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PGG Wrightson Finance, nearing Heartland NZ deal, posts a big annual profit drop as net interest income slumps

PGG Wrightson Finance, nearing Heartland NZ deal, posts a big annual profit drop as net interest income slumps

Rural lender PGG Wrightson Finance, whose "good loans" are set to be acquired by wannabe bank Heartland New Zealand as soon as this week, has seen its annual profit nearly halve as it booked a big fall in net interest income.

Heartland aims to complete the acquisition of PGG Wrightson Finance's good loans this Wednesday - August 31 - from PGG Wrightson in a deal that will see it take on the rural lender's Crown guaranteed deposits and bonds and is expected to be valued at about NZ$102 million. See more here.  Treasury approval is the key remaining tick needed for the deal to go ahead.

PGG Wrightson Finance's June year profit after tax fell to NZ$4.533 million, or by NZ$4.400 million, from NZ$8.933 million last year. The drop came as the lender's net interest income fell NZ$6.799 million, or 24%, to NZ$21.574 million. The profit drop would have been worse if it wasn't for a NZ$2.172 million fair value gain on derivatives compared with a NZ$338,000 loss the previous year.

Operating expenses rose NZ$1.204 million, or 17%, to NZ$8.260 million. Impairment losses on loans dropped NZ$137,000 to NZ$8.812 million.

The company's financial statements show loans and receivables of NZ$381.778 million at year's end, down from NZ$530.119 million a year earlier. Deposits and other borrowings were down to NZ$55.621 million from NZ$70.819 million, secured debentures up to NZ$264.472 million from NZ$247.580 million, and bonds due to mature on October 8 this year worth NZ$92.314 million.

As of June 30 the company had a net carrying value for impaired assets of NZ$15.340 million, down from NZ$53.118 million with NZ$34.678 million transferred for retention with PGG Wrightson upon completion of the Heartland deal, and a gross amount of past due assets of NZ$119.9 million, up from NZ$87.9 million.

PGG Wrightson Finance had cash of NZ$71.617 million at June 30, up from just NZ$9.277 million a year earlier. The results show the company paid annual fees of NZ$2.890 million to participate in the extended Crown retail deposit guarantee scheme.

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Here's an announcement from Heartland on its capital raising today:

Heartland New Zealand Limited (“HNZ”) (NZX: HNZ) advises the Share Purchase Plan (SPP) has closed raising $12.14m with 1090 shareholders participating, representing nearly 15% of the shareholder base. The result is ahead of expectations and very pleasing in light of the volatility experienced in global equity markets recently.

Ahead of the planned placements to Pyne Gould Corporation (PGC) and PGG Wrightson (PGW), the SPP was designed to ensure fairness and equity to all shareholders.

The total capital committed to the SPP and Placements is $58 million at an average issue price of $0.65. As a result of the support of participating shareholders and the underwriters for the Heartland vision, the completion of the acquisition of PGG Wrightson Finance (PWF) is expected to proceed on 31 August following final regulatory approval. Impact Capital, PGC and Accident Compensation Corporation (ACC) will become the three largest institutional shareholders in HNZ.

Impact Capital is a long term value investor and shares Heartland’s vision and desire to promote and develop a New Zealand controlled financial services business dedicated to the provision of financial services to the Productive Sector and to Families within New Zealand.

PGC’s Chairman Bryan Mogridge stated, "We are pleased to support Heartland's strategy and in particular the capital raising. The PWF acquisition will, we believe, create value and is an important step for Heartland towards achieving its goals."

PGW will also become a significant shareholder in Heartland, cementing the strategic alliance (via a Distribution Agreement) between the two organisations whereby Heartland will provide the existing range of services from PGG Wrightson Finance plus an enhanced, broader range of financial products. PGW’s Managing Director George Gould says “PGG Wrightson’s new shareholding in Heartland clearly demonstrates our commitment to what is a very important partnership.”

All members of the Heartland Board and Senior Executive team participated in the SPP.

For the purposes of Listing Rule 7.14.1, Heartland advises that it has received applications for $12,140,000 of shares under the SPP to be issued at $0.522 per share (representing an aggregate of 23,256,705 shares). Accordingly, the underwriters and sub-underwriters of the SPP have been called upon to take up the shortfall at $0.65 per share (representing an aggregate of 35,169,231 shares).

