KEY POINTS:
The collapse of LDC Finance owing nearly $20 million yesterday followed a run of panicky investors withdrawing cash.
The Nelson-based firm became the eighth finance company to go to the wall in 16 months, just days after telling the Securities Commission it was in sound financial health.
The
company's trustee, Perpetual Trust, said it got into difficulties only in the days after responding to the commission's request for assurances of health from the sector. But there are indications it was losing cash fast before that, raising questions about the reliability of information the commission received from other firms.
Perpetual Trust said it had appointed Malcolm Hollis and John Fisk of PricewaterhouseCoopers as receivers on Monday night at the request of the company's directors.
As at yesterday, LDC owed $11.1 million to 408 debenture investors, $7.9 million in on-call unsecured deposits to 576 customers and $300,000 in unsecured term deposits to 11 customers.
Louise Edwards of Perpetual Trust said the company had lost about $2 million in funds paid out to investors in a run that occurred primarily on Friday and Monday.
But Hollis said the run began much earlier: "It's fair to say they've had hundreds of thousands of dollars being withdrawn each day over the last week and a half."
That suggests the company was haemorrhaging cash even as it last week assured the Securities Commission it was in good shape.
The commission two weeks ago wrote to the 66 finance companies in the country requesting confirmation that the firms' prospectuses reflected their true financial position in spite of a sector-wide run on funds sparked by recent failures.
Of the 49 companies the commission initially wrote to, 48 responded by the earlier deadline of Wednesday last week saying they were complying with disclosure requirements. The exception was Five Star Finance which, instead, called in the receivers. The other 18 companies responded on Friday.
The commission yesterday confirmed LDC had told it that its prospectus was up to date and not false or misleading and noted that according to Perpetual, an "unprecedented number of LDC investors had demanded their money back over the last two days".
Edwards said investors had been pulling money out of the company for "a couple of weeks" but until Friday and Monday the flow had not been deemed worth disclosing to the commission. Last week the commission's director of primary markets, Kathryn Rogers, told the Business Herald the regulator would not seek to verify the responses it had received to its letter.
However, if, in the event of further failures, it emerged that companies' prospectuses did not comply with regulations at the time they responded, they could face charges of misleading the commission in addition to those they would face in relation to misleading investors by way of their offer documents.
"If any of the reports made to the commission were knowingly false, the companies and directors concerned may face prosecution, and a fine of up to $300,000," said acting commission chairman Colin Beyer yesterday.
LDC's directors said the receivership was not the result of asset quality issues, but "because of serious concerns as to the state of the debenture and funding markets and the ability of the company to obtain new funds and retain existing investments".
They expected all debenture holders and depositors would be repaid in full.
Hollis said LDC Finance invested primarily in property developments and real estate, rural assets and in two other small consumer finance firms, Stoke Finance and Quick Cash, which were still operating "at this point".
LDC's funding structure meant it had always been "fairly vulnerable" to a run on its funds.
"Whilst in recent times they had converted to more of a term type arrangement, still about 40 per cent of their investor base was in this on-call arrangement so members of the public simply walked in and drew cash out."
"They've really been hammered and I suspect many finance companies in this area are having the same situation at the moment."
He hoped to give investors an update in three or four weeks.