Numeria style a question of substance

By PAUL PANCKHURST

The new venture of former dotcom high-flyer Evan Christian is pulling in millions from private investors.

The 5-month-old company, Numeria Finance, describes its consumer finance business as "conservative" and "steady".

But critics focus on a balance sheet loaded with shares acquired in related-party transactions.



Christian resigned as Advantage chairman in October, shortly after setting up Numeria. His replacement at Advantage, David Wolfenden, is also chairman of Numeria. The company is run by former Pacific Retail Finance chief executive Kelly Wright.



"Limited time, special offer," says one of Numeria's newspaper advertisements.

But the biggest type blares: "8.88 per cent".

The Auckland company attracts investors through provincial sharebrokers and extensive newspaper advertising.

The rates on offer range from 6.65 per cent for three months to 8.95 per cent for five years, with a minimum investment of $1000.

So far, after a launch late last year and a relaunch this month, the public has put in several million dollars, the company says.

However, peeling back the layers leads to questions about the risk-and-return ratio - and an arrangement claimed to lend "substance" to the company's initial balance sheet.

Numeria wants to help merchants provide finance to their customers - without trying to muscle in.

As examples, the company says it could provide finance for customers buying office equipment (whiteboards, water coolers), shop gadgetry (Eftpos Machines, clothing security tags), or major household products (garages, spa pools).

A prospectus dated November 12 says the company seeks up to $100 million for secured debenture stock and $25 million in unsecured deposits.

But a trust deed effectively limits borrowing - and therefore lending - to a maximum of 20 times the capital invested in the company.

The paid-up capital is now $2 million, up from an initial $1.25 million, so the company can lend up to $40 million.

The prospectus shows the company kicking off with investments in Advantage and Zintel, the latter a telco whose shares are traded on the unregulated "grey" market.

As with Advantage, Evan Christian is a director and shareholder of Zintel. In two transactions last September 30, Numeria paid $3,053,359.50 for shares owned by Christian and Matrisse Trust, an entity associated with Christian.

In the first deal, Numeria bought 4,083,567 shares in Zintel for 50c each - $2,041,783.50 in total - from Matrisse Trust.

Numeria then mortgaged the shares for an $831,361 advance from a family trust connected with one of Christian's associates, Nick Gordon. This mortgage ranks ahead of debenture-holders if Numeria goes under.

The shares were recently trading in the high 70s - meaning a gain on paper of more than $1 million, although the volumes on the unlisted market are generally very small.

In the second deal, Numeria paid Christian $1,011,576 - or 32c a share - for 3,161,175 shares in Advantage Group, which amounts to a 3.7 per cent stake.

The average daily trade in Advantage is 78,551 shares - raising the question of how easily, and for what price, this block would sell.

A put option gives Numeria the right to require Christian's company, Numeria Corporation - owner of Numeria Finance - to buy the shares back at the purchase price. That is significant as the Advantage shares now trade at 15-17c.

The company's prospectus said the share investments were "designed to give the balance sheet substance from the outset", and the company did not intend to invest in shares in the long term.

Wright said the investments were there "for liquidity purposes" and would be "very quickly convertible to cash" - the latter claim debatable.

"Going forward . . . the value of the shares will be, not irrelevant, but insignificant compared to the value of the loans or leases."

The prospectus shows Numeria Finance's initial funds came from equity of $1.25 million and a $2,573,300 unsecured loan, both from Numeria Corporation, and $831,361 from the Gordon Family Trust.

Most of that went into the Advantage and Zintel shares. Another $1.6 million went into the company's first loans to customers.

Competitors have been harsh in their assessments of Numeria Finance.

One said investors were "unwittingly playing the venture capital game", while the promoters had found a low-cost way of taking a bet on the continued growth of the consumer finance market.

The interest rates on offer were "closer to a bank deposit rate than to anything remotely like the return they should be getting for such an exposure".

Wright said the public were secured lenders and the venture capital risk lay with Christian, via the paid-up capital of $2 million.

The Business Herald asked two experts to look at the prospectus.

Said Mark Brighouse, chief investment officer of Arcus Investment Management: "How convenient that these initial investments were acquired from related parties.



"Investors should think carefully about the value of the put option to sell these shares to the parent company. Counter-party risk in option contracts can be a problem," he said.

In other words: one risk is the possibility of Christian's company defaulting on the put option.

Mark Tume is the general manager of Grosvenor Financial Services, which researches investment products.

He said the Advantage and Zintel shares were puzzling.

"That doesn't seem to fit with their strategy. I would definitely scratch my head about that."

Numeria said it was a finance company, but looked like an investment company.

On the pricing - the risk-and-return ratio - of debt issues such as this one, Brighouse said, "the average Mum and Dad investor in New Zealand is not very discerning in terms of the credit quality of the debt securities that they buy".

Overseas investors kept saying they were surprised at how easy it was for unrated issuers - ones with no "investment grade" rating from credit agencies - to raise cash in New Zealand.

Investors, in trying to avoid the risks of shares, "may be giving their capital too freely to debt issuers", Brighouse said.

"There is some irony in that these investors may bear the very equity risk that they are seeking to avoid."