Liquidity & Funding
Heartland continues to maintain surplus liquidity in preparedness for the proposed PWF acquisition. Liquidity is currently $586 million and consists of cash, liquid assets and unutilised available funding lines. Liquidity has reduced over the course of the month due to lending growth – with a good pipeline developing.

Heartland retail depositors continue to demonstrate strong loyalty:
The Heartland retail deposit reinvestment rate during August was 74%, with stable new fund flows.
An overwhelming majority of Heartland retail deposits (new or reinvested) now being made by depositors on a non-guaranteed basis: only 5% of new retail deposits and approximately 22% of reinvestments during August required the sole benefit of the crown guarantee.

Key Facts on Heartland
Key facts on Heartland (as at 30 June 2011):
Total assets $2.1 billion
Total retail deposits $1.6 billion
Shareholders funds $296 million

Pro-forma estimates on Heartland (post the acquisition of PWF on 1 Sept 2011):
Total assets $2.6 billion
Total retail deposits $2.0 billion
Shareholders funds $351 million
Net Tangible Assets $324 million
Net Tangible Assets per share ~83 cents


The deal is done:

"Heartland New Zealand Limited (NZX: HNZ) (HNZ) is pleased to announce that it has today completed the acquisition of PGG Wrightson Finance Limited (PWF) from PGG Wrightson Limited (PGW).
PWF has been acquired, and will be held, through Heartland Building Society (Heartland), and will form part of the Heartland financial services group.
PWF specialises in the provision of financial services to the rural sector. PWF is highly complementary with the existing Heartland business and will be an engine for growth in the rural sector for Heartland.
Highlights of the acquisition include:
Price: The consideration paid to PGW for the shares in PWF was approximately $100m being an amount equal to the net tangible assets of PWF adjusted to take account of certain agreed items.
PWF Debt Securities: PWF’s secured bonds, secured debenture stock and unsecured deposits have become unsecured bonds and deposits with Heartland.
PGW Guarantee of some Loans: Certain finance receivables which remain in PWF on purchase have been guaranteed by PGW. The amount of these guaranteed finance receivables was approximately $30 million.
Use of PWF Brand: Heartland has been granted a license to use the PWF brand in association with certain products, under a distribution agreement.
Promotion of Product and Services: PGW will promote certain financial products and services of Heartland to PGW customers in return for commission payments, under that distribution agreement.
Capital Raising
HNZ determined it wished to raise $55m of capital in order to maintain acceptable levels of capital following the acquisition of PWF.
The capital raising was subsequently increased to a proposed $58m, to accommodate further institutional interest.
The final capital raised was $57,346,857.15. This is short of the proposed $58m as one sub-underwriter of the Share Purchase Plan (SPP) failed to meet its obligations on closing (the shortfall resulting from that failure being $653,142.86).
On completion of the capital raising at that final level, 88,703,975 new ordinary shares have been issued to
eligible HNZ shareholders pursuant to the SPP (23,257,528 shares)1
underwriters of the SPP (34,164,396 shares)
institutional and strategic investors by way of placements (31,282,051 shares)
For the purposes of Listing Rule 7.12.1, HNZ advises the issue of new ordinary shares in HNZ (New Shares) upon the completion of that capital raising as set out in the attachment."


Tweaks to the Crown guarantee now the Heartland-PGG Wrightson deal is done:

Crown Withdraws Guarantee for PGG Wrightson Finance Limited

The Crown has withdrawn the Crown retail deposit guarantee to PGG Wrightson Finance. This follows completion of arrangements for the acquisition of PGG Wrightson Finance by Heartland Building Society on 31 August 2011.

There has been no default in relation to PGG Wrightson Finance, but there is no longer a practical need to maintain the guarantee for PGG Wrightson Finance, as all of its guaranteed obligations are now held by Heartland Building Society.

The Crown stands fully behind its guarantee commitments under the Extended Retail Deposit Guarantee Scheme, which comes to an end on 31 December 2011

Amended Crown Guarantee for Heartland

The Crown has approved changes to the Heartland's Crown Guarantee, to take account of Heartland's recent acquisition of PGG Wrightson Finance Limited. All eligible deposits in both entities continue to be covered until 31 December 2011, when the Extended Retail Deposit Guarantee Scheme ends.