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Government wants to regulate how the word 'secured' is used in debt securities sold to the public

Posted in Bonds

By Gareth Vaughan

It may be a case of shutting the stable door well after the finance company horse has bolted, but the Government plans to regulate use of the word "secured" when it's used in the context of debt securities sold to the public.

"I consider that it is desirable to regulate the use of the term ‘secured’ and related terms," Commerce Minister Craig Foss says in a Cabinet paper outlining proposed regulations to be introduced through the Financial Markets Conduct Bill.

"In Australia, in some contexts the use of the term ‘secured’ is only permitted where the security is likely to be sufficient to cover the amount secured . This corresponds to the ordinary meaning of the word. I propose that New Zealand adopts a similar approach to ensure that investors may not be misled by the use of inappropriate language."

Many finance companies that collapsed in recent years, losing the bulk of their investors' money, had promoted their debenture stock as "secured first ranking debentures." However, when the mainly property financiers met their Waterloo, in many cases, the value of the assets secured was inadequate to cover the company's obligations to investors. See full details of the finance company collapses in our Deep Freeze list here.

Foss says the description of security in relation to debt products is one of the most difficult areas to convey in a way that is meaningful and informative to investors.

"Current disclosure often provides considerable detail on the security for the debt product on issue. However, it can fail to give the investor a sense of how far that security will go to cover losses arising out of failure," says Foss.

"The term ‘secured’ can be misleading. While it has a particular legal meaning, the ordinary meaning of ‘secure’ implies something that is safe and reliable. Some investors in failed finance companies appear to have taken more comfort from the description of their investments as ‘secured’ than was warranted in the circumstances."

One finance company with genuinely secured debentures on offer is ANZ subsidiary UDC Finance, a plant, equipment and vehicle lender. As of March 31 UDC had $1.467 billion worth of secured debenture stock on issue, with $2.125 billion of UDC tangible assets pledged as collateral for secured stock.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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18 Comments

One finance company with

One finance company with genuinely secured debentures on offer is ANZ subsidiary UDC Finance, a plant, equipment and vehicle lender. As of March 31 UDC had $1.467 billion worth of secured debenture stock on issue, with $2.125 billion of UDC tangible assets pledged as collateral for secured stock.
 
Is an independent and constant price discovery mechanism disclosed to confirm on a regular basis the valuation estimate for the tangible assets? UDC by default extends debt to enable third parties to purchase what are characteristically defined as depreciating assets.
 
We need to extend from secured to collateralised debt liabilities, where marked to market margin top ups reflect the deteriorating nature of an asset type due to use, age and or changed market valuation. Repurchase agreements and currency swaps demand such  credit supplier protection.

Ultimately the government is

Ultimately the government is asking for some clarity around the capital structure. The lawyers of the debt issuers have given the dictionary a good going over in how to describe their ious to the public. 
Gareth, as you did with the OBR, perhaps it's time to illustrate the capital structure of a company, starting with equity (and all its permutations) and dribbling down through the senior debt and dwon into the murky waters of unsubordinated, perpetual, till hell feeeze over obligations of the is it equity or not pieces of paper flushing around the system.
The days of equity being ownership of a company and debt being a loan to a company are long gone. It's good to see the government calling for more transparency here. Perhaps they could extend that demand towards the RBNZ and ask them to be a bit more transparent about how they describe and explain the workings of our banking system, which would no doubt help people in their analysis of which banks to deposit their money with. 
They say sunlight is the best disinfectant :-) 
 
 

Commerce Minister Craig Foss

Commerce Minister Craig Foss onto a PR exercise...after he has secured the term secured, perhaps he should look closely at the term "surplus"...!

A cutting comment, Wolly.

A cutting comment, Wolly.

Colin, we certainly are

Colin, we certainly are struggling when it comes to a "surplus" of another kind. Read more
 
New Zealand recorded a smaller-than-expected trade surplus last month as exports including crude oil and meat missed estimates, offset by a drop in imports.
 
The trade surplus was $71 million in May, for an annual deficit of $869 million, according to Statistics New Zealand. A monthly surplus of $400 million was expected for an annual deficit of $520 million, according to a Reuters survey.
 
China took 15.3 per cent more exports at $669 million, for an annual jump of about 30 per cent to $7.6 billion, remaining the second largest market for New Zealand goods. For imports, China remains the largest source, with inbound shipments increasing 0.5 per cent to $653 million and rising 1.6 per cent to $7.76 billion annually.
 
Shipments to Australia, the nation's biggest export market, fell 16 per cent in May from a year earlier to $751 million. Exports declined 8.6 per cent to $9.58 billion in the year, adding to signs demand may be waning across the Tasman as the economy slows.
Imports from Australia fell 13 per cent to $585 million in May from a year earlier and fell 3.6 per cent to about $7 billion in the year. Exports to the US, Japan and South Korea all fell.

