Watchdog gets tough on finance company

GFNZ managing director David O'Connell. Photo / Brett Phibbs

In another flex of its muscles the Financial Markets Authority has used a new power to crack down on a finance company it says failed to disclose a banking covenant breach in its registered prospectus.

But the GFNZ Group - formerly known as Geneva Finance - says it has already taken steps to prevent investors from subscribing to securities under the document.

The FMA said it had issued the firm with an interim order to stop an allotment of securities being made to raise funds from the public.

It was seeking further information from GFNZ and considering whether to order the offer documents to be corrected, or cancelled on grounds that they were likely to deceive, mislead or confuse investors.

In the March 2011 quarter GFNZ breached its minimum new lending covenant with its primary funder, Bank of Scotland, the authority said.

The FMA said that as a result of the breach the loan facility was repayable on demand.

"[GFNZ] had not disclosed to the market the fact they were in breach of their banking covenant ... that's the issue," said FMA chief executive Sean Hughes. "As a result of that [breach] Bank of Scotland could pull its funding facility from GFNZ at any point in time and that would obviously be a material issue for any investor because ... potentially, their funding [could] run dry."

GFNZ managing director David O'Connell said the extent of the covenant breach was "relatively low" .

"The breach could have been easily avoided had the board been prepared to lift lending volumes by relaxing lending criteria," he said. "Instead, the board chose to work with [Bank of Scotland] to resolve the matter. [Bank of Scotland] have a track record of being supportive of the company."

At a meeting on March 31, GFNZ shareholders approved a restructuring and name change for the company.

An amended prospectus was issued on May 12 that allowed the firm to begin raising funds.


O'Connell said no securities had yet been allotted.

Asked about the effect the authority's crackdown would have on GFNZ, he said there would only be an impact if the media and public interpreted the FMA's action as an indication that the company had behaved inappropriately. "The company had already voluntarily implemented procedures that have had the same effect as the action taken by the FMA."

Geneva Finance went into debt moratorium in 2007 and has shares listed on the NZX.

Many former debt holders were now shareholders as a result of a debt-for-equity swap earlier this year, the FMA said.

Releasing its full-year results on Tuesday the company reported a loss attributable to security holders of $6.1 million.

Revenue from ordinary activities of $15.5 million was a 35 per cent decline on the prior year's result, the company said.

According to its website GFNZ has 80.5 million shares held by 2663 investors.

Shares closed unchanged at 2.2c last night.

The FMA, which came into being on May 1, has taken on the regulatory functions of the Securities Commission, Ministry of Economic Development and NZX.

Since its formation the regulator has taken action against Bernard Whimp, a businessman who was posting low-ball offers to shareholders in NZX-listed firms, as well as Patrick Diack, an unregistered KiwiSaver salesman who was offering beneficiaries cash in exchange for signing up to the savings scheme.

Exposing Unacceptable Financial Advice (EUFA) spokesman Gray Eatwell said it was good to see the FMA swinging into action. "I guess it supports what we've been calling for ever since our inception really," he said. "Our criticism is really that the FMA has come after the event."

GFNZ GROUP

* Formerly known as Geneva Finance.
* Entered a debt moratorium in 2007.
* Offers car loans, personal finance, debt consolidation and insurance services.
* Received shareholder approval this year for its new name and restructuring into four operating subsidiaries.