Pyne Gould Corp (PGC), which owns Marac Finance, has announced a massive shakeup of its operations and assets that will see Marac pull out of property lending and apply for a banking licence. (Updated to include details from interview with PGC CEO Jeff Greenslade and my views on the annnouncement). PGC said it would buy George Kerr's Equity Partners Asset Management (EPAM) Limited for NZ$18 million in cash to become a banking and asset management firm. The asset management arm would include EPAM and PGC's Perpetual Trust trustee firm, while Marac Finance would sell its NZ$160 million of property loans to a real estate credit fund called Torchlight Credit Fund that would be owned by EPAM. Kerr, who is the former owner of Brook Asset Management, owns just under 11% of PGC through family interests. A profile of Kerr is here. Meanwhile PGC said it would book a provision for losses on these loans of NZ$60-65 million and look to raise an unspecified amount of extra capital, with George Kerr acting as underwriter on an arms length basis. PGC said it would also keep its 20% stake in PGG Wrightson.
PGC CEO Jeff Greenslade told interest.co.nz in an interview that the PGC's Perpetual Trust was a "great brand with a fantastic franchise that had a big client base with a small product range." Perpetual Trust dealt with trusts and estates and would benefit from funds management expertise. "We needed to upgrade and expand," Greenslade said. "Bringing on George Kerr helps us leapfrog into the funds management business," he said. PGC had decided to take the property lending portfolio off Marac Finance's balance sheet ahead of registering as a bank, which was good for debenture holders in Marac, Greenslade said. "They (the property loans) need to be held in an environment with patient capital that can give them 3, 4, or 5 years to achieve their real value," he said. External advisors would give independent valuations on the loans and any purchase price, he said. PGC had not agreed a price to sell the portfolio to Torchlight, he said. Greenslade declined to give a likely size for PGC's capital raising, adding this was not certain yet given the requirements under the new regime for non-bank deposit takers to ensure sufficient capital. The process of applying for a bank license and complying under the new Reserve Bank regime would be a factor in deciding the size of any capital raising. Any capital raising was likely to be done as a rights issue of new PGC shares via the stock market. Kerr had already said he would take up his entitlement, Greenslade said. Standard and Poor's was currently reviewing Marac Finance's investment grade BBB minus credit rating. Greenslade said Marac's presentations to S&P had gone well. PGC expected to release its results for the year to June towards the end of August, he said. My view There are now a variety of uncertainties around Marac Finance that should make debenture holders look closely before committing to roll over their debentures or invest in new debentures. Obviously, any debentures maturing before October 2010 are covered by the government's deposit so there's no worry there. But any maturing after that date are utterly dependent on the strength of Marac and its shareholder PGC, unless there is an extension of the scheme. So investors need to be confident that Marac and PGC are in good shape and have the capital strength to ensure it can redeem the debentures and pay interest. This deal feels like a lot of shuffling of assets between related parties. Torchlight will own the former Marac Finance loans. Torchlight will be owned by Perpetual Asset Management, which will be owned by PGC, which will own Marac. They're off the balance sheet but they're not off the shareholder's books. US investment banks tried to keep their sub-prime loans in off balance sheet vehicles, but when the pressure came on they eventually ended up on their books. The key news today is that PGC needs/wants extra capital from its shareholders to meet Reserve Bank requirements. Shifting the delinquent property loans doesn't really solve the problem of having them in the first place. They are still a problem for someone and now that someone is PGC rather than Marac. The other disappointment is that PGC will not sell the PGG Wrightson stake, meaning it won't have the extra cash from that deal. Debenture holders should watch closely how PGC's capital raising exercise goes and what happens with S&P's credit rating for Marac. If the capital raising is successful and Marac keeps its BBB minus rating , then PGC and Marac can justifiably say they are a strong place to invest. For now there is some uncertainty in the mix. We welcome our readers' comments and insights in the comments below the full statement from PGC.
