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Proposed 'Heartland Bank' eyes NZ$500 mln securitisation programme, up to 150 basis point drop in cost of funds

Proposed 'Heartland Bank' eyes NZ$500 mln securitisation programme, up to 150 basis point drop in cost of funds

By Gareth Vaughan

The proposed 'Heartland Bank' hopes to establish a NZ$500 million programme securitising car loans and residential mortgages and could see its costs of funds reduced by up to 150 basis points if it achieves an investment grade credit rating and bank licence, the independent report on the merger plans says.

The report, by Northington Partners and Cameron Partners, says it's difficult to accurately assess the quantum of potential funding cost savings, what will initially be known as Building Society Holdings, could achieve should the merger go through. This is due to uncertainty over how long it could take to get an investment grade credit rating from Standard & Poor's and bank licence from the Reserve Bank, with the latter estimated at between one and two years, and the lack of observable funding cost data in New Zealand for directly comparable entities.

"(But) based on the limited information that is available, we believe an overall reduction of between 50 basis points and 150 basis points may be achieved by Combined Building Society if it achieves a rating upgrade and a bank licence," the report says.

This assessment is based on a review of retail deposit rates over the past five years, a comparison of funding rates between entities with different credit ratings, a comparison of funding rates between banks and non-bank deposit takers, and an estimate of the Crown retail deposit guarantee scheme's impact on funding rates.

The independent report is contained in a 228 page information memorandum released by the merger partners. The plans, to merge Pyne Gould Corporation (PGC) subsidiary Marac Finance, the Canterbury Building Society (CBS) and the Southern Cross Building Society (SCBS) ultimately envisage a Christchurch headquartered 'Heartland Bank' that would aim to double its NZ$2.2 billion asset base within five years through growing family, small business and agricultural lending.

Taking into account an 11.56% stake in CBS held by SCBS, CBS shareholders will own 13.04% of the merged Combined Building Society, SCBS shareholders 14.75% and PGC 72.21%.

The information memorandum comes ahead of votes from seven stakeholder groups across the three merger partners and PGC this month. These include Marac 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 aim  to secure an investment grade credit rating and aim to apply for a banking licence in July.

At BB+ Marac's credit rating, which is on CreditWatch Positive, is one notch below investment grade. CBS also has a BB+ rating and SCBS a BB one.

Plans for growth of Marac & CBS's securitisation programmes

The independent report notes Marac and CBS's existing securitisation programmes will be continued and grown by the merged group. As of June 30, finance receivables of NZ$149 million were securitised by the merger partners through Marac's drawn NZ$150 million motor vehicle facility and CBS's NZ$75 million residential mortgage backed security (RMBS) facility.

Westpac has agreed to provide a NZ$200 million standby facility to support the securitisation programmes and CBS's NZ$75 million securitisation warehouse.  The merged group will be able to sell up to NZ$275 million of qualifying receivables into special purpose securitisation trusts.

"Combined Building Society is targeting a NZ$500 million (securitisation) programme, including a NZ$200 million motor vehicles facility and a NZ$300 million RMBS facility," the independent report says.

The merged entity will also have a new NZ$200 million standby bank liquidity facility with BNZ and Westpac to provide support for its loan portfolio. Divided into two even tranches, one matures on March 31, 2012 and the other on March 31, 2013. Marac currently has a NZ$200 million syndicated bank facility provided by lead banker ANZ, plus Westpac, BNZ, ASB's parent Commonwealth Bank of Australia and HSBC.

A NZ$30 million standby facility CBS had with Westpac was cancelled after CBS set up a funding warehouse and RMBS programme with the same bank earlier this year.

Competitor response seen as limited

The proposed 'Heartland Bank' will hold less than 1% of New Zealand's financial systems assets. It plans to position itself as an alternative provider to the main banks rather than attempting to fully capture all of a customer's business from its primary existing bank. 

"We expect that this approach should reduce the likelihood of direct competitor responses," Cameron Partners and Northington Partners say.

As of June 30 the merger partners collectively held cash and liquid assets of about NZ$300 million, retail deposit and debenture funding of NZ$1.56 billion, NZX listed Marac bonds worth NZ$104 million, plus Marac's NZ$5 million drawn bank facilities and NZ$195 million undrawn standby facilities.

Should it obtain a banking licence the 'Heartland Bank' ought to be able to meet the Reserve Bank's core funding ratio (CFR) relatively comfortably. The CFR sets out that banks must obtain at least 65% of their funding from retail deposits and bonds with durations of more than 12 months. As of June 30 Marac was getting 61.5% of its total funding from retail sources, CBS 94.2% and SCBS 99.9%.

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securitisation of residential mortgages worked great in the states, why not here too? hay they're even thinking about chucking in car loans, i wonder if that will cover used imports... based on past experience S&P and Moodys will probably rate the whole lot AAA.


Hamrod, will Rob Alloway and John Loughlin be appointed as independent directors?


Didn't those two just seagull allied farmers?


Anyone putting a cent into this needs a frontal lobotomy.


Why are the CBS shareholders agreeing to this merger?

They are the strongest component of the three parties merging. Without CBS they have no banking license. Both Marac and SCBS have had huge losses and writeoffs and are desperate for the merger.

Even the new Chair of Heratland Bank , Bruce Irvine has recently admitted that Marac only survived becaiuse of a $250M capital raising that also decimated the value of the original loyal shareholders. many old Canterbury families lost millions of legacy dollars. these people were very loyal to PGC and Marac over many years and they bore the brunt of the losses.

So the track record of these organisations with the exception of CBS is not flash. The CBS shareholders should vote against this deal before it's too late and they become the next victims.

Up until very recently Heartland Bank had George Kerr well intrenched in the organisation. If iot wasn't for his well publicised indiscretions with SCF, he would still be being supported by Bruce Irvine and his band of merry men.