Strategic's $180m net loss bad news for 15,000

About 15,000 investors in failed property lender Strategic Finance will not get all their money back as previously promised.

In July, Strategic told debenture holders they would get full payments despite its loan book souring in the six months to June, prompting it to warn of a $98 million full-year loss.

Now, Strategic has released its annual report for the year to June showing a huge loss and a revised forecast which outlines how investors will lose between 7c and 15c in every dollar.

"Debenture holders are now forecast over the five-year term of the moratorium to receive between 85 and 93 cents in the dollar of principal and no further interest payments," the board said.

Quarterly payments to debenture holders are due soon but Strategic raised doubts about whether it would even be able to meet these.

"Uncertainty exists in terms of the ability of the company to make the full amount of these repayments in December 2009 and January 2010 and further payments from 2010 to 2013. The uncertainty relates to the ability of the company to generate a sufficient level of loan repayments prior to those dates."

Last December, Strategic entered into a moratorium proposal agreeing to pay $325 million back to its 15,000 stockholders over the next five years.

But in its latest accounts, Strategic has declared an annual net after-tax loss of $180 million, much worse than last year's $15.5 million loss. It wrote off $77.5 million of bad debts (last year $18.7 million), and spent just $258,000 on advertising and marketing (last year $2.4 million).

Last year's Strategic accounts showed it had equity and liabilities of $536 million but that now stands at $339 million. Total shareholder equity has become a deficit, converting last year's $77.5 million equity to this year's $102 million deficit.

The company's annual results are posted on NZX's debt exchange NZDX.

All goodwill has been written off.

Of the $77 million bad debts, $55.3 million were New Zealand loans, $5.2 million were Australian and $16.9 million were Pacific Islands. Strategic blamed the market for these write-offs.

"The increase in total bad debts expense reflects the ongoing deterioration in the New Zealand, Australian and Pacific Islands property and credit markets and the resulting impact on the ability of borrowers to meet their repayment obligations via refinancing or asset realisation," it said.

The business has loaned $139 million on first mortgages, $144 million on second mortgages and $40.7 million on second mortgage in a subordinated position but the report showed how fast the real estate market is declining.

"There has been a continuing slowdown in the New Zealand economy and in particular the property development sector. Concurrent with the slowdown in credit to the property development industry there has been a marked slowdown in sales activity in the property market.

"These market conditions result in uncertainty in terms of when development projects commence and when they can be completed and hence the return available to prime and mezzanine debt providers," Strategic said.

Strategic's executive directors in the reporting period were Kerry Finnigan, Marc Lindale, Jock Hobbs up until last September and Graham Jackson.

Some of the big property projects it has funded are the stalled Ponsonby Soho Square, the Fiji Hilton where stage two has stalled and is predicted to go into receivership, and Cornerstone Group's 30-level Sentinel apartment tower where some units have not sold.

STRATEGIC FINANCE
Year to June 30

Operating profit (loss)
2009 - ($168m)
2008 - ($20m)

Pre-tax profit (loss)
2009 - ($161m)
2008 - (20.3m)

Net after-tax profit (loss)
2009 - ($180m)
2008 - ($15.5m)