KEY POINTS:
Lombard Finance and Investments, which yesterday said it was unable to meet repayments on the $127 million it has borrowed from the public, should be placed in receivership to protect its 4600 investors, financial adviser Chris Lee says.
Lombard, a subsidiary of the listed Lombard Group, said it
had suspended payments of capital and interest to debenture and capital note holders who are owed a total of $127 million.
It is the 17th finance company to either fail outright or default on payments to investors in the last two years.
Lombard which boasts two former justice ministers Sir Douglas Graham and Bill Jeffries on its board, blamed deteriorating market conditions in the property development sector, which has been tipped as a particularly risky sector and is where virtually all Lombard's lending lies.
Chief executive Michael Reeves cited a marked deterioration over the last month "with a downturn in real estate values, lack of sales and the lack of bank finance available to our borrowers due to the impact of the international credit squeeze".
He went on to describe the situation as "a systematic failure of an entire industry".
Lombard said it would seek approval from its investors for a moratorium or freeze on repayments for a set period to allow it to trade its way out of difficulty, as secured last year by Geneva Finance and Beneficial Finance.
However Kapiti Coast financial adviser and outspoken industry commentator Chris Lee said Lombard's management and board had simply shown poor judgment and mismanaged their business.
"Lombard does not deserve a moratorium, it should be put into receivership, it has traded beyond the edge of fair lending business for too long."
Lombard's relatively low level of shareholder capital, the money its owners have at stake, has been noted by business commentators over the last couple of years, with a recent improvement to $24 million largely the result of an issue of further debt.
Signs of bigger problems were evident in the company's amended prospectus, issued largely unnoticed on Christmas Eve last year in which Lombard disclosed what amounted to a serious decline in the quality of its $144 million lending book.
The company's level of riskier second mortgages climbed from 40 per cent to 56 per cent in the space of a few months.
The document also showed Lombard's concentration risk had risen sharply with loans to its six largest debtors accounting for 65 per cent of its loan book.
One debtor, who Lee believes is Aucklander Tim Manning, the developer of the Brooklyn Rise residential development in Wellington, accounted for loans totalling somewhere between 160 and 169 per cent of the company's total shareholders' funds, or about $40 million. That sum represents 27 per cent of the company's total lending.
Lee said responsible, well managed finance companies were unlikely to invest more than one third of shareholders' funds let alone nearly a third of all lending in a single project.
Moreover, since Manning bought out the troubled project from original developer Lance James, Lombard's security on its lending had been subordinated to Wellington-based company St Laurence.
St Laurence managing director Kevin Podmore yesterday confirmed his company had provided "a few millions" to Manning for the project, and had become the first mortgage holder.
Most of the loan had now been repaid, he said. Although work on the development is continuing, it has been slowed by resource consent problems and a string of other issues and sales are understood to be sluggish.
Last week Lombard denied reports a Mahia development to which it has exposure was being sold in a mortgagee sale.
Lombard Group's shares plunged almost 75 per cent yesterday from 79c to 20c.
Lombard Group's other businesses largely comprise two mortgage companies holding $500 million worth of loans which it bought from Hanover and Blue Chip.
LOMBARD FINANCE
* Subsidiary of listed Lombard Group
* Has 4600 investors which it owes $127 million.
* Lombard is the 17th finance company to run into trouble in the last two years.
* Lombard Group shares dropped 75 per cent yesterday.
