The 5 Survivability Factors for finance companies

The finance companies that survive this cash crunch are likely to have at least 2 or 3 of what we call the 5 Survivability Factors. The 5 Survivability Factors are;

1. Diversified lending. This is where the finance company lends much wider than through one type of loan to one sector. Finance companies wholly exposed to residential and resort property development are most at risk at the moment. We categorise 3 types of lending or lending in 3 different sectors as diversified. These could range from pure residential lending (existing property lived in by owner) to residential and resort development lending (capitalising property loans via second mortgages or mezzanine loans ie do not pay interest until project built and sold).
2. Diversified funding. This is where a finance company is funded much wider than through retail debenture investments. We categorise 3 different types of debt funding as diversified. This could include debenture funding, a listed bond issue, a US private placement market capital raising or a securitisation programme.
3. A large local bank funding facility. This is the capacity to call on plenty of cash from a large local bank (ASB, BNZ, Westpac, ANZ National) through a pre-arranged overdraft type facility for when things get tough.
4. A strong corporate, individual or family shareholder. This company, individual or family should be sufficiently wealthy to be able to quickly inject enough equity capital if and when required.
5. An investment grade credit rating. This is a Standard and Poor's rating of BBB minus or better.

Here is a chart showing the 20 biggest existing and failed finance companies (ranked from the end of 2005) and detailing how they stacked up. Fuller explanations of the individual company situations are below.

The list does not include all finance companies still raising money through debentures. The chart and the potted profiles should be read together.

Here's how the largest remaining finance companies stack up against these five factors.

All 5 factors

UDC

UDC is owned by ANZ and lends to businesses buying vehicles and equipment across industries and most parts of the country. It is as safe as the bank (ANZ). It has a AA credit rating from Standard and Poors. See news about UDC.

Marac Finance

Marac Finance is owned by the NZX-listed Pyne Gould Corp and has loans ranging across commercial finance (vehicles and equipment), property lending and personal lending. Marac has NZ$480 million of bank funding (a consortium of banks including the big four), is issuing over NZ$100 million of bonds, and has securitised loans, as well as debenture funding. Marac has a BBB minus credit rating from Standard and Poors. See news about Marac.

South Canterbury Finance

South Canterbury is controlled by wealthy South Island businessman Allan Hubbard and his Southbury Group, which owns signficant dairy farming and other assets in his own right. South Canterbury has a loan book diversified across residential property, rural lending and personal lending and across most of the country. It’s funding is diversified across several areas apart from debenture funding, including money raised from the US private placement market, two local bond issues and a NZ$150 million bank funding line from Commonwealth Bank of Australia and BNZ, which it has not been used yet. It also has only a small exposure to Auckland, New Zealand’s slowest growing big city and the city most affected by the property slump. Most of South Canterbury’s lending is in provincial cities and towns, and mostly in the South Island. See news about South Canterbury Finance.

4 Factors PGG Wrightson Finance

PGG Wrightson Finance is owned by the NZX Listed PGG Wrightson and lends across various parts of the rural sector, including real estate, livestock, machinery and grains. It has issued bonds and has a NZ$100 million bank credit line from ASB to complement its debenture funding. It does not have an investment grade credit rating. See news about PGG Wrightson Finance.

NZF Money

NZF Money is part of the NZF group that includes Mike Pero Mortgages, Finance Direct and NZ Mortgage finance. It lends to residential property owners and investors, but does little development or project lending. It has a bank funding line from Westpac, has securitized some loans and raises money through debentures. It therefore has diversified funding and its Huljich family shareholders count as a wealthy owner able to inject capital if needed.

3 Factors Fisher and Paykel Finance

Fisher and Paykel Finance lends across a range of consumer and equipment finance sectors and has a consortium of four banks, including ANZ, CBA, BNZ and Westpac, who provide a funding line. It is owned by NZX listed Fisher and Paykel Appliances. It does not have an investment grade credit rating. See news about Fisher and Paykel Finance

Speirs Finance

Palmerston North based Speirs Finance is owned by Speirs Foods and has diversified funding across a NZ$150 million securitisation facility backed by BNZ, its debenture funding and a non-redeemable perpetual bond. It is focused on asset finance, although its loans are spread across industries and regions. It doesn't have a credit rating for its debentures, but its securitisation facility has an A1 rating from S&P. See news about Speirs Finance.

2 Factors Allie Nationwide Finance

Allied Nationwide has diversified commercial, property and rural lending. It is owned by the Taranaki-based and NZX listed Allied Farmers Group, but is wholly dependent on debenture funding and has not disclosed a bank funding line in its prospectus. It does not have a credit rating. See news about Allied Nationwide Finance.

