Surviving when the money dries up

The future of the 16 Crafar farms hangs in the balance, sparking a wider debate about foreign ownership and investment in the primary sector. Photo / Herald on Sunday

A form of financial lockjaw has settled in, as big assets like farms, primary processors, financiers and hotels hunt for new owners.

The lack of cash and inability to access capital has caused a type of corporate paralysis, leaving foreign investors like the Chinese the big, if somewhat unpopular, winners in New Zealand lately.

Bright Dairy & Food Co's move this week on a majority stake in Canterbury milk processor Synlait Milk, subject to regulatory and shareholder approval, sparked widespread disquiet and criticism, particularly from Fonterra and others like Federated Farmers dairy chairman Lachlan McKenzie, who said it was a "damning indictment on our capital markets" that funding for Synlait's expansion had to come from China.

The future of the 16 Crafar farms hangs in the balance, sparking a wider debate about foreign ownership and investment in the primary sector.

Half of the giant South Canterbury Finance has been flogged around the markets all this year and The Westin Auckland Lighter Quay is in the hands of vendors KordaMentha.

But buyers are hardly rushing - any money which does come in is more likely to originate from Singapore or China than Auckland or Wellington.

NZX, where businesses might be expected to turn in their hunt for new money, has been shunned by all but two companies this year: lightweight fragrance business Ecoya tapping just $10 million and next month's DNZ Property Fund's $35 million call to buy out two bosses for their management business.

These are hardly the quality of listings many institutions had hoped for, and were described by one professional fund manager this week as "so manky" he did not even want his name mentioned in the same sentence.

No NZX debt issues have emerged for months and finance remains tight.

Mark Weldon, NZX chief executive, projected an IPO rush in March, tipping that the first one was soon to materialise.

He later blamed the deafening silence on upheavals in Europe over sovereign debt issues, which he said might be putting some businesses off. Greece, it seemed, killed his aspirations.

Takeovers could wipe NZ Farming Systems Uruguay and Affco from the NZX but Weldon said he was more interested in the future than any losses

"It's the birth rate we need to fix rather than the death rate," he said, predicting a return to vogue of capital notes, debt instruments favoured in the past by big businesses like Fletcher Building.

He cited three new NZX listings looming, two now without a presence, one which wants to expand.

Moves for state-owned enterprises to float was another positive sign, he says, with Fonterra's vote to allow units to list to raise capital for a new fund to buy share benefits from farmers.

"Last year, we had $6.6 billion of new capital raised on the market, of which $3.3 billion was bonds, and a lot of that was to restructure balance sheets," he said.

This year was slower. New Zealand's thin market and lack of listings was nothing unusual internationally, he said, and the lack of capital was a big constraint on business overseas and here.

"It's been very shallow in terms of listings. Companies are stockpiling cash rather than undertaking construction or new investment. It's an important macro-economic question to ask where money might come from. Clearly, it's good that shonky finance companies have gone but on the other hand, subordinated debt is a good thing if it's managed well. We might start to see capital notes on NZX again but it will take some time before any mezzanine finance comes back because now everything has to go through Reserve Bank regulations."

Ecoya made it clear it was a high-risk, high-growth business and DNZ's scale and sizeable asset base made its arrival on NZX "a positive addition to the market".

This year's standouts with good price rises should not be forgotten, he said, providing a list of the seven best-performing NZX listed businesses in the last year.

The heavily indebted Yellow Pages remains waiting for a buyer, with much of developer Nigel McKenna's empire, including his Queenstown hotel project Kawarau Falls, with receivers for nearly two years, and his stake in Auckland's Westin hotel venture.

Half of South Canterbury Finance has been on the block for the last seven months, chief executive Sandy Maier saying this week that August 31 was "D-Day" for that deal to meet the terms of its waiver from the trustee which gave it some breathing space.