I am not sure that MPI has

I am not sure that MPI has the Herald's business desk fully convinced:
 
Exports of dairy, meat, wool, forestry, horticulture and seafood are forecast to reach $24.1 billion in the year ending June 30, 2014, and grow at a compound annual rate of 7.4 per cent to reach $29.5 billion by 2017, according to the Situation and Outlook for Primary Industries 2013. Demand from Asia, improving global growth and a weaker kiwi dollar, will drive the gains.
The bullish outlook for growth is driven by the dairy sector, with a modest increase in cow numbers and productivity lifting exports by 8 per cent to $14 billion in 2014 and an average 8 per cent growth rate through 2017, when exports are forecast to be $17.7 billion, the report said.

Seems to me that the Herald's

Seems to me that the Herald's editorial duties have been exported offshore. For years, both print and online editions have deteriorated. I think they are now staffed by a bunch of monkeys randomly bashing keyboards.

Maybe, but this time I am

Maybe, but this time I am going to give them credit for doing significantly more than reproducing a media release.
 
Digging out MPI's latest Situation and Outlook and putting its rosy forecasts against May's export stats was better than I expected.

For years, both print and

For years, both print and online editions have deteriorated.
 
I get the same feeling about bank business confidence surveys- the facts fail to match the rosy forecasts. Read another one
 
Business confidence has risen across all sectors and to levels barely seen since the late 1990s, the ANZ's June business outlook reports.
 
Half the firms surveyed expected general business conditions to get better over the year ahead, up 8 points on the previous month.
 
More importantly, a net 45 per cent of firms were upbeat about their own prospects, up 11 points.
 
ANZ chief economist Cameron Bagrie said it was the best result for years, except for a blip in early 2010 when New Zealand was re-emerging from a collapse in consumer confidence.
 
This time round there were stronger grounds for confidence. The country's balance sheet was still weak but it was cleaner, and great strides had been made in micro-economic reform.

I think this extract of a

I think this extract of a recent short atricle by Charles Hugh Smith covers it:
 
In eras of extended abundance, the populace slowly loses the ability to think critically and develop concepts outside the narrow confines of the Status Quo.
 
When the abundance/prosperity ends, as it always does, the populace has lost the ability to make difficult choices and realistically assess cost-benefit. Magical thinking and nostalgic references to past glories dominate the conventional mindset.
 
http://www.oftwominds.com/blogjun13/bogus-abundance6-13.html

Well said.... As PDK says

Well said....
As PDK says we'll need to triage, or with what we have decide what we'll do and what will be left...
regards

ANZ said its business and

ANZ said its business and consumer confidence data indicated people were expecting 4.4 per cent economic growth by the end of the year.
 
People? Or a construct of a Public Relations advisor?

Maybe they ask the property

Maybe they ask the property ppl in here?
;]
Indeed ppl are saying themselves that they expect 4.4% or is this a number that based on a feel good thing ANZ thinks ppl mean? suspect the latter.  Bearing in mind that much of our economy is based around the housing ponzi scheme I guess businesses feeling confident isnt a huge surprise...
Either way its at odds with the mess the world looks to be in, or that the RB see's the risks in nz housing being greater than the start of the GFC. JK and RB clashing over the tools being used should be interesting....
regards
 
 
 
 
 
 

One finance company with

One finance company with genuinely secured debentures on offer is ANZ subsidiary UDC Finance, a plant, equipment and vehicle lender. As of March 31 UDC had $1.467 billion worth of secured debenture stock on issue, with $2.125 billion of UDC tangible assets pledged as collateral for secured stock.
 
what is UDC's trust deed ratio (Total liabilities to TTA ). 87.5%, 65%?
 
gee at 65% UDC would well and truely be under water
 
Lets face it the only reason UDC hasn't come in for criticism is that ANZ stand in front of it!

A quick look at the Deep

A quick look at the Deep Freeze table and some guestimates with the aid of a spreadsheet, the losses to the NZ investors since the start of the collapses is approximately NZ$4.7 billion or around 50% of the initial investment.
Secure - Yeah Right!
Tell me what our "secure" invstment options are.
Cheers, TP

In a word? None! Not even

In a word? None! Not even your trusty old bank savings account. Why? OBR and covered bonds will basically put any bank creditor (previously known as 'depositor') into a full loss making position if a worse case scenario was actually contemplated. But, of course, that could never happen. Or could it...?

ctnz asks the question...the

ctnz asks the question...the one the nz media refuse to go near..or have been told not to attempt to answer...!
Sad thing is, the credit stuffed farce of a property bubble economy is now utterly dependent on yet more credit stuffing and an absolute silence over what will happen when the music stops.
Go read the Telegraph article on what a tiny wee 1% rise in rates will do in the UK...and then figure out what a 2% rise will do here....and if you think average mortgage rates at 7% will never happen then you need a brain.

GV, but what are the assets? 

GV, but what are the assets?  is it a  $100k truck someone took out a 90% loan to buy?  using his $200k house as colateral? What makes me scratch my head is in a major financial event assets can take huge book losses...ie no one knows thier real worth until they are sold. If the bottom has dropped out of trucking and the x2 property bubble (50%+ losses) has burst, that $100k may now no longer be secured.....So I wonder how much leverage is really in the numbers....
regards