KEY POINTS:
The 'R' word (recession) was the one on everyone's lips earlier this year, but on the New Zealand finance scene nowadays it seems to be the 'M' word that is catching on.
M for moratorium, that is. The freeze on payments which is the solution, apparently, to any
finance company's current account woes.
The latest to hop on the bandwagon is Dominion Finance.
Dominion Finance Holdings (DFH) is considering a moratorium on payments to debenture holders after becoming concerned about the liquidity of its two subsidiaries, Dominion Finance Group (DFG) and North South Finance Ltd (NSFL).
The board entered into discussions yesterday with bankers, auditors and trustees to explore the prospect of a moratorium, chief executive Paul Cropp said.
At March 31, debenture holders were owed $276 million, down from $350 million a year earlier.
"DFG and NSFL would seek the suspension of the obligation to make payments to debenture holders for a yet to be determined period of time, with a view to enabling those companies the opportunity to restructure in order to alleviate the liquidity pressures and ensure the maximum realisation of investors' investment in DFG and NSFL," he said.
Final details had not been decided. The board would make a further announcement once more information about the moratorium process was available.
Moratoria - if that's the plural form of the word - have already been proposed, or voted in, for Geneva Finance, MFS Pacific Finance and Lombard, among others. (The Lombard proposal was subsequently rejected by its Trustee.)
A moratorium at DFH would bring the number of finance companies to get into trouble in the last two years to 21 and lift the amount invested in these companies collectively to over NZ$2.25 billion. Investors are currently expected to lose about NZ$1 billion.
The liquidity problems at DFH were a reflection of the global credit crisis on investor confidence, and the inability of DFG and NSFL's borrowing clients to refinance or repay debts, Cropp said.
Dominion Finance Holdings continued to trade profitably, with net profit after tax for the months of April and May of $2.61 million.
Unveiling a larger than expected fall in annual net profit last month, Cropp said reinvestment rates had fallen but the company had enough assets to cover its liabilities and had a diverse loan book.
Reinvestment rates had halved to around 20 per cent in April after industry counterpart Lombard Finance hit trouble.
Twenty finance companies have failed in the past two years, in part reflecting the effects of a global credit crunch.
Dominion Finance debentures funded about 60 per cent of total assets, with the balance made up of equity (11 per cent), capital notes (9 per cent) and banking funding facilities (20 per cent).
DFH's annual net profit after tax fell 36 per cent to $8.95 million for the year to March, with the company having burned through more than $25 million in cash as it repaid debenture holders.
At year-end, net operating cash stood at $20 million.
Property finance company DFG loaned across sectors including commercial and residential property, horticulture, viticulture and tourism.
DFH shares were on a trading halt until the end of trading tomorrow.
They have fallen from a record high of $2.86 in May 2007 to yesterday's record low of 50c.
- NZPA