BNZ and Westpac could have say in 'Heartland Bank' dividend payments

BNZ and Westpac could have say in 'Heartland Bank' dividend payments

By Gareth Vaughan

The entity hoping to become the country’s next bank could have its ability to pay dividends to its thousands of shareholders restricted by loan deals with two of the existing big banks.

Building Society Holdings, the proposed “Heartland Bank” created by the merger of Marac Finance, CBS Canterbury and the Southern Cross Building Society, has signed up for a NZ$200 million bank loan from BNZ and Westpac. The facility is designed to provide liquidity support for the new entity’s loan portfolio and is so far undrawn.

The prospectus for Combined Building Society Holdings, wholly owned by the NZX listed Building Society Holdings, and additional information released on the merger note the BNZ and Westpac loan facilities could restrict the payment of dividends.

Payment would be restricted if the aggregate amount of dividend in any financial year exceeded the after tax profit for the previous financial year or if an event of default, or potential event of default, occurs or would occur as a result of payment of the dividend.

Bruce Irvine, chairman of both the establishment board overseeing the “Heartland Bank” merger  and Marac’s parent Pyne Gould Corporation (PGC), told interest.co.nz last September the new entity would have the potential to be able to pay shareholders regular dividends. Irvine said this forecast was based on a "detailed business case" prepared by First NZ Capital.

The business case indicated “sufficient headroom” for the Establishment Board to be positive about the prospect of regular ongoing dividends, Irvine said.

Pro-forma financial information shows Building Society Holdings would have recorded a NZ$11.37 million net profit for the June 2010 year, below Marac's NZ$14.29 million profit. PGC recently issued about NZ$1.6 million worth, or up to 4.4 million new shares to executives and senior managers to reward them for helping push through the merger. Irvine said the share scheme would have a NZ$1.7 million impact on net profit after tax in the 2011 financial year, with PGC taking a NZ $1.4 million hit and Building Society Holdings impacted to the tune of NZ$300,000 this year and NZ$100,000 next year.

The Christchurch headquartered Building Society Holdings, which has a BBB- investment grade credit rating from Standard & Poor's and is covered by the extended Crown retail deposit guarantee scheme until December 31, listed on the share market on February 1. It plans to apply to the Reserve Bank for a banking licence in July and aims to double its NZ$2.2 billion asset base within five years through growing family, small business and agricultural business. If it succeeds in obtaining a banking licence, Building Society Holdings says it'll then provide the only opportunity for New Zealand investors to own shares in a bank focused on the home market.

So far 28% of the group's shares are in free float with PGC holding 72%. However the bulk, or potentially all, of PGC's holding is set to be distributed to PGC's shareholders in the second quarter creating a shareholder base of about 8,000.

As of January 31, Building Society Holdings, which has over 91,000 investors and borrowers, had NZ$1.559 billion worth of retail deposits, NZ$104 million worth of retail NZX listed bonds, a NZ$275 million securitisation programme, the NZ$200 million undrawn loan from BNZ and Westpac, and cash and liquid assets of about NZ$300 million giving it liquidity equivalent to 32% of total liabilities.

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Completely bog standard lending terms and conditions....  

Do any of you guys at interest.co.nz actually know how anything works??

This is so far from 'news' it isn't funny....  a lender with security has a prior claim... end of story...  shareholders get dividends paid from what is left over... and of course a lender is going to restrict the ability to pay out more than 100% NPAT, because that is in effect a repayment of capital and reduces the security value against the loan!!!

I mean... come on!!!  This even complicated enough to get to Economics 101!!!

Sure Horace. But it's the irony of other banks potentially having a say in what a would-be bank might pay in dividends to its shareholders.

Also it's possible that the new entity might have considered paying dividends in excess of its after tax profit from the previous financial year if the company has a good year after a tough one (or made a loss) the year before...And some companies have been known to use debt to fund dividend payments.

By the way Horace, you've had a lot to say about "Heartland Bank" over the past few months. Any interest to disclose?

Ouch Heartland being held by the short and curlies by the aussie banks. Kiwibank a much better option in my view.