Broadlands Finance is looking to raise up to NZ$40 million from the public through issuing debenture stock as owner and wealthy car dealer Tony Radisich commits to support Broadlands only until August 20 next year.
(Update clarifies sentence on size of investments taken under the Crown guarantee).
Broadlands, which provides car loans, personal finance, commercial wholesale finance and invoice discounting facilities, is seeking minimum investments of NZ$500. Chief executive Rudi Kats told interest.co.nz the company is aiming to offer investors interest of between 8.5% and 10% per annum.
At its March 31 financial year end, Broadlands whose Crown retail deposit guarantee expires on October 12, had NZ$15 million worth of debentures on issue. The company says it has had an average debenture reinvestment rate of 47% in the five months since March. That compares to a 12 month average, covering the period to March this year, of 58%. The company had cash of NZ$1.2 million at March 31 versus NZ$3.4 million a year earlier.
Broadlands’ new prospectus says as at August 31, 60% of its loans were in default, up from 48% a year earlier. Broadlands' BB- credit rating is too low for inclusion in the extended Crown retail deposit guarantee scheme which begins on October 12, running until December 31, 2011.
Kats acknowledges the NZ$40 million target is pretty optimistic. However, he says the company is looking beyond ma and pa investors to corporate investors and KiwiSaver funds for money.
Until Broadlands got its Crown guarantee Kats says its typical investor put between NZ$10,000 and NZ$60,000 into the company. The guarantee saw investors coming forward with sums of up to NZ$10 million, although the maximum Broadlands took in from any one investor was about NZ$500,000. About NZ$4.5 million of money was expected to be pulled out as the guarantee expires, meaning a lower reinvestment rate.
“People who stick with us are those with long standing relations with us,” says Kats.
Radisich's multi-million dollar 'carrot'
The prospectus notes that Broadlands’ principal source of funds is deposits from stockholders and advances from sole shareholder Radisich, although he doesn’t guarantee the debenture stock.
According to the prospectus Radisich has committed to Broadlands:
• that he will not withdraw support from Broadlands within the 12 months from 20 August 2010; and
• that he will use his best endeavours in giving Broadlands the management and financial support it may require to enable it to pay its creditors as they fall due, in so far as such payments cannot be funded from Broadlands’ own resources, within the 12 months from 20 August 2010.
“(Broadlands’) directors – Radisich, Kats, Nigel Smith and Timothy Storey - are satisfied that Tony Radisich has the resources and ability to meet his obligations under this commitment if called upon by Broadlands,” the prospectus says.
Keeping the auditor happy
Kats says the 12 month commitment from Radisich is for auditor BDO’s purposes, as a guarantee the firm can make bill payments as a going concern over the next year.
“The good man’s got somewhere around $NZ25 million to NZ$30 million of his own money invested in here,” says Kats.
“So that’d be a good carrot, I would imagine, for him to not withdraw his support.”
Radisich and/or his associated company Timberton Investments Limited, have loans to Broadlands worth NZ$6.265 million. He also holds NZ$3.68 million of Broadlands debenture stock. The prospectus notes Timberton has charged interest of 15% per annum on a NZ$5.2 million loan to Broadlands, which ranks behind debentures. The balance of the money has been loaned since March.
Says Kats: “We don’t do related party loans. We’re actually the other way. We get money from related parties rather than lend it to them.”
Kats says as things stand today Broadlands will be able to meet the 8% minimum capital ratio required under Reserve Bank non-bank deposit taker regulations due for introduction on December 1. And he notes that “with a stroke of a pen” NZ$5 million of a Radisich loan could be subordinated to a level where it could be treated as capital, if necessary.
After a tough three or four years that have seen dozens of finance companies fail, Kats says key reasons Broadlands is still around are because it writes consumer loans where “you get money all the time every day,” its shareholder’s support and trustee Trustees Executors, given the Trust Deed doesn’t allow related party lending and has “very strict” ratios.
He also reveals that Broadlands could have brought US vulture fund Fortress Credit Corporation on board in 2007.
“If somebody waves a big $100 million cheque under your nose, then you’ve got to say what am I going to do now? I’m proud to say that we turned that down. That is one of the reasons we’re still here.”
As for 60% of Broadlands' loans being in default, Kats says this just means they’re past due.
“We’re very comfortable,” says Kats.
“I’ve got a provision of $12 million, all provided for in my accounts. So if worst comes to worst I can write $12 million off without the company occurring any losses.”
“But my opinion is that a lot of that impairment will flow back into the company as profit and some tax credit as well.”
As of March 31, 75% of Broadlands’ total loans by dollar value were for motor vehicles or other personal loans, 4% were property mortgage finance and 21% finance provided to business and commercial customers. At the same date, 65% of the company’s loans by value were to customers in the Auckland region, and 20% to people in the Bay of Plenty or Waikato regions. Broadlands held 3,742 loans at March 31, down from 5,259 a year earlier. The average size was NZ$9,448 versus NZ$6,581.
Kats maintains consumer loans are very easy to collect in New Zealand.
“If people don’t pay me I take them to court,” says Kats.
“I get judgment and they pay me. The only way people don’t pay me is if they go bankrupt or they die. New Zealand is surrounded by water (so) eventually I’ll find them.”
BDO’s unqualified opinion in its audit report highlights issues relating to the impairment of goodwill and the NZ$11.8 million finance receivables impairment allowance. Broadlands has goodwill attributed to subsidiary Beneficial Insurance Limited in its balance sheet valued at NZ$7.4 million. BDO says actual events are likely to vary from the key assumptions used in the assessment of goodwill, and if forecasts aren't achieved, the value of goodwill may be impaired.
“The financial statements do not include any adjustments that might be required should the goodwill be impaired,” BDO notes.
It also notes that gross finance receivables are predominately unsecured and rely on future cash flows. The impairment allowance is based on Broadlands’ past experience and expectations.
“Future cash flows and realisation of securities from finance receivables are inherently uncertain and given the current economic climate these uncertainties are fundamental to their recoverability. In the event the actual cash flows do not meet the forecasts, further impairment allowances would be required.”
If the value of goodwill is impaired, or further finance receivable impairment allowances are required, Broadlands’ financial position may be adversely affected which may impact on the company’s solvency or ability to make payments to debenture holders, BDO adds.
And, the auditor also cautions that the expiry of Broadlands’ Crown guarantee on October 12 may lead to a reduction in new investments or debenture reinvestments.
“This could have a material adverse effect on the financial performance and financial condition of the company, including its liquidity,” says BDO.
New funding sources possible
Meanwhile, Kats says additional sources of funding could yet be tapped. He reckons he’s on a roundabout with about 10 side streets, all of them leading to different opportunities and options. Talks are going on with various parties and it is possible something could emerge from these if it is good for Broadlands and Radisich. Ideally Broadlands aims to place itself in the market somewhere between GE Money and the rest.
“(But) I can sit here and say I don’t need to look at a deal and be desperate,” says Kats.
“Broadlands, in one way or another, is going to be around for a long time yet.”
* This article was first published in our email for paid subscribers earlier today.See here for more details and to subscribe.