Rural lender PGG Wrightson Finance has recorded a near threefold jump in its half-year credit impairment provision and saw the terms of many of its 90 day past due assets lengthen in the six months to December as high debt levels continue to take a strain on the rural sector.
The finance company, covered by the extended Crown retail deposit guarantee scheme until December 31, reported its half-year results today alongside parent PGG Wrightson's NZ$5.9 million loss. PGG Wrightson Finance said profit for the six months to December 31 last year fell to NZ$1.3 million from NZ$3.3 million in the same period of 2009. However, when other income, including that related to hedges and tax, is factored in, total comprehensive income rose to NZ$1.2 million from NZ$651,000.
Net interest income rose to NZ$12.3 million from NZ$11.6 million.
PGG Wrightson also released its target company statement on the partial takeover offer from China's Agria Corporation. Agria is seeking 38.3% of PGG Wrightson's shares at 60 cents a share to lift its stake to 50.01%. The target company statement says that PGG Wrightson is undertaking a strategy to "review the divestment" of PGG Wrightson Finance’s finance book.
"However, this initiative has been under consideration for some time, and is unconnected to the (Agria) offer."
Credit impairment provision jumps
PGG Wrightson Finance's provision for credit impairment surged to NZ$20.1 million from NZ$7.4 million in the same period of 2009. The net carrying amount of impaired assets almost doubled to NZ$56.4 million from NZ$29.8 million a year earlier and was up from NZ$53.1 million at June 30, 2010.
At NZ$44.8 million, total past due assets were up NZ$3.75 million year-on-year. Although just NZ$5.5 million worth of loans were past due by between 91 and 180 days at December 31, 2009, this had swelled to NZ$26.7 million at December 31 last year. And the value of assets past due by more than 365 days stood at NZ$10.4 million compared to NZ$4.7 million a year earlier.
The December 31 gross amount of past due assets rose to NZ$121.3 million - equivalent to nearly a quarter of its total NZ$525.8 million of assets - from NZ$87.9 million six months earlier. The company says collateral held against past due loans includes properties, deposits, livestock and shares.
PGG Wrightson Finance's total loans and receivables stood at NZ$491.8 million at December 31, down from NZ$530.1 million at June 30 and NZ$551.3 million at December 31, 2009.
According to Reserve Bank data, total rural sector debt stood at NZ$47.8 billion in December against a backdrop of lower rural land valuations. And although the latest farm sales figures from the Real Estate Institute of New Zealand (REINZ) showed a big rise in the number of dairy farm sales in December and slightly higher farm prices, the REINZ attributed the pick up to banks re-entering the market in support of the bigger deals and vendors leaving in finance to help secure deals.
'Legacy of problem loans' across finance company sector
PGG Wrightson, and broader finance company problem loan issues, featured in KPMG's Financial Institutions Performance Survey - Non-banks Review of 2010 which was released late last year. KPMG noted a "legacy of problem loans" held by the finance company sector were proving difficult to dispose of or recover despite improvements to profitability and margins.
KPMG pointed out four companies, which combined represent 39% of the total finance company sector's assets - PGG Wrightson Finance, the now in receivership Equitable Mortgages, Marac Finance, and UDC Finance, reported an NZ$111 million annual increase in impaired loans. This essentially doubled the level of such loans year-on-year.
"While the four companies operate in somewhat different segments of the industry, including automotive and equipment financing, property funding, rural exposures and general asset financing, the trend across these four companies points to a legacy of problem loans which are proving difficult to dispose of or recover," KPMG said.
Wait and see on Agria offer
An independent report on the merits of the offer by Grant Samuel & Associates assesses the underlying value of PGG Wrightson shares to be in the range of 53c to 65c each. Given PGG Wrightson has now received an approach from a second potential bidder, the company says shareholders' should wait until near the close of the Agria offer, currently April 15, before deciding whether to sell or not.
Meanwhile, Building Society Holdings, the new entity created by the merger of Marac Finance, CBS Canterbury and the Southern Cross Building Society, is interested in buying PGG Wrightson Finance should it be put on the block amid the shake-up underway at PGG Wrightson.
(Update adds detail from target company statement).