Asset Finance withdraws from deposit guarantee in bid to secure longer term funding

Asset Finance has announced its decision to withdraw from the the government's deposit guarantee scheme which it says inhibits the company's ability to secure funding sources that extend beyond October 2010, when the current scheme ends. Whakatane-based Asset Finance said it had contacted Treasury with its withdrawal application. Any deposits currently with the company, or invested with the company up until the time it received Treasury's response would still be covered under the current scheme until October 12 next year, it said The government announced an extension of the retail deposit guarantee scheme from October 12, 2010 to the end of December 2011. However it tightened the entry criteria for the scheme, meaning a number of finance companies would find it hard to enter and, if they were eligible to be covered, it would become more expensive to join. "Because of the nature of its business and in particular its relatively small size, Asset Finance believes that it, along with the majority of NBDT's operating in the New Zealand market, is unlikely to achieve the minimum credit rating required to continue in the scheme as it is proposed to be extended," Asset Finance said in a statement.

"Given that the company is unlikely to be able to continue in the guarantee scheme after October next year, Asset Finance believes that it is essential for the future of its business that it develops and secures alternative sources of funding that extend beyond the term of the current guarantee period as soon as possible," it said. "Asset Finance believes that continuing in the existing scheme actually inhibits its ability to develop alternative funding sources." "Asset Finance advises that the effect of withdrawing from the guarantee scheme would mean that deposits placed with Asset Finance up to the date that the requested withdrawal is confirmed, will continue to be covered by the Crown Guarantee until 12 October 2010 irrespective of whether they mature before or after 12 October 2010 and deposits placed with Asset Finance after the withdrawal will naturally not be covered by the Crown Guarantee." "For clarity, any funds invested with Asset Finance Limited under the Crown Guarantee will continue to be covered by that guarantee." Here is the full release from Asset Finance:

Asset Finance Limited (Asset Finance), a consumer and business finance company operating within the Non-Bank Deposit Taking (NBDT) sector, has, in communications dated and sent 3rd September 2009, advised Treasury of its desire to withdraw from the Government's current Crown Deposit Guarantee Scheme. The Crown Deposit Guarantee Scheme was introduced by the Government with effect from 12 October 2008 and Asset Finance opted to join the scheme in November of 2008 The Government recently announced its intention to extend the scheme beyond its current expiry date of 12 October 2010 but introduced additional regulatory requirements for NBDT's to remain in the scheme from that date, including a minimum credit rating requirement and significantly increased guarantee payments for lower rated NBDT's. Because of the nature of its business and in particular its relatively small size, Asset Finance believes that it, along with the majority of NBDT's operating in the New Zealand market, is unlikely to achieve the minimum credit rating required to continue in the scheme as it is proposed to be extended. Given that the company is unlikely to be able to continue in the guarantee scheme after October next year, Asset Finance believes that it is essential for the future of its business that it develops and secures alternative sources of funding that extend beyond the term of the current guarantee period as soon as possible. Asset Finance believes that continuing in the existing scheme actually inhibits its ability to develop alternative funding sources. Clive George, Managing Director of Asset Finance explains; "To prudently manage the maturity profile of its deposit book Asset Finance considers it essential to extend its maturity profile by taking deposits for terms beyond the end of the current guarantee scheme. Given existing market conditions, we actually need to offer depositors a premium to place money in investments which extend beyond October next year, in addition to the fee we are required to pay for our continued participation in the guarantee scheme. This means we are, in effect, paying a double premium to accept longer-dated funds". Mr George goes on to discuss the effect this will have on Asset Finance's ability to meet its other regulatory requirements. "Staying in the current scheme would have a material negative impact on our profitability at a time when we are building our reserves to meet the new prudential capital adequacy requirements". Commenting on the companies wish to voluntarily pull-out of the scheme, Mr George says, "We believe our exit from the current scheme is in the best interests of the company and our depositors". He goes on to say that withdrawing from the current scheme "shows that Asset Finance is working hard towards prudently managing its loan book and controlling the risks around it". Mr George also commented on the cost impacts to the business if Asset Finance were to meet the credit rating requirements. "Even if we get the minimum "˜BB' credit rating from an approved ratings agency, the cost of participating in the extended scheme for a company such as Asset Finance is significantly higher than what we are paying to remain in the current scheme". He goes on to say that "while the current scheme offers some reassurance to those investors putting money into the finance company sector, it has also meant that depositors are wary of lending monies beyond the life of the current scheme, which is creating funding issues for the industry as a whole". Mr George notes that "in order to secure longer term funding we also need to be able to communicate a clear message to our depositors. By clearly stating our intention to leave the current scheme and not join the extended scheme, we hope depositors will have better transparency over our strategy and be able to make better informed decisions about the investments they are making". "We have therefore taken the decision to advise The Treasury/Reserve Bank, of our wish to exit the scheme". Asset Finance advises that the effect of withdrawing from the guarantee scheme would mean that deposits placed with Asset Finance up to the date that the requested withdrawal is confirmed, will continue to be covered by the Crown Guarantee until 12 October 2010 irrespective of whether they mature before or after 12 October 2010 and deposits placed with Asset Finance after the withdrawal will naturally not be covered by the Crown Guarantee. For clarity, any funds invested with Asset Finance Limited under the Crown Guarantee will continue to be covered by that guarantee. Mr George commented that "Asset Finance strongly supports the new regulatory framework being introduced by the Reserve Bank to provide greater protection for the investing public and noted that Asset Finance has arranged for Standard and Poors to undertake a credit rating of the company in November 2009"