KEY POINTS:
Shares in listed finance company Dorchester Pacific plunged over 16 per cent, 13 cents, to a 10-year low of 66 cents today.
Last week, the company said it had cut its annual profit guidance by up to half, due to reduced lending volumes, lower fee income and increased
provisioning for its finance company.
The company forecast profit to between $3 million and $4m, from $6m previously, as the company felt the effects of lower investor confidence following the global credit crunch.
Dorchester held $33m in cash or equivalent, representing 12 per cent of total assets, after repaying a $20m loan to related parties of two major shareholders, said chief executive Andrew Walker.
"Although our focus on strong liquidity is impacting operating profit, we believe healthy cash reserves are in the best interests of maximising long-term shareholder value," he said.
Dorchester posted annual profit last year of $3m, including writedowns.
Finance companies are having a rough time against a backdrop of 15 companies either defaulting or failing altogether over two years and an international credit crunch.
Not only are debenture holders baulking at reinvesting, finance companies are widely reported to be holding back from lending to try and preserve cash reserves.
This year Mr Walker predicted the industry would shrink by half or more within two years or even virtually disappear.
He said finance companies needed to find alternative sources of funding from debentures.
He said in January that Dorchester's debenture reinvestment rate had fallen to around 40 per cent in December, which he said was "not bad".
Before the crisis, it had been 65-73 per cent across the industry.
"It's very simple mathematics. If it (the reinvestment rate) goes to zero and with average debentures 18 to 24 months, then in that time the industry won't exit.
"If the long-run reinvestment rate is 50 per cent, then the industry is going to halve."
He said banks were not really in a position to fill the void as "they have their own issues".
Many have lost billions in the US subprime mortgage market resulting in a credit crunch. In that environment they are loathe to lend and have lost their appetite for risk.
Raising money through equity markets is not an option, for similar reasons.
Mr Walker said he wouldn't be surprised to see more finance company collapses. Others will simply close shop.
Between them, Hugh Green Investments and Kevin Podmore's Auguste Finance own 40 per cent of Dorchester, while Dorchester owns 25 per cent of finance-property company St Laurence.
Mr Walker predicted the speculative property market would also "slow down quite a bit" as finance companies become a lot choosier about who they lend to.
- NZPA