Two of the smaller and lower profile finance companies, Avanti Finance and Asset Finance, were standouts in managing their way through the tricky waters of the Crown retail deposit guarantee scheme, according to international credit rating agency Standard & Poor’s.
Peter Sikora, S&P’s director of financial institutions ratings for Australia and New Zealand, told interest.co.nz that the approaches taken by the two has seen them successfully negotiate challenges created by the Crown guarantee scheme. These include walls of debenture maturities, investor uncertainties and enticing interest rates offered to investors by under-the-cosh rivals such as South Canterbury Finance.
Sikora pointed out Avanti, which makes personal, dealer and short-term property loans, didn’t qualify for the extended Crown retail deposit guarantee scheme because its BB- credit rating was below the required BB minimum. The extended guarantee started yesterday, as the initial Crown retail deposit guarantee scheme ended, and runs until December 31, 2011.
Avanti was “a good example of someone who has good strong relationships with a small number of retail investors,” Sikora said.
In its latest prospectus Avanti’s CEO Glenn Hawkins, son of convicted fraudster and Cynotech Holdings CEO Allan Hawkins, says reinvestment rates held above 80% in the five months to August 31. The prospectus also notes that a term loan Avanti’s sister company Galatos Finance has from the ANZ has recently been increased by NZ$10 million to NZ$40 million and extended for two years through until August 1, 2012. The facility is drawn down to NZ$24.5 million, Hawkins says.
Sikora noted Avanti hadn’t grown aggressively. Rather it “sort of churned its balance sheet at a level where the company wasn’t picking up a lot of debenture investors that were rate chasing or jumping from one entity to the other.”
Sikora says the Whakatane-based consumer financier Asset Finance has also managed the Crown guarantee process well. Asset Finance, which has a B credit rating, was accepted into the initial Crown guarantee scheme in November 2008. However, it then withdrew from the guarantee scheme on November 6, 2009 believing it wouldn't meet eligibility criteria for the extended scheme and remaining in the initial scheme would incur costs and potentially lead to a significant concentration of deposits maturing in the months leading up to the end of the scheme. The company returned to profit after quitting the scheme.
Sikora said Asset Finance, led by managing director Clive George, had been quite brave, decided it needed to live without the guarantee and got on the front foot with it.
“They were of the view that they have a good list of loyal depositors and would rather give that fee to them than pay it away to government,” said Sikora.
Equitable Group, which is pulling out of life insurance and focusing all its attention on Equitable Mortgages as it diversifies lending away from the commercial property sector, had been “mildly successful,” Sikora said.
“Equitable’s reinvestment rates (53% to 63% from June to August) are nowhere near what we’re seeing at the other two, which means they’ve got to find new money or liquidate assets to meet their liquidity requirements,” said Sikora. “So there’s a company that will need to continue to actively manage their funding and liquidity profile.”
Debenture investor behaviour to be watched closely
Meanwhile, Sikora said S&P would be looking at debenture investor behaviour in the first quarter of 2011 to get a clearer picture of investor sentiment towards the expiry of the extended guarantee scheme, which seven companies - merger partners Marac Finance, the Southern Cross Building Society and the Canterbury Building Society, plus Equitable Mortgages, Fisher & Paykel Finance, PGG Wrightson Finance and the Wairarapa Building Society - have been accepted into.
Of interest would be whether debenture investors who traditionally invested for 12 month terms looked to continue the habit. S&P would watch to see to what extent this 12 month money stayed as 12 month money, or whether a significant volume of investors choose to renew it for shorter terms, ending before December 31, 2011.
In a Double Shot interview in early June Sikora said he was “very concerned” about the volume of debenture rollovers finance companies were set to face just prior to the end of the Crown retail deposit guarantee scheme. He noted this included about NZ$350 million worth at South Canterbury Finance alone, compared to the NZ$100 million worth of maturities the company would face in a typical month.
South Canterbury Finance was placed in receivership on August 31 after failing to bring in fresh equity to mend a trust deed breach. Another finance company, Allied Nationwide Finance, was placed in receivership on August 20 as its trustee fretted over how the firm would cope with about NZ$70 million worth of debenture stock due for repayment before October 31.
In parent Allied Farmers' annual report, managing director Rob Alloway placed some of the blame for Allied Nationwide's demise at the feet of the Crown guarantee scheme.
"The Retail Deposit Guarantee Scheme, while a welcome safety net for investors, established a new set of challenges for the finance sector," Alloway wrote.
"The influx of new deposits in 2008-2009 at levels never experienced before by finance companies, ultimately led to an oversupply of funding."
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