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Times are tough and getting tougher for finance companies in New Zealand. But one analyst says those who keep their heads off the chopping block are making good money lending in a market where rivals continue to go to the wall.
Listed finance company Lombard Finance, which lends money on property developments, last week announced it owes $127 million to 4600 investors who won't be getting their money back anytime soon.
Lombard chief executive Michael Reeves, announcing the suspension of repayments on Thursday, said business confidence, which had fallen since the Bridgecorp collapse last July, "deteriorated markedly over the last month with a downturn in real estate values, lack of sales and the lack of bank finance available to borrowers due to the impact of the international credit squeeze".
Those who had borrowed money from Lombard were finding it increasingly difficult to sell properties and hard to refinance mortgages to repay Lombard loans.
As a result, Lombard Finance in turn "is unlikely to be able to meet its obligations to investors as they fall due in late April or May".
"It is clear from recent events that this is a systematic failure of an entire industry, and from our perspective a moratorium is now the only responsible course of action," said Reeves.
"I and the rest of the board very much regret this has occurred and the anguish this will cause investors.
"However, we believe the interests of investors are best served by a moratorium to enable an orderly realisation of its loan book."
Reeves said that at the end of last month this year, the amount owed to investors, in order of priority, was $111m to holders of secured debenture stock, and $16m to holders of subordinated notes and subordinated capital notes.
As the Lombards of this world come to the brink, the finance company sector is consolidating.
President of the Institute of Financial Advisers, Simon Hassan, has some sage - but perhaps tough - advice for investors who want to get their money out of similar finance company investments early.
"Under a debentures contract they give their money for a fixed term and can't get it back unless they meet narrow hardship provisions," he says.
"The answer [for] people who have money in a failing or failed finance company? I don't think there's anything they can do unless they can prove hardship. Even they may not get their money because it's not there.
"What we advise them to do is look ahead, not backwards. There's no point in steaming up over something that's spilt milk, really."
The deal that investors made when buying the debentures was to lend their money for a fixed period of time, says Hassan.
A term deposit is a contract that lasts until the end of the agreed date. They can be sold, but this will be heavily discounted if the finance company is in trouble.
When times were good, finance companies sometimes agreed to let investors have their money ahead of time, simply on request from the clients. But times are not good now.
"Things are tough, and they haven't got the money, so they can't say yes to things like that when there's someone else likely to ring up with hardship," says Hassan.
The other side of the coin will be a finance company ringing up a mortgage holder and demanding the loan be repaid immediately, despite having lent it on a 30-year term.
"People are retreating from risk," says Hassan. "Oddly enough, they can get the same terms now on a term deposit that they got two years ago from a finance company debenture, and for far less risk."
John Kidd, an analyst at brokers McDouall Stuart, says the bigger, better funded companies are now finding the market is opening up for them, with good business opportunities lending money to those who previously went to the smaller operators for funding.
Kidd wrote a research report into the finance company sector last year, predicting a widespread industry consolidation with a range of factors pushing smaller finance companies to the brink.
"It is panning out largely as we would have thought," Kidd told the Herald on Sunday. "Certainly the global credit crunch has exacerbated what we thought we saw a year or two ago was going to be a more localised squeeze on credit.
"But it's just exaggerated the effect. I think in New Zealand it's fair enough to say the finance companies have borne the brunt of both those elements, globally and locally.
"This sector has taken the pain on behalf of New Zealand. The banks have found things tighter, but they were already well-placed, their balance sheets were strong.
"We've been saying for a couple of years that things have been waiting to turn downhill [for finance companies].
"The squeeze on the finance companies over the past nine months is now getting worse since it is now happening on the other side of the equation - the assets finance companies had lent money on.
"The squeeze has been at the funding end of the model, but we're moving into what's probably an even more unfavourable stage, which is a downturn in the property market. All of a sudden asset quality is more of an issue."
Kidd says having access to funding that is not dependent on retail debentures is the most important thing at the moment. "Apart from the very top companies you would still be seeing rollover rates around 30 per cent and heading up to 50 per cent.
"All of a sudden you have pressure at both ends of the model. You've got the funding which has been dry over the past six or so months and there's not much sign of a recovery in that.
"Now you've got this layer of a softening property market, which is affecting the lending end of the model. It's an unpleasant mix right now.
"Despite the world credit crunch, the good New Zealand finance companies, such as Marac and South Canterbury Finance, have been able to secure new lines of funding from overseas investors.
"That is exactly the kind of quality of money right now that if you can get it, it's very good to have."
And there's good business to be had in the sector that's had a big clear out of smaller players, says Kidd. "Anyone who can continue normal lending operations in this market - the margins on finance company lending, on any lending - that's wonderful because others around you are not able to continue lending at that level."
Lombard's problems also show that a stock exchange listing does not offer protection against problems facing the industry.
That said, Kidd says he still favours listed companies because of the higher level of transparency and disclosure that is required.
Lombard's new investment statement, released on Christmas Eve, contained some warning signs, says Kidd. New clauses talking about lending risk were inserted. Another clause, which originally limited its lending on second mortgages to no more than 50 per cent of the total book, was removed.
"The signs were there," says Kidd. "Lombard was an average company, pretty unspectacular - average liquidity, average book size, average pretty much everything." But Lombard "wasn't a great company either".
"It's important in this environment your money is steered to where you know quality is, which is unfortunately a pretty small group of companies at the moment."
Lombard's Christmas Eve filing also showed the proportion of riskier second mortgages in its total $144m loan book rose from 40 per cent a year ago to 56 per cent in December.
Its concentration risk also increased, with loans to its six largest debtors accounting for 65 per cent of its loan book.