Equitable Mortgages

Equitable Mortgages is focused on property lending, but unlike other property finance companies, has first mortgages on commercial lending rather than second mortgages on property developments. It has a BB plus credit rating from Standard and Poor's, which is one notch below investment grade. It has the backing of the Rich List Spencer Family, who once owned Caxton Paper and now has a range of assets here and overseas that provide substantial backing, according to Standard and Poors. It has a NZ$125 million medium term facility it can use to supplement debenture funding. See news about Equitable Mortgages.

1 Factor Mascot Finance

Timaru and Christchurch based Mascot Finance has a relatively diversified lending book covering property, commercial asset finance and personal finance, although more than 50% of its book is in property. It does not have a large corporate or family backer (it is owned by Christchurch businessman Ken Lane) and is largely dependent on retail debenture funding. It does not have a large bank funding line. See news about Mascot Finance.

No factors Hanover Finance

Hanover Finance has the backing of rich listers Eric Watson and Mark Hotchin, but they have not shown any signs of injecting capital in the last year. We have not judged them to be a substantial corporate backer with easy access to liquid assets or the ability to raise capital from listed shares. The owners of Hanover have withdrawn NZ$99.8 million in dividends from Hanover Finance in the last two years. Hanover is heavily exposed to real estate development (83% of its loan book) and relies almost completely on debenture funding. It does not have a local bank funding line and has also used vulture fund Fortress Credit Corp for funding. Hanover has a BB plus long term credit rating from Fitch, which is not considered investment grade. It is the highest non-investment grade rating in the Fitch scale. Hanover has a "B" short term rating from Fitch. "Hanover Finance’s ‘B’ short term relates to obligations of less than 12 months and under the Fitch rating scale indicates a minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions," Hanover says on its website. See news about Hanover Finance

Strategic Finance

Strategic Finance is exposed completely to residential property developers, has a (not strong) corporate backer in Allco HIT, does not have a local bank funding line and is exposed almost completely to retail debenture funding. Allco Finance Group, which owns a stake in Allco HIT, is trying to renegotiate its own funding with its banks in Australia and is not in a position to inject capital into Strategic if needed. Strategic has used up all its NZ$75 million funding line from HBOS International (Halifax Bank of Scotland), which does not rank as a local bank, but has said it is confident it can repay maturing debentures from loans as they mature. It has more than four times as much maturing from loans in the next three months than the cash needed to repay debentures maturing over that period. More than 80% of its loans are capitalising loans and it is currently in the process of looking for a strong corporate backer. See news about Strategic Finance. One loan to the Hilton Denarau project in Fiji is worth more than 60% of its equity.

How the big failures stacked up 1 Factor Dorchester Finance

Dorchester was NZX listed and had a diversified lending portfolio ranging from property to motor vehicles to consumer lending. However, it too was dependent on debenture funding and had no local bank funding line and no investment grade credit rating. It's major shareholder was St Laurence Ltd, which had Dorchester as its major shareholder. They were like mountain climbers roped together that both fell when one (St Laurence) slipped. See news about Dorchester Finance No factors Bridgecorp (In Receivership) Bridgecorp was focused on property development lending, had no local bank funding line, was concentrated on debenture funding, had no corporate backer and had a credit rating that was not investment grade. See news about Bridgecorp.

MFS Pacific Finance (OPI Pacific Finance)(In Moratorium)

MFS Pacific was owned by a weak corporate (MFS) and focused on property development and sub prime mortgages in Australia. It did not have a local bank funding line and was dependent on debenture funding. See news about MFS Pacific. Lombard Finance (In receivership) Lombard Finance was utterly exposed to property development lending, had no bank funding line, was totally dependent on debenture funding, had no strong shareholder and no credit rating. See news about Lombard Finance.

St Laurence (Has stopped borrowing and is negotiating repayment schedule)

St Laurence was heavily exposed to property development and real estate lending, did not have a local bank funding line, was dependent on debenture funding and its corporate backer was fellow finance company Dorchester Pacific. See news about St Laurence.

Dominion Finance (Has defaulted on its payments and is negotiating a moratorium)

Dominion Finance was very exposed to second mortgages and mezzanine finance on property developments, did not have a local bank funding line and was dependent on debenture funding. Its major shareholders, Terry and Ann Butler, were either not able or willing to inject fresh capital when push came to shove. It did not have an investment grade credit rating. See news about Dominion Finance.

Capital and Merchant (In receivership)

Capital and Merchant was completely exposed to property lending, had no corporate backer, relied totally on debenture funding and had no investment grade credit rating. See news about Capital and Merchant. Provincial Finance (In receivership) South Island based Provincial Finance was heavily exposed to second hand car loans in South Auckland and some property, did not have a strong shareholder, did not have a local bank funding line and was almost completely dependent on debenture funding. See news about Provincial Finance.

Nathans Finance (In receivership)

Nathans Finance was exposed to equipment finance, and in particular finance for its main shareholder, vending machine company VTL. This proved a toxic mix. It had no local bank funding line and was dependent on debenture funding. See news about Nathans Finance