By Gareth Vaughan
Consumer lender Geneva Finance says a third capital reconstruction since a 2007 moratorium is needed largely because it owns its head office in Auckland's Mt Wellington and has an investment in a Hamilton medical centre.
Geneva is proposing a debt for equity swap that would see its 75 subordinated noteholders swap NZ$4.4 million worth of subordinated notes for 88.7 million shares and is offering its debenture holders 97.4 million shares in exchange for their NZ$4.9 million March 31, 2015 scheduled debenture principal repayment. Should the deal go through, Geneva's existing 80.5 million shares on issue would balloon out to 266.6 million. See full details here in Geneva's prospectus and what trustee Covenant Trustee Company has to say about the proposal here.
The debt for equity swap is proposed, Geneva says, because although it has a capital adequacy ratio above the Reserve Bank's 8% minimum, it's below the guideline minimum of 10% stipulated by its Unsecured Deposits and Subordinated Notes Trust Deed of 10%, and because bad loans made before April 2008 have proven more difficult to collect than the board had envisaged.
"To a large extent" the problem stems from the fact Geneva owns its head office in Mt Wellington, plus an 11% stake in Hamilton medical centre Angelsea Medical Properties.
"These assets carry a higher equity requirement under the Reserve Bank's capital adequacy ratio calculations than the company's finance receivables assets,' says Geneva.
Management has looked into selling the properties and says doing so at book value would see its capital adequacy ratio stabilise.
"But the perception of Geneva in the current market climate is such that it is unlikely that fair value would be achieved and the result would be a significant write off and a risk of there being a breach of the minimum 8% capital adequacy ratio."
On top of this Geneva says it's still incurring losses stemming from the exit of what it calls its old business model.
"Should the company fall below the 8% equity level the directors believe that it is highly likely that a receiver would be appointed (by its trustee)," says Geneva.
The company also says its directors have explored several other options including new equity investments, a merger with other financial institutions and continuing to market its property holdings for sale.
"The directors' assessment of the situation is that while these options may eventually come to pass, they are unlikely to do so unless Geneva is able to move out of the 8% to 10% Reserve Bank capital adequacy range."
Geneva entered a moratorium in November 2007 owing a net NZ$132.4 million to investors. It says total payments to subordinated noteholders per NZ$1,000 of notes held at October 31, 2007 comprise NZ$239.72 in interest plus Geneva shares with a current market value of NZ$86.5, totalling NZ$326.22, which is equivalent to 32.6% of principal.
And Geneva says it has repaid NZ$111.3 million of debenture holders' principal and interest payments since entering the moratorium owing debenture holders a net NZ$132.4 million. This includes interest payments, including to the Bank of Scotland (BOS), of NZ$33 million and principal repayments to debenture holders of NZ$59.4 million.
Geneva investors did, however, approve a capital reconstruction plan in April 2008 that saw share capital increase by NZ$22.7 million through debt conversion by debenture holders and noteholders, plus additional cash subscriptions.
And in March last year Geneva investors voted through an interest bearing repayment plan, which extended the period for full repayment of outstanding principal of the moratorium stock by 30 months to March 31, 2015 from September 30, 2012. This also meant the security stock held by BOS didn't have to be repaid until March 31, 2015 instead of by April 30 this year, and the full repayment of outstanding notes was also deferred by 30 months, to April 30, 2015. See previous Geneva story.
A report by Northington Partners, hired by Covenant Trustee Company, to compare the capital reconstruction proposal with a four year wind down, says Geneva is forecast to owe BOS NZ$24.2 million as of March 31 this year. Northington forecasts a NZ$5.2 million shortfall in net assets in a wind down scenario and says noteholders would be very unlikely to receive any principal or accrued interest under a wind down.
As of March 31 Geneva is forecast to have NZ$83.6 million in gross loans with a NZ$29.7 million provision for loan arrears.
Geneva has a CCC credit rating from Standard & Poor’s, which S&P says makes it “currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments.”
Geneva provides hire purchase finance and personal loans secured by registered security interests over personal assets such as cars, furniture, appliances and mortgages on residential property. The company tightened its lending criteria in 2008, which it says means its client profile now has higher affordability and credit performance, and greater residence and employment stability. It says the difficulty in collecting bad loans has been compounded by the continued effect of the recession and unemployment of people who pre-April 2008, comprised the majority of Geneva's borrowers.
Subordinated noteholders and shareholders will vote on the proposal at a March 31 meeting and debenture holders' applications are due in by April 8.