The PGG Wrightson Finance-Heartland NZ money go around sees ASB as a beneficiary

The PGG Wrightson Finance-Heartland NZ money go around sees ASB as a beneficiary

By Gareth Vaughan

PGG Wrightson plans to lend up to NZ$100 million of the up to NZ$110 million received for selling its finance company subsidiary to Heartland New Zealand to a newly established subsidiary that will buy dud loans the bank wannabe doesn't want to inherit, and will use another NZ$10 million to subscribe for shares in the capital raising Heartland NZ plans to help fund the deal.

The deal also sees ASB wind up a risk sharing arrangement with PGG Wrightson Finance, which is buying it back from ASB at book value. This is likely to amount to tens of millions of dollars, which PGG Wrightson will fund through a loan from Heartland NZ.

These details are revealed in documentation released on the deal, which was announced yesterday.

Heartland NZ, a building society created in January through the merger of Pyne Gould Corporation's Marac Finance, CBS Canterbury and Southern Cross Building Society, will pay about NZ$102 million for rural lender PGG Wrightson Finance, based on its net assets as of August 31 this year. PGG Wrightson says the ultimate price could vary from NZ$90 million to NZ$110 million. As of December 31, the book value of shareholders' equity was NZ$101.175 million giving the business a 2.7% return on equity.

Heartland NZ's subsidiary, Heartland Building Society, will actually buy PGG Wrightson Finance's ordinary shares. Heartland NZ, which plans to apply to the Reserve Bank for a banking licence in the second half of 2011, wants PGG Wrightson to keep some of its finance company's loans, which are mainly impaired or restructured.

The excluded loans portfolio is made up of 18 individual loans with an estimated net value of about NZ$90 million and includes PGG Wrightson Finance's 4% share of the more than NZ$200 million worth of loans from it, Westpac and Rabobank to the in-receivership Crafar farms group. These loans will, prior to the sale, be sold by PGG Wrightson Finance to a newly established PGG Wrightson "special purposes vehicle" at their net book value. Here, the aim will be to "realise or refinance" the problem loans. 

The NZ$85 million to NZ$100 million purchase price for these troubled loans will be funded by PGG Wrightson from the proceeds of the PGG Wrightson Finance sale.

"Of the remaining funds, if any (received for selling PGG Wrightson Finance), up to NZ$10 million will be used by PGG Wrightson to subscribe for ordinary shares in Heartland."

Heartland NZ hopes to raise at least NZ$55 million in a capital raising to help fund its first acquisition.

The deal, tipped by interest.co.nz last month, is part of Heartland NZ's ultimate aim to become a Christchurch-headquartered bank that doubles its NZ$2.2 billion asset base within five years through growing family, small business and agricultural lending. In April the entity, then known as Building Society Holdings, said it had liquidity of NZ$590 million comprised of NZ$285 million in cash, NZ$200 million of committed undrawn bank facilities with BNZ and Westpac, and NZ$105 million of unutilised securitisation facilities (with NZ$169 million utilised through motor vehicle and residential mortgage backed security programmes with Westpac).

Heartland NZ, which has 13% of its total receivables book exposed to Christchurch, has said it expects no material financial impact from the February 22 Christchurch earthquake.

Full recourse & 3 year guarantee over NZ$30 million of loans

PGG Wrightson will also provide Heartland NZ with full recourse over a further eight loans with a current book value of about NZ$30 million. The rural services provider will guarantee these loans for three years from the date of the sale's completion. Heartland NZ can require PGG Wrightson to buy any guaranteed loan that has become impaired at the full face value of the loan plus interest. PGG Wrightson, meanwhile, has the right to require Heartland to sell any impaired loan at its face value plus interest.

PGG Wrightson Finance's most recent financial results, for the six months to December 31 last year , showed profit down to NZ$1.3 million from NZ$3.3 million in the same period of 2009 as its credit impairment provisions rose almost threefold to to NZ$20.1 million from NZ$7.4 million. Its 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. 

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, 2010. Of the total book, 71% was in the South Island as of December 31 with 56% in the sheep and beef sector and 25.8% in the dairy sector. A total of 86.6% of the book is secured through a first mortgage.

As of January 5, Heartland NZ had 51% of its NZ$1.7 billion worth of net receivables in the South Island, of these 40.6% was secured by a first mortgage and 43.4% through the personal property security register.

ASB's cut

Meanwhile, a risk sharing agreement PGG Wrightson Finance has in place with ASB Bank will be terminated and repurchased at its book value, which was NZ$54.5 million at May 31, by PGG Wrightson Finance from ASB. The arrangement sees PGG Wrightson Finance sell a portion of the income stream from loans to customers "with certain characteristics" to ASB. The sold element of the loan isn't held on the finance company's balance sheet.

"With the exception of NZ$15.3 million of the re-purchased loans that are impaired and will become loans excluded from the deal, the repurchased loans will form part of the PGG Wrightson Finance assets that are included in the proposed transaction. To assist PGG Wrightson Finance meet its repurchase obligations, Heartland NZ will provide it with a loan equal in amount to the book value of the repurchased loans."

Conditional deal

An array of conditions the deal must satisfy to pass muster includes Crown approval, given both Heartland NZ and PGG Wrightson Finance are covered by the extended Crown retail deposit guarantee scheme.  The PGG Wrightson Finance deposits guaranteed by the taxpayer will continue to be guaranteed after the deal goes through, albeit as Heartland NZ obligations.

