Pyne Gould Corporation (PGC) might look to offload the George Kerr chaired Torchlight Investment Group as it pushes ahead with plans to merge its finance company Marac with two building societies and seek a banking licence.
PGC managing director Jeff Greenslade told interest.co.nz the group is reviewing whether Torchlight fits with its strategic direction.
“We are conscious of the fact that we are up against a lot of confusion in the marketplace about what Torchlight does,” Greenslade said.
He noted "two schools of thought" existed on whether private equity fits within a banking environment or not.
“We just need to make sure that if we are going to have private equity, that’s the right thing to be doing,” Greenslade added.
PGC wants to merge Marac Finance with the Canterbury Building Society (CBS) and Southern Cross Building Society (SCBS) to create greater scale and tap a bigger retail deposit funding base, seek an investment grade credit rating from Standard & Poor's (S&P) and bank licence from the Reserve Bank.
The plans envisage a NZX-listed "Heartland 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 lending.
The proposal calls for CBS and SCBS to be amalgamated and then acquire Marac. PGC would be the cornerstone shareholder.
Kerr a Machiavelli fan
Greenslade said financially Torchlight, chaired by Kerr who is a 14.8% PGC shareholder and a director, had been a great success. PGC’s Perpetual Group, which includes Torchlight, produced NZ$6 million in June year net profit, up from NZ$4.7 million last year.
The media shy Kerr is the great-great-grandson of F H Pyne, who launched one of PGC’s founding businesses, Pyne & Co, in 1887. According to a PGC newsletter Kerr enjoys reading and usually has four or five books on the go.
The newsletter notes Kerr's favourite quote from the 1532 book The Prince, by Niccolò Machiavelli, is "very relevant" in today’s market. It is: “Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.”
Charges over South Canterbury Finance assets
Torchlight recently raised NZ$150 million as it eyes “counter cyclical” investments in the infrastructure, financial services and real estate sectors and now manages a total of NZ$315 million. Torchlight contributed NZ$15 million towards a NZ$100 million loan it arranged for beleaguered South Canterbury Finance (SCF) earlier this year. The loan ranks ahead of SCF’s debenture holders under the finance company's trust deed and means Torchlight has a prior charge on up to NZ$151 million or 7.2% of SCF's assets.
Despite the financial success of Torchlight, Greenslade said PGC was cognisant of the fact that the market "is a little bit confused about Torchlight on the one hand and Heartland on the other.” PGC's board had an open mind going into the Torchlight review and there was no set timeframe on when it would reach a conclusion.
“I don’t want to create the impression that we’ve got any preconceived outcome," Greenslade said, "so there’s a whole lot of things we could look at including keeping it and/or repositioning it.”
“We have no particular solution or outcome in mind.”
Meanwhile, the assets PGC does plan to tip into the Heartland Bank include Marac and Marac Insurance. Greenslade said the group also wants to align the wealth management arms of Perpetual with the Heartland Bank. How this was structured was yet to be decided but might involve a strategic alliance.
All Marac’s assets at the time of the merger would flow through to Heartland Bank, Greenslade added. The finance company reduced its property loan exposure to NZ$147 million at June 30 from NZ$374 million a year earlier, but says it still has “pockets of risk” in the portfolio after booking NZ$10.7 million worth of property impairments over the June year. Marac stopped writing property loans some time ago.
Greenslade said how much of Marac’s remaining property book went through to the Heartland Bank was yet to be determined.
Marac offloaded NZ$175 million of non performing loans to fellow PGC subsidiary Real Estate Credit Limited last year. These are now valued at just NZ$78.3 million and delivered an annual loss after tax of NZ$1.8 million.
No plans to raise capital
The initial Heartland Bank plans call for an NZX listed non-operating holding company to oversee the operating company, a building society.
Greenslade said the three partners believed they would have enough capital to meet the requirements of obtaining a banking licence and investment grade credit rating. All of Marac, CBS and SCBS all currently have speculative, or "junk," ratings.
“We’re confident that we will have enough capital,” said Greenslade. “I can’t disclose yet what that number is because that’s bound up in the process we’re going through in terms of valuing the various components of what will go in the Heartland Bank.”
But there were no capital raising plans at this stage.
“Our priority is to get ourselves together first and then take stock.”
He believed sign-off from the PGC, CBS and SCBS boards wasn’t far away at which point they would ink a merger implementation agreement. Approval from the three parties shareholders, depositors and bondholders would then be needed with voting meetings likely in November.
Meanwhile, Greenslade said there was constant dialogue and contact with both the Reserve Bank and S&P.
“We’re not hearing anything negative,” said Greenslade. “We’re hearing encouraging noises (from S&P) but nothing set in stone and the same would go for the Reserve Bank.”
He said July remained a realistic target for receiving a banking licence.
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