KEY POINTS:
Dominion Finance ran into trouble after reinvestment rates plummeted to just 15 per cent at the same time as property companies it had lent to struggled to make payments, the Business Herald understands.
The listed finance company on Tuesday announced it was considering asking investors for a temporary
freeze on repayment. Dominion Finance is the 22nd finance company to run into trouble in little more than two years.
The $276 million owed to 13,000 debenture investors by its two property development lending subsidiaries, Dominion Finance Group and North South Finance, takes total funds tied up in those failed or troubled companies to about $2.38 billion.
Chief executive Paul Cropp declined to speak to the Business Herald yesterday. Through a spokesman he said he had nothing to add to the announcement issued to the market late on Tuesday.
In that announcement, Cropp said his company had liquidity problems related to "the impact of the international credit crisis on the confidence of Dominion Finance Group and North South Finance's investor base" and the inability of the two subsidiaries' borrowing clients to repay their loans.
A Dominion Finance insider yesterday told the Business Herald the company's debenture reinvestment rate had dropped from the 40 to 45 per cent mark to 15 per cent after a separate finance company - Lombard Finance and Investments - was placed in receivership in April. The rate had been slow to recover since then.
At the same time, property developers who owed the company money were finding it hard to sell their projects on completion and were unable to repay their loans or refinance them elsewhere.
That left Dominion Finance with some uncertainty as to whether it could meet its own commitments to investors, the insider said.
The Business Herald understands the company is examining options around some kind of recapitalisation, as well as a freeze on repayments of interest and principal.
The NZX yesterday said it was investigating whether Dominion Finance Holdings breached continuous disclosure rules about its situation. Acting head of market supervision, Simon McArley, said it would be talking with the Securities Commission and expected its investigation would take a week.
Market watchers expressed surprise at Dominion Finance's move to discuss a moratorium, as the company was previously regarded as well run with an experienced management and board, and likely to ride out the current difficult market conditions.
The company's board and owners include some highly respected figures in New Zealand's finance industry. Director and shareholder Vance Arkinstall is the chief executive of the Insurance and Savings Industry Association. Rick Bettle, another director, is a former president of the Directors' Institute.
South Canterbury Finance founder Allan Hubbard holds 1.8 per cent of the company.
Dominion Finance's major shareholders are Terry Butler and interests associated with his family, holding 61 per cent of the company between them. Butler has been involved in the 50-year-old company since 1987.
Dominion Finance's total loans stood at $447 million last month. About 30 to 40 per cent of lending is in the form of first mortgages and the balance is in second mortgages.
About 60 per cent of the book is funded through retail debentures, with a further 20 per cent funded by bank lines comprising a $70 million line from the Royal Bank of Scotland and $20 million from ASB Bank. It is understood that these bank lines are fully drawn.
Dominion Finance's board was in discussions yesterday with its bankers, auditors and trustees to discuss a moratorium proposal which will require investor approval.
Louise Edwards of Perpetual Trust, Dominion Finance Group's trustee, said a decision whether to go ahead was likely within the next couple of days. Dominion Finance's shares remained in a trading halt yesterday having last changed hands at 50c.