KEY POINTS:
Finance company collapses over the last year have hit the property development industry, but it is vehicle dealerships that will suffer in the future with the withdrawal of their financiers, a report said today.
At least 10 finance companies have defaulted so far in 2008, placing $2.2 billion
and more than 74,000 debenture holders at risk, adding to last year's failures.
In addition, about $2.4b is frozen in at least 13 mortgage funds which have little capital or liquidity, and short borrowing and long lending terms.
The defaults of mezzanine property financiers Dominion Finance, North South Finance, St Laurence, Dorchester Finance, Strategic Finance, Hanover Finance and United Finance have decimated the sector, said John Kidd, head of research at McDouall Stuart.
"The overlaying of the global credit crisis and a steep downturn in the domestic property market onto a sector already suffering from a major crisis of confidence has had a profound, compound effect," Kidd said.
Almost $3b of the $3.8b of debenture money at risk in distressed finance companies was tied up in property lenders.
Despite the collapses, the $22b finance company sector was an important funder of projects that banks were not interested in, and was perhaps more crucial now that global credit had dried up, he said.
The departure of GE Money and GMAC, owned by multinationals General Electric and General Motors, from the local vehicle financing market was potentially bad news for car dealers and buyers.
"GE Money and GMAC together finance probably up to half New Zealand's vehicle dealerships. Dealers are currently faced with finding alternative financing arrangements, which in the current environment is likely to prove very difficult for some."
There was not enough capacity among existing finance companies in the market to cover the shortfall, he said.
GE Money would continue to offer personal loans, retail store finance, credit cards or insurance services in New Zealand.
On a brighter note, the government guarantee of retail deposits had boosted the industry, and was likely to result in renewed debenture offers to the retail market which had all but dried up.
"Because of their lending models, finance companies are able to offer higher deposit rates than banks.
"Although finance companies tend to present higher credit risk than banks, for investors, the risk of losing money is no different. Under either, their investment is guaranteed by the Government," said Kidd.
However, the scheme signalled there was such a thing as a riskless return just as investors were starting to appreciate the lessons of the last two years, he said.
Investment rates had increased substantially since October 12 when the guarantee scheme was announced, and some companies could not absorb the volume and were returning money to depositors.
Deposit rates on offer had also fallen.
Looking ahead, profitability was not likely to improve as companies focused on liquidity, and as bad debts and lower lending volumes offset higher lending margins.
More companies were also likely to upgrade to bank status ahead of new regulations in 2010.
More than $1.5b left the sector in the 15 months to September 2008, while the major finance companies had raised more than $1.5b in bank, institutional and listed debt in the last year, said Kidd.
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Only 11 finance companies included in McDouall Stuart's annual report on the sector are unaffected by receivership, moratorium or restructuring.
That compared with 29 the previous year, and 38 in 2006.
* Allied Nationwide, Equitable, Famers Mutual, Fisher & Paykel, Marac, and Medical Securities, NZF Money, Oxford, PGG Wrightson, South Canterbury and UDC were unaffected.
* Dorchester Finance, Hanover Finance, St Laurence, Strategic Finance and United Finance have suspended payments to depositors, but have yet to receive formal Trustee and/or depositor support for restructure proposals.
* Geneva, MFS Boston, MFS/OPI Pacific and North South Finance have had reconstruction proposals approved by investors following moratoria.
* FAI, Instant, Mascot and Orange have either withdrawn their investment statements or ceased taking retail deposits.
* Capital+Merchant, Dominion and Lombard are in receivership.
* Speirs Finance has been acquired by Allied Nationwide Finance, and Southland Finance has been amalgamated into its parent, South Canterbury Finance.
- NZPA