As of March 31, PGG Wrightson Finance had NZ$417.7 million worth of retail funding in place including deposits, debentures and bonds. As of January 5, Heartland NZ had NZ$1.67 billion worth of retail funding comprised of NZ$1.57 billion worth of deposits and NZ$104.18 million of bonds.

Heartland NZ and PGG Wrightson also require Reserve Bank approval for the deal and consents to terminate the latter's NZ$100 million bank loan facility with BNZ and ASB's parent Commonwealth Bank of Australia that was undrawn as of December 31 and is due to expire on December 1, 2013.

Under a distribution agreement Heartland NZ will be PGG Wrightson's preferred supplier of credit facilities and debt securities, including the likes of credit to help buy livestock and farmland, term deposits, savings accounts and transactional banking, to the latter's customers.

If the deal doesn't go through, Heartland NZ will still buy NZ$50 million worth of PGG Wrightson Finance loans at face value.

PGG Wrightson holds 33.85 million worth of preference shares in PGG Wrightson Finance with a principal amount of NZ$1 per share. They mature on the sale of a controlling interest in the finance company and currently pay interest quarterly at 8% per annum.

Heartland NZ has a BBB- investment grade credit rating from Standard & Poor's and PGG Wrightson Finance a BB speculative, or "junk", grade rating.

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Here's S&P on the deal:

Standard & Poor’s Ratings Services said today that it had placed its 'BB/B'
issuer credit ratings on New Zealand nonbank financing company PGG Wrightson Finance Ltd. (PWF) on CreditWatch with positive implications, following Heartland New Zealand Ltd.'s (HNZ) announcement of a conditional acquisition of PWF.

The CreditWatch action reflects the potential equalization of PWF’s ratings with those on Heartland Building Society Ltd. (HBS, formerly Combined Building Society; BBB-/Stable/A-
3), should the proposed acquisition of PWF by HBS, a key operating subsidiary of HNZ, succeed (on or about Aug.31, 2011).
In Standard & Poor’s opinion, HBS’ overall business diversity will benefit from this acquisition, and the business and distribution arrangement with PGG Wrightson Ltd. (PGG) would provide an established platform for the Heartland New Zealand group to grow its rural sector business. This could be supportive to the group’s business-risk profile if PWF is effectively integrated.
The neutral rating impact on HBS importantly factors in our expectation for HBS to raise additional capital (earmarked at a minimum of NZ$55 million) to help fund this acquisition and moderate the impact of it on its capital-adequacy position. Rating stability for HBS is also reliant on the merger being effectively managed, and reasonable ongoing investor support being maintained from PWF debenture investors.
"The ratings on PWF could be taken off CreditWatch and equalized with the ratings assigned to HBS after
settlement of the acquisition is complete,” said credit analyst Peter Sikora. "Key considerations underpinning resolution of the CreditWatch on PWF and the rating implications for HBS will be our further assessment of business and financial implications of the merger on PWF and the wider HNZ group."

Specifically, our analytical focus will include an assessment of:
• Integration risks associated with the merger;
• An assessment of the distribution arrangement with PGG;
• A fuller assessment of the financial impact of the merger on HBS;
• The ongoing financial impact of the Christchurch earthquake, in that it does not detract from our assessment of HBS’ credit profile; and
• Evidence of no material divergence of strategy from current expectations such that it compromises our view f the benefits of the acquisition, or any strategic shift that increases HBS’ overall risk profile.

Where is Heartland's the $100mio coming from to buy PWF, that it then gets lent back them to hive off the dud loans into an SPV? Are! Here's part of the answer ."Heartland NZ hopes to raise at least NZ$55 million in a capital raising to help fund its first acquisition.". The operative words being 'hope' and 'at least'?!

 

Isn't PGW lending the $100M to Heartland?  Thought it was obvious.

Which is that money that they get (PWF)  from Heartland for buying them (also PWF)! It's a zero sum game designed to create a SPV to 'hide' the dud loans? Then, subsequently try to 'raise the capital' to cover those dud loans in the SPV. I can't help but feel that somehow these loans are being eased towards the Government Guarantee  before it runs out.

I think Hearland and PGW are listed companies.  How are they related?

"PGG Wrightson plans to lend ( to Heartland) up to NZ$100 million of the up to NZ$110 million received for selling its finance company subsidiary (PWF) to Heartland ..."

PGW looks to be selling PWF to Heartland not sure how that makes them related.

And here's Macquarie analyst Brooke Bone in a research report on PGG Wrightson: "PGW announced the sale of PGW Finance (PGWF) to Heartland Building Society (HBS) for c.NZ$100m (Macq. NZ$80m). However, as impaired loans will be retained in a Special Purpose Vehicle by PGW, it will still remain „on the hook‟ for further impairment charges. PGW will initially pay HBS c.NZ$2.5m for the privilege."

"The net effect of these transactions will initially be a cashflow from PGW to HBS of c.NZ$2.5m!"

"PGW stated it wanted to divest its Finance book. It may succeed. However, there seems little scope for upside for PGW investors in this deal, only avoidance of further pain if issues around the removal of the government guarantee were to disrupt funding of the finance book at the end of 2011.
While the transaction may focus attention on the valuable „Seeds‟ business, it also draws further attention to the problematic Rural Supplies business. We continue to wait for signs of significant operational re-structuring and remain comfortable with our Underperform recommendation at present."