Pyne Gould Corporation Limited ("PGC") announced today that the group has taken an important step towards becoming New Zealand's only publicly listed banking and asset management company. Asset Manager Acquired PGC has entered into an agreement to acquire an established New Zealand based asset management firm, Equity Partners Asset Management Limited ("EPAM") from a company controlled by George Kerr. George is a PGC director and associated with Pyne Family Holdings Limited, PGC's largest shareholder. EPAM is focussed on infrastructure and credit. It currently manages Equity Partners Infrastructure No.1 Limited ("EPIC") and owns a 10% cornerstone stake in that company. EPIC holds international infrastructure investments including investments in Thames Water and Moto International Holdings Limited "“ refer Appendix 2. In addition EPAM is developing a real estate credit fund "“ Torchlight Credit Fund. The purchase price payable by PGC is $18 million, and is subject to the conditions in Appendix 1. EPAM will become part of a new PGC group company, Perpetual Asset Management Limited to be chaired by George Kerr. This company will both manage and own cornerstone shareholdings in major funds, initially focussed on infrastructure and real estate credit assets and, in time, other asset classes including agri-business. The development of this major asset management arm for PGC will enable the group to offer a comprehensive suite of financial services to all clients and stakeholders across the PGC group. MARAC Property Development Loans to be Divested As part of its strategy to apply to become a bank, MARAC Finance Limited ("MARAC") intends to cease lending on development property. MARAC has retreated from this market and will continue this withdrawl by divesting its remaining impaired or likely to be impaired property loans, expected to involve approximately $160m, to PGC at face value, subject to obtaining all necessary approvals. Accordingly, MARAC's balance sheet will not be impacted by any impairment on these loans. As PGC pays cash to MARAC for the loans over time, MARAC will invest this cash in Government and bank securities to underpin liquidity and surplus cash may be available for selected acquisition opportunities that arise. Torchlight Credit Fund, once established, intends to acquire these loans from PGC together with other specific strategy property credit assets it has identified, as seed assets for the real estate asset backed credit fund. To allow Torchlight to acquire these loans at fair market value PGC will take a one-off charge to its 30 June 2009 results to reflect the impairments, expected to be approximately $60-$65m after tax (being an additional approximately $43m after tax to the $22m after tax charge taken at the half year to 31 December 2008). Final details will be released when PGC reports its annual results in late August. PGC has two major divisions that comprise: MARAC MARAC intends applying for a banking licence this year and it is expected, if the application is successful, to grow to become a mid-sized New Zealand bank catering to the needs of private individuals and SME's. It is intended to build on MARAC's expertise in the SME sector and expand the range of services provided to these customers, such as working capital products and utilising the products and services available through Perpetual Asset Management and Perpetual Trust. MARAC's asset and SME lending has continued to deliver strong results through the market downturn with minimal impairments. The property lending being divested has borne almost the full brunt of the downturn. Perpetual Trust and Perpetual Asset Management Perpetual Trust currently provides its clients with a wide range of services which will continue as usual. The new company, Perpetual Asset Management, will develop an asset management business across a range of specialist asset classes. Perpetual Asset Management will hold the management contract for each of its funds and a cornerstone stake to ensure alignment with other investors in the funds. Each fund will be established as a "best of breed" building block designed to meet long term investment objectives of Perpetual clients and clients of other financial institutions. The purchase of EPAM positions Perpetual Asset Management with an already substantial infrastructure fund. Torchlight Credit Fund will specialise in real estate asset backed credit across a range of sectors including commercial and residential. Torchlight has already identified a number of specific strategic property credit assets in addition to MARAC's non-SME property assets. Perpetual Asset Management sees the New Zealand property sector as a classic counter-cyclical opportunity with very significant value creation potential for a patient investor. Assuming Torchlight successfully secures the portfolio of MARAC assets and the other specific strategic property credit assets it has identified, it is likely to be the largest fund of its type in New Zealand. Update of PGC's shareholding in PGG Wrightson PGC's approximately 20% stake in PGG Wrightson is to be retained and may be considered as a long term seed asset for a significant agri-business fund. Chairman's comments PGC Chairman Sam Maling commenting on the major new initiatives announced today said: "2009 marks not only Perpetual Trust's 125th anniversary, but also the 75th jubilee of PGG Trust. I can think of no better way to mark these proud milestones than with a transformative set of initiatives which, I believe, will mark Pyne Gould Corporation as one of New Zealand's foremost and comprehensive financial service providers for the next 100 years. While PGC has not been immune to the impacts of the credit crisis, our conservative approach to lending and discipline of having no related party lending has ensured that the losses we have suffered are comfortably within the Group's capital capability. It is also true that for strong companies like PGC, these clouds do have a silver lining. We are fortunate to have someone of George Kerr's calibre agree to drive this asset management strategy for the group. George brings more than 20 years of success and experience in asset management on both sides of the Tasman and shares PGC's view that this is a time of considerable opportunity for consolidation across both banking and asset management." Commenting on the proposed Torchlight Credit Fund, Perpetual Asset Management future chairman George Kerr noted, "Property lending will continue to be a core part of the New Zealand financial system despite the savage realignment in values during this part of the cycle. What is clear is these assets need very patient capital and highly specialised expertise to realise their full value. Often traditional lending institutions find it impossible to be patient at low points in the cycle as their lending structures don't allow it. A fund that not only understands lending but also the underlying property can achieve excellent returns for its investors and that's the opportunity Torchlight has been established to take." Once the Board of PGC has determined the appropriate level of capital required by MARAC to support a banking licence and the medium term capital requirements of the asset management business, subject to obtaining all necessary approvals it will execute a capital expansion programme in which current shareholders will have the opportunity to participate. George Kerr, an associated person of Pyne Family Holdings, PGC's largest shareholder, has indicated to PGC his willingness, subject to finalising an underwriting agreement on arms' length terms and obtaining PGC shareholder approval, to play a major role in underwriting the capital expansion programme. Note: George Kerr is the great great grandson of FH Pyne who founded Pyne & Co in 1887.