'Meaningful risk' getting banking licence could take proposed 'Heartland Bank' longer than expected

'Meaningful risk' getting banking licence could take proposed 'Heartland Bank' longer than expected

There's a "meaningful risk" that obtaining a banking licence could take longer than expected for merger partners Marac Finance, Canterbury Building Society (CBS) and the Southern Cross Building Society (SCBS), according to Cameron Partners and Northington Partners, the authors of the independent report on the proposed three way merger.

However, the report's authors say that if what will initially be known as Combined Building Society meets its business plan objectives, "it is likely" that a banking licence will be granted by the Reserve Bank over time. Cameron Partners and Northington Partners say that, based on their discussions with the Reserve Bank and the time taken by previous applicants to get a banking licence, it could take Combined Building Society anywhere between one to two years from the merger date to get a bank licence.

The Reserve Bank only says the length of time it takes to process bank licence applications will vary, and the time taken with any specific application will depend on the complexity of the application. It also notes that unsuccessful applicants can reapply. See more here.

All three merger partners, who combined have about 91,000 borrowers and investors, have been accepted into the extended Crown retail deposit guarantee scheme, which began this month and runs until December 31 next year. They believe that should they gain a banking licence, they'll no longer need the guarantee.

Cameron Partners and Northington Partners conclude that the merits of the merger proposal are "compelling" for each of the three entities relative to each one's standalone outlook.

"We also conclude that the future prospects for each of the merging entities as a standalone entity are limited," the report, contained in a 228 page information memorandum released by the merger partners, says.

"In our view these challenges (of continuing as standalone entities) will be particularly acute for CBS and SCBS."

Seven groups set to vote

The wall of information on the proposed deal has been released ahead of votes next month from seven different stakeholder groups from across the three merger partners and Marac's parent Pyne Gould Corporation (PGC). These include debentureholders, Marac bondholders, CBS and SCBS depositors, PGC shareholders and CBS and SCBS members.

Assuming support from the seven groups is secured, the merger partners then hope to have  Building Society Holdings in place by January 1 next year and listed on the stock exchange during February. From there they hope to secure an investment grade credit rating from Standard & Poor's and aim to apply for a banking licence from the Reserve Bank in July. The merger plans were announced in June with the idea being to create greater scale and tap a bigger retail deposit funding base.

PGC will own 71% of the merged entity, CBS 14.5% and SCBS 14.5%. The plans ultimately envisage a Christchurch headquartered "Heartland Bank" that would aim to double its asset base within five years through growing family, small business and agricultural lending.

Meanwhile, the independent report also notes that in the event of a liquidation of the Combined Building Society, the deposits and bonds will rank equally with any other unsecured debt and behind any secured debt. That means Marac's secured deposit, secured debenture and bond holders will become unsecured deposit or bond holders of the new entity.

"By moving from a secured to an unsecured position, these stakeholders could be worse off," the independent report says.

"However, at June 30, 2010, Marac did not have any unsecured creditors other than trade creditors."

Furthermore, they will rank equally with BNZ and Westpac, providers of a NZ$200 million loan facility to Combined Building Society.

And, the report notes, the immediate practical effect of the change in security position after the merger would be limited because the depositors and bond holders will largely be the same group of claimants in the event of liquidation.

Pro-forma financial information shows the combined group would have recorded a NZ$11.37 million net profit for the June year, down on Marac's NZ$14.29 million profit. The group would've had total assets of NZ$2.2 billion at June 30 and total liabilities of NZ$1.93 billion.

The three partners have allowed up to two years to fully integrate their branding and business operations.

PGC strategic review could see liquidation of remaining assets

PGC chief executive Jeff Greenslade told this afternoon's annual meeting that in PGC's strategic review, as it moves towards establishing "Heartland Bank," it's canvassing diverse options.

These include continuing with PGC as a holding company with a 71% stake in Heartland plus its other current holdings and activities, liquidating PGC through distribution of its assets  "in cash or kind," or perhaps settling on a decision somewhere between these two extremes.

"No decision has been made," Greenslade said. "No particular outcome is pre-determined but we will be thorough and endeavour to be as swift as possible in reaching conclusions."

(Update adds detail on BNZ and Westpac facility and line on 91,000 total borrowers and investors, plus PGC's strategic review options & one to two year estimate of the time needed to get a banking licence).

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I cannot understand why the two building societies have gone with a finance company, rather than one of their own.

Is this because they are more like a finance company in nature, or is it because certain people will be doing really well out of the transaction.

I can beleive that it will take a long time to merge such disparate cultures, and the Reserve Bank is right in taking its time to approve them as a bank.

FYI, I have updated this with comments from PGC CEO Jeff Greenslade at this afternoon's annual meeting on strategic review options for the rest of PGC, excluding Marac.

CBS shareholders  have rocks in their heads if they agree to this merger. Without them there will be no banking license and yet the CBS directors agree to only a 14.5% shareholding for their investors.

Marac was a failure until PGC recapitalised with a $250M capital raising. It's finance company lending is far riskier tahn CBS's - yes it can make good profits but it can also lose many millions.

CBS should merge with Southern Cross and also Nelson Building Society and some of the remaining smaller Nth Island building societies to form the Bank and leave Marac to die - because it will without them - or Marac needs to dilute their shareholding in the proposed new venture and give CBS's shareholders 25% in the new entity.

I agree. I wonder how management will do out of this. Going with a dodgy finance company is madness. And the prices ridiculously low. They are being ripped off!

Bruce Irvine Chair of PGC and Marac has admitted that PGC and Marac were dogs until they raised $250M of new capital a year or so ago.

Why are the CBS directors agreeing to this merger and their 14.5% shareholding when CBS is the basis that they will get a banking license and it's client base ( particularly depositors ) are highly sought after by the current Marac component of the merger - who struggle with investors due to their hsitorically weaker performance.

 

Article as follows

Pyne Gould Corporation Ltd (PGC) is paying shareholders a special fully imputed dividend of 1.5 cents per share on December 3.

The company signalled a review of dividends when it announced its full year result in August and announced the dividend today as it held its annual shareholder meeting.

"The company has a long history of paying dividends and PGC's performance has improved sufficiently to warrant the payment of a special dividend," Chairman Bruce Irvine said.

He told the meeting that in many ways the last year had been historic for the company.

"It has not all been good. We have had to deal with the outfall of the global financial crisis and we have had to further adjust the values on our balance sheet, in particular the property assets.

"We then had to sure up our position through a capital raising that was painful for many of our long standing and loyal shareholders."

The company has reposition in plant and equipment and motor vehicle lending and is now working on merging its finance company unit Marac with Southern Cross Building Society and CBS Canterbury with an intention that the merged entity becomes a bank.

The company was now a financial services group based around Marac, wealth management arm Perpetual, private equity arm Torchlight and had a shareholding in PGG Wrightson Ltd (PGW), Mr Irvine said.

"We continue to be a supportive cornerstone shareholder in PGW as that company also evolves its business. Again we will continue to consider our options with respect to that business moving forward but at present we see further upside value in that investment," Mr Irvine said.

The board saw great potential in the expansion of the Perpetual business but the fit of Torchlight with the company's strategic direction needed to be reviewed 

FYI, I've just added to this that the authors of the independent report on the merger plans estimate it'll take between one and two years, from the date of the merger, to obtain a banking licence.