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Allied Nationwide reinvestment rate slips below 30%

Allied Nationwide reinvestment rate slips below 30%

Allied Nationwide Finance, which pulled its prospectus on Friday as it disputes a potential beach of its Trust Deed with trustee Guardian Trust, had a debenture reinvestment rate of just 29.3% in May. It also must replace an NZ$86.2 million loan facility from BNZ.

(Update corrects S&P rating, adds comment from S&P's Peter Sikora on talks with Allied Nationwide).

This is revealed in a recent investment statement issued by the Allied Farmers subsidiary, which is covered by the Crown retail deposit guarantee scheme until October 12, but whose BB-  B Standard & Poor's credit rating is too low to meet criteria for the extended Crown retail deposit guarantee which runs from October 12 till December 31, 2011.

The details show the intense funding pressures on Allied Nationwide and its parent Allied Farmers as it tries to raise fresh equity from shareholders and satisfy its trustee it has not breached its Trust Deed before its government guarantee expires on October 12. The news will also be another blow for the 16,400 Hanover Finance investors who exchanged their Hanover debentures for more than 1.9 billion shares in Allied Farmers last December.

Peter Sikora, Standard & Poor's director of financial institutions ratings, told interest.co.nz S&P was in discussion with Allied Nationwide's management about a "range of issues" relating to its credit rating. Allied Nationwide's long-term rating was cut to B from BB- in early June and placed on creditwatch negative, implying a one-in-two likelihood the rating could be lowered further within three months. Participation in the extended Crown retail deposit guarantee scheme requires a rating of at least BB.

Meanwhile, the investment statement also reveals that:

- Allied Nationwide Finance expects to recognise a total loan provision expense of approximately NZ$10.7 million for the second half of year ended June 30.

- It does not have sufficient capital to meet the requirements of the new non-bank deposit taker regulations due for implementation in December or January and will need cash or Hanover loans from Allied Farmers.

- The BNZ wants out of its role as funding standby bank for a securitization programme Allied Nationwide took on through its takeover of Speirs Finance. At May 31 NZ$86.2 million worth of commercial paper was on issue under the securitization programme.

Allied Farmers said on Friday that Allied Nationwide Finance’s trustee, Guardian Trust, considered it to be in breach of one of its Trust Deed ratios. The relevant ratio sets out that the company must not let its total liabilities exceed 90% of the value of its total tangible assets.

Allied Farmers said it didn’t agree with the trustee and had presented financial information to the trustee showing it was, and is, in compliance. It expected this position to be confirmed once an audit of its June 30 year results is completed. The Trustee had provided the company 14 days to remedy this position and Allied Farmers would take the necessary steps to resolve the issue “expeditiously.” See more on that announcement here.

Allied Nationwide continued to meet all its financial obligations, including repayment of maturing debentures.

Meanwhile, Allied Farmers last week revealed plans to raise up to NZ$19.3 million through a capital raising including an institutional placement raising NZ$2.25 million at 2.5 cents per new share, and a rights issue to current Allied Farmers shareholders entitling them to 1 new share at 2.5 cents for every 3 shares held. Allied Farmers wants to pay off NZ$19 million owed to Westpac before the end of March next year.

'Less than a third rolling over'

Allied Nationwide says in the investment statement its debenture reinvestment rate fell to 29.3% in May from an average of 48.2% in the six months to April. It attributed this to the fact it isn’t eligible to apply for the extended Crown deposit guarantee scheme.

“This declining rate of reinvestment has been taken into account in the company’s liquidity management and forecasts,” Allied Nationwide says.

“Under these circumstances, it is expected that the net outflow of liquidity to repay secured deposit holders will be funded by existing liquidity, repayments of principal and interest from the company’s borrowers, sale of repossessed security assets and repayment of obligations due to the company from its parent, Allied Farmers.”

As of June 30, 2009 Allied Nationwide had NZ$236.7 million of gross payable borrowings. Of these, NZ$107.7 million was due within 12 months and a further NZ$44.4 million due within one to two years.

The company also notes the Reserve Bank’s “new and more stringent regulations” for non-bank deposit takers such as Allied Nationwide. Expected to be introduced in December this year or January next, one requirement is for a lender to hold minimum levels of capital.

“As at the current date Allied Nationwide does not have sufficient capital to meet the requirements of the regulations. Allied Farmers has agreed to provide further capital to the company to ensure that it will meet the new regulatory capital requirements before the regulations come into effect.”

This could be through cash or the transfer of loans, in exchange for capital, acquired by Allied Farmers from Hanover Finance and (sister company) United Finance in last December's high profile shares for debentures swap. Any transfer would be subject to internal review and all necessary external party approvals.

“If Allied Farmers were not able to provide the company with the capital required to meet the proposed statutory regulations then the company may need to find alternative sources of capital funding,” the investment statement continues.

“ If the company does not have sufficient capital to meet its statutory obligations at any stage then it would no longer be able to accept deposits, and would then need to assess its ability to continue trading.”

'Credit enhancement facility'

Meanwhile Guardian Trust has consented for Allied Nationwide to strike a “credit enhancement facility agreement” of up to NZ$10 million with Allied Farmers. This enables Allied Nationwide to assign impaired loans into the facility and be reimbursed for losses up to a maximum of $10 million. The facility is for a 2 year term, from 30 June last year. At May 31, 2010 Allied Nationwide had assigned losses of NZ$10 million to the facility and issued demands to Allied Farmers for NZ$4.4 million. Of this, NZ$750,000 was due in June and NZ$3.65 million in October.

Allied Nationwide says it was also owed NZ$3 million by Allied Farmers as of May 31, plus NZ$20.8 million under long standing debt factoring arrangements.

“In preparing its liquidity forecasts, the company is reliant on Allied Farmers fulfilling its payment obligations to the company on a timely basis, and externally funding the debt factoring arrangements.”

As of December 31, 2009 the principal amount of secured deposits issued by Allied Nationwide was NZ$194.7 million. It also had NZ$13.5 million of listed perpetual bonds and NZ$2 million worth of unlisted perpetual bonds on issue. Secured Deposits rank in priority ahead of all subordinated notes and perpetual bonds issued by the company.

'BNZ wants out'

As for the securitisation programme, which has standby support of NZ $120 million, BNZ has indicated it doesn’t want to remain as the funding standby bank. Speirs and Allied Nationwide are in negotiations with BNZ on an appropriate transition arrangement to allow Speirs to secure a replacement standby funder or alternative funding for the programme.

“ If Speirs Securities Limited is not able to obtain a suitable replacement standby funder or alternative funding arrangements within the agreed timeframe then the standby support remains in place to maintain the continued funding for all receivables acquired up to May 27, 2010,” Allied Nationwide says.

“The amount of Commercial Paper on issue under the securitisation programme as at May 31, 2010 was NZ$86.2 million.”

Meanwhile a deal trumpeted late last year with Resimac, Australia’s largest non bank issuer of mortgage backed securities, is still yet to deliver anything to Allied Nationwide. The deal sets out that Resimac can be issued with share warrants by Allied Nationwide entitling it, over a five year period, to invest up to NZ$7 million to acquire Allied Nationwide shares and appoint up to three directors to Allied Nationwide’s board. But Resimac is yet to make a move.

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