-owned subsidiary of Bendigo and Adelaide Bank has increased its impairment provision to almost $17 million due to defaults by borrowers in the Great Southern managed investment schemes (MIS).

The subsidiary, Adelaide Managed Funds (AMF), is the responsible entity for the Adelaide Managed Funds Asset Backed Yield Trust (AYT).

AYT invested in a securitisation program that lent money to investors in the MIS promoted by Great Southern, although AYT itself has no exposure to Great Southern or any other MIS provider.

AYT is invested in two junior notes in this program, which have face value equal to $22.3 million or 12.3 per cent of AYT's total investment portfolio.

According to AMF, because the MIS investments are junior notes any losses that occur within the securitisation program have a direct impact on the value of AYT's investment before impacting the senior noteholders.

In May, AMF announced an expected impairment of $4.3 million in its fiscal 2009 accounts, however an increase in defaulters has caused it to increase expectations of future losses four-fold to $17 million.

AMF said it was aware the servicer of the loans, Bendigo and Adelaide Bank, had modified its approach to pursuit of payments of the loans and there had also been an increase in borrowers seeking legal action in regards to their loan obligations.

Consequently, it has established an independent board committee to deal with the issues related to AYT's MIS investments.

"The independent board committee of AMF intends to continue to fully pursue all rights that it has in relation to these investments, where it is in unitholders' interest to do so," an AMF statement said.

The increased impairment provision will reduce AYT's 30 September 2009 unaudited net tangible asset backing by 13.1 cents per unit to $1.78 per unit.