January's long list of 15 interested parties has now been whittled down and although Maier won't say how much that stake will fetch, he admitted he has stepped in to head that process after the June 20 statutory management of majority owner Allan Hubbard.

"Who will buy? It might be a combination of onshore and offshore. We're down to a handful now. The money is not the problem, there's money around. But we all have certain expectations of the character and quality of the investor so it's not just a question of the dollars.

"The actual negotiations are being conducted by the company and its investment advisers Forsyth Barr. We expect an announcement to be made as soon as we get complete clarity on it. I'd like to announce it today, if I could."

On the other side of the ledger, as the last big financier standing, South Canterbury's generosity with cash appears to only extend to existing contractual arrangements. Does it still loan?

"Minimally. Most of the lending is being done on the basis of existing relationships working themselves through. We're supporting existing clients," Maier said.

The lack of capital around was mourned by Shane Solly of Mint Asset Management, a professional fund manager. There is money for borrowing, but only to fund the right type of assets.

"The banks appear to be loaning for the good quality portfolios, well-capitalised businesses at the high-end of town like Kiwi Income Property Trust. But businesses like that didn't just fall into a good position but the likes of Kiwi and Goodman Property Trust can now benefit from doing the hard work.

"For the next tier down, there's still concern," he said, referring to the collapse of the mezzanine funding market via the finance companies and the lack of property development money.

"Where do you go? There is no money. The finance companies out there are not in a position to grow their exposure," Solly said.

Paul Glass, of the new Devon Funds Management business on Quay St, says much of his fund remains in cash and he can't see that changing immediately.

Any equities which do interest him are more likely to be Australian. Devon, previously Goldman Sachs JBWere Asset Management, is looking for value and companies with strong cash flows, good industry characteristics and strong management.

The troubled Allied Farmers this week pushed out its borrowing deadlines, announcing it now had months to renew debt facilities as it restructured.

That outcome affects the futures of thousands of Hanover and United investors, counting on Allied recovering and its share price rising to give them some growth or return.

The loss of businesses like St Laurence, Strategic Finance or Hanover caused the evaporation of mezzanine funding, leaving a huge hole.

Goodman Property Trust, the $1 billion industrial landlord, considers NZX a viable alternative.

Last year, it raised $150 million by listing bonds and John Dakin, chief executive of Goodman's manager, said he would be a repeat issuer.

Although the banking system was in good shape, the evaporation of mezzanine funding had left a big gap for money, he said.

"Banks remain primary lenders but many participants in the industry need to find new equity," he said.

"Our initial $150 million bond issue late last year was a deliberate strategy to diversify the sources of debt financing for our business. We do not have any specific timing for future bond issues but do expect to be a repeat issuer as we continue to balance the cost, source and term of debt across our business."

Chris Dibble, Jones Lang LaSalle's research and consulting manager, told Thursday's Property Council retail conference how lack of money was a huge constraint on deals. That would only change, he said afterwards, when international markets calm down, then recover.

Connal Townsend, Property Council chief executive, mourned the lack of cash for investors, let alone developers.

"It's really, really, really difficult to get money. Development depends on finance and we don't have any finance companies left any more. The property market's access to capital has been challenged by the collapse of mezzanine funding and the reluctance of banks to provide debt financing to developments. Banks are looking to fund quality deals but are applying a more conservative approach than previously, given the high cost of capital in the short to medium term. Some listed property vehicles are turning to alternative funding models, including the corporate bond market. Others will no doubt look to sovereign wealth funds, offshore investment and KiwiSaver.

However, property is performing well on the NZX compared with other portfolios, Townsend said. Wealthy, long-term property investors with cash stockpiles remained the main influencers on real estate. Big purchases by fellow multi-millionaire investors John Sax of Auckland and Tim Glasson of Christchurch are some of the few big deals. Colourful developer Rick Martin of Cornerstone summed up the rush for liquidity best when he told why he was selling big chunks of assets and undeveloped land. "Cash, baby, cash!".