Treasury 'had no idea' of Mascot Finance's woes

Property lender Mascot owes $70 million to about 2500 investors. Photo / Simon Baker

South Island property lender Mascot Finance, which owes debenture investors $70 million, yesterday became the first financial institution covered by the Government's Retail Deposit Guarantee to fail but Treasury says "there may well be others".

A source close to the company believes the shortfall between what Mascot owes investors and what receivers collect on its loan book is unlikely to be large and will easily be met by what Treasury has collected in fees - mostly from the large banks - for the guarantee scheme to date.

Mascot's trustee Louise Edwards called in receivers yesterday morning after the company informed her last week that a major loan was unlikely to be recovered and a breach of the company's trust deed was imminent.

Mascot, which owes $70 million to 2558 investors and lends mostly to the property sector, was one of the first finance companies to gain coverage under the Retail Deposit Guarantee introduced last year. Treasury Secretary John Whitehead moved quickly to assure eligible Mascot investors they would get all their money back.

"The deposit guarantee scheme was put in place to give New Zealand depositors confidence that their money would be secure in the event an approved financial institution failed. The Crown stands behind the deposit guarantee scheme and Mascot Finance depositors can be assured that they will get back all of the money they are entitled to under the guarantee," he said.

The decision in October last year to allow finance companies coverage under the guarantee was criticised at the time on concerns that the taxpayer would end up footing the bill for failures and that it would distort the pricing of risk in fixed interest investment markets. Large banks, which pay the lion's share of fees, complained they would effectively subsidise smaller riskier institutions.

However the Reserve Bank said at the time all institutions including finance companies would have to meet "strict eligibility criteria".

When it applied for coverage, Mascot, which was active in the rapidly deteriorating property market, had already ceased raising money via debentures and was "reviewing" its future in the finance industry.

As it has not taken any new money since being accepted into the scheme, Mascot has paid no fees for its coverage. Institutions with less than $5 billon in retail deposits are charged on growth in their book since October.

Yesterday Treasury spokesman Bryan McDaniel said Mascot was accepted into the scheme based on information from the company, its trustee and the Reserve Bank.

At the time, it had not breached its trust deed and had significant cash reserves.

Treasury had no idea of the company's worsening situation until last week. McDaniel did not rule out the possibility that other finance companies among the 25 covered by the guarantee may also be struggling.

"At the moment we're not aware of any other financial institutions facing trouble but over the course of the guarantee period, which is two years, there may well be others."

Kapiti Coast financial adviser Chris Lee, who has worked closely with Mascot and has just over $6 million worth of client funds in the company, said he had been in touch with management as recently as last week. Based on those discussions he did not expect a big shortfall in realisations of the company's loan book.

"If all the 50:50 loans go against them they could be down the tube for $10 million but if they go for them they won't be down the tube at all."

Receiver Brett Chambers of Deloitte said his initial task was to assess the company's loan book and determine the level of impaired loans and "how that's likely to pan out in terms of likely payout to investors, but it's too early to tell at present".

If Lee is right, likely losses would easily be covered by contributions to the guarantee scheme to date.

Treasury confirmed fees raised so far stood at just over $83 million.

Lee said the loan which forced Mascot under was to the developers of the upmarket Threepwood subdivision in Central Otago. The loan, a second mortgage, stood at about $15 million.

* The guarantee

So far 78 financial institutions have joined the scheme, including 25 finance companies.

As at December 31 deposits totalling $126 billion had been guaranteed.

Latest available data shows $83.8 million has been paid in fees by participating institutions and the Herald understands most of this has come from the big four banks.