Pyne Gould Corporation (PGC) says merging its finance company Marac with two building societies will enable the merged entity to tap a bigger retail deposit funding base as the combined group seeks an investment grade credit rating and bank licence.
PGC CEO Jeff Greenslade told interest.co.nz one of the appeals of the proposed tie-up with Canterbury Building Society (CBS) and Southern Cross Building Society (SCBS) was their strong deposit bases. This is because it’s now much tougher for non-bank financial institutions to raise funds from both the wholesale and retail markets than before the global financial crisis and the collapse of dozens of local finance companies.
CBS had held deposits of NZ$465.95 million as of September 30 last year and SCBS had NZ$358.2 million as of June 30 last year. Marac had NZ$867.9 million of debenture stock on issue as of December 31. As of today, some 64% of the combined group’s funding comes from retail investors with 22% from securitisation programmes, 9% from bank loans and 5% from wholesale funding.
Greenslade said CBS and SCBS also brought good lending customers to the table that fit well with Marac’s car finance and plant and equipment financing. PGC also planned to merge Marac insurance into the new entity and for it to have retirement planning capability through wealth management products. No decisions have yet been made on names or branding.
Number of hurdles
The deal will require the approval of shareholders, depositors and debenture holders, plus Crown retail deposit guarantee consents given all three are party to the extended guarantee. The merger would also need the Building Society Act to be amended enabling shareholders in listed building societies to have one vote per share, rather than one vote per shareholder, on special resolutions.
The parties are talking to the Government about this. Greenslade said there was little overlap between the three businesses and everyone involved should win from the merger.
“Everyone is going to be better off (by) benefiting from a larger, more sustainable organisation. The key thing in financial services is risk diversity and this creates greater risk diversity so it’s better for everybody whether you’re a lender, shareholder or depositor,” Greenslade said.
The three have signed a memorandum of understanding and hope to have the merged entity trading by early 2011. An application for a banking licence would then be made to the Reserve Bank by mid-2011, with a banking licence seen as adding credibility and reducing the new entity's cost of funds.
The plans envisage a NZX-listed bank headquartered in Christchurch that would aim to double its NZ$2.2 billion asset base within five years through growing family, small business and agricultural business.
The three say listing would open up capital raising options which Greenslade said would be about funding future growth as the combined group would have a tier one capital ratio above 10%. He wouldn’t comment on how much fresh capital the group might need to reach its goal of doubling assets within five years, other than to say he was confident of accessing capital if needed.
He said the three’s loan books appeared to be performing adequately but due diligence between the parties would look more closely at this. The combined group has 30% of its loans in Auckland and 29% in Canterbury where 35% of investors and depositors are also located compared to 23% in Auckland.
The proposal calls for CBS and SCBS to be amalgamated and then acquire Marac. PGC would be the cornerstone shareholder. The group would have 360 staff and 70 customer outlets.
Credit ratings an issue
All three entities currently have speculative, or junk, grade credit ratings and the merged group would need an investment grade rating to obtain a banking licence. Standard & Poor’s noted today if the merger was completed, debt providers could benefit from the bigger and more diversified financial institution.
In a letter SCBS told shareholders it was highly likely the listed entity would be a building society and the value of their shares would be determined by an independent valuer. The merged entity was expected to pay dividends. SCBS CEO Bob Smith told interest.co.nz the building society envisaged being able to offer cheque accounts and credit cards to customers and a national network if the deal goes ahead.
"Our position has always been pretty open," Smith said. "We think that the sector needs consolidation and we’ve been working hard in that regard. To form an entity that has an opportunity to have a banking licence is fundamental to Southern Cross’ strategy."
Meanwhile, Greenslade said nothing and no one was being ruled out in terms of potential future consolidation opportunities. But putting together a "strong, sustainable" platform together was the first priority.
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