Room to grow, without $20m

Prospectus information from General Finance, which wants to raise up to $20 million, shows the company is still in the early stages of development with plenty of room to grow, even without new capital.

At the end of July, owners William Cairns and James Lockie put in $490,000 of fresh capital and converted a $500,000 loan to redeemable preference shares, boosting its equity to $1 million.

Chairman Cairns says the preference shares have no redemption date.

At the end of July, the company's liabilities were a little over $2 million.

But the trust deed allows it to gear up to what look like scary levels.

It is allowed to take total liabilities to 95 per cent of total assets, a 20-to-one ratio.

Cairns agrees this is high for a finance company, and that a more normal level would be between eight-to-one and 12-to-one.

"I view that as a positive. That's the trustee [Perpetual Trust] and various people saying we've got the skills to manage a bigger book," he says.

"We're established residential lenders. The trustee allowed that [high gearing] because we are experienced residential mortgage lenders."

Parent company Cairns Lockie manages a mortgage book of more than $260 million - Cairns says it has grown to $280 million since the end of July - mostly financed by Australian wholesalers AMS, Origin and Liberty.

High gearing will also lower the company's cost of capital, he says, allowing it to offer customers cheaper mortgage rates and possibly to move into prime lending in its own right.

Cairns does not know if the company will gear up to the degree allowed, but he says "we're not going to just grow for the sake of growing".

The interest rates General Finance is offering are mostly higher than its prime lending rates.

In particular, it is offering to pay 9 per cent on two-year debentures compared with its current prime lending rate for two-year fixed rate mortgages of 7.95 per cent. That is hardly competitive with the Bank of New Zealand's 6.9 per cent offer.

Cairns says the two-year debenture rate is "a bit of a special", but his company can afford to pay such high rates because all the lending from the debenture proceeds will be on higher margin second mortgages or bridging finance rather than to prime lending propositions.

"We're not lending money on prime first mortgages because we can't compete," he says.

In other words, General Finance is concentrating on loans the major banks won't do.

That implies its lending is higher risk. Cairns says the company's record shows it hasn't been.

"Everything has been on residential property. We've never done commercial, we've never done farming. The other thing is it's short-term finance."

The prospectus shows that at March 31, the company had no loans on its books maturing longer than 12 months and just under 60 per cent of its loans were to mature within six months.

But all the lending will be secured over residential property, Cairns says.

The prospectus also says the company has "no material balances in arrears and no assets which are considered impaired".

It shows that lending was highly concentrated at March 31 - the six largest loans accounted for 84 per cent of the portfolio.

The trust deed limits the size of any one loan to 10 per cent of the total assets.

Cairns says these figures reflect the fledgling nature of the loan portfolio and the top six loans now represent 47 per cent of the total portfolio.

General Finance was established in 1997, a year before the partners started Cairns Lockie, but didn't start trading until April 2001.

The prospectus contains financial information from then to March 31 this year. It also gives details of the equity top-up and additional lending through to the end of July.

Cairns says he and Lockie have known each other since 1982.

Cairns Lockie specialises in "no financials" mortgages to the self-employed who can't supply detailed financial information, to people with impaired credit histories (called "non-conforming mortgages"), 100 per cent finance to high-income earners who can't or don't want to save a deposit, 10-year interest-only mortgages for property investors and second mortgages.

I wondered why the prospectus did not provide more up to date information.

Cairns said that was because he wrote it himself - he worked for NZ Guardian Trust, managing its mortgage operations, between 1990 and starting his own business - and was delayed by other matters.

These included being on the Auckland City Council - he didn't seek re-election in October's elections, although he is still on Metrowater's board.

Delays in getting the accounts audited, getting a trustee and trust deed and getting the prospectus printed also contributed, he says.

Writing the prospectus himself certainly helped Cairns keep costs down.

The prospectus shows the cost of the issue is $40,000 and Cairns says that, at most, the company will spend $35,000 a year on one or two newspaper advertisements a week.

As with most finance company debenture issuers, the offer has no closing date and fundraising is intended to be ongoing.

One comfort for potential investors is that the debentures are secured, ranking only behind preferred claims such as any insolvency costs, unpaid wages and taxes and money owed to the trustee.

There is also a major asset apart from the loan portfolio - the company owns its own premises in Green Lane, Auckland.

The Bank of New Zealand has first dibs on the building, but it has given the company a $664,000 loan facility secured by the building.

The trust deed limits the amount that can be borrowed against the building to 66 per cent of its value.

The building is in the books at $916,211, but the company got an independent valuation in June putting its value at $1.132 million.

Cairns Lockie occupies half the premises, and the other half is rented to a blue chip tenant on a six-year lease with a further six years right of renewal.

The trust deed prevents any other claim ranking ahead of the debentures to 5 per cent of total assets.