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New Zealand's third largest financial services group with assets of over $1 billion, Hanover Finance Ltd, today suspended repayment of its deposits.
"Against a backdrop of global credit uncertainties, falling property prices and lower reinvestment rates, the industry model has collapsed," said Mark Hotchin, joint owner of the company with Eric Watson.
About half the 49 companies finance companies operating in New Zealand 18 months ago have either collapsed or been unable to repay deposits on maturity and analysts have predicted the $18 billion sector will shrink to about 20 companies.
Mr Hotchin said his board was also suspending capital and interest repayments, investments with Hanover Finance subsidiary United Finance Limited, and sister company Hanover Capital Limited.
Earlier this year, the Hanover Finance book comprised of about 13,000 investors with $465 million in debentures.
United Finance had around 2400 investors with $65 million in debentures and Hanover Capital, offering secured preferential bonds, had about 1100 investors with $24 million worth of bonds.
The company's boast in extensive TV advertising has been that it would protect deposits whatever the economic "weather".
A detailed proposal will be presented to investors in late August after consultation with the trustees - New Zealand Guardian Trust for Hanover Finance, and Perpetual Trust for United Finance and Hanover Capital.
Mr Hotchin said the company's board was "acting early to preserve value" as market conditions continued to deteriorate and uncertainty mounted over borrowers' abilities to repay.
"Alternate financiers are increasingly unwilling to step in, and we're also now starting to see borrowers trying to take advantage of the uncertainty to delay payments - further compounding the situation," Mr Hotchin said.
The company could still meet its trust deed obligations and had a financial capacity to trade, but directors were working on a plan to restructure the business.
"Given the future uncertainty for the industry and the impacts now being felt by even the most well-established finance companies, we believe it is prudent to act early."
About 24 other finance companies have so far collapsed or reported problems in paying back deposits. As some of the first victims, Five Star Consumer Finance, Property Finance and Nathans Finance, fell over 11 months ago, Hanover Group's then chief executive Sam Stubbs called on the Government to fast-track proposed tighter regulation of the sector.
He said the Government should allow finance companies to voluntarily come under a supervisory regime of the Reserve Bank from today.
That would be a strong signal and help restore public confidence, he said.
He agreed with Stock Exchange chief executive Mark Weldon that finance companies should be required to get a credit rating from a reputable international rating company.
Mr Stubbs left Hanover last December, when Hanover Group, a holding company for Hanover Finance and other finance companies, said it was refining its structure.
The text of today's announcement reads:
"The Board of Hanover Finance Limited today announced it would suspend acceptance of new investments and repayment of existing deposits as it worked with trustees on a plan to restructure the business going forward.
"Hanover Finance, which continues to meet its Trust Deed obligations and has ongoing financial capacity to trade, says it is acting early to preserve value in the business as market conditions continue to deteriorate and uncertainty mounts over borrowers' abilities to repay as forecast.
"Shareholder Mark Hotchin says: 'Against a backdrop of global credit uncertainties, falling property prices and lower reinvestment rates, the industry model has collapsed. Alternate financiers are increasingly unwilling to step in, and we're also now starting to see borrowers trying to take advantage of the uncertainty to delay payments - further compounding the situation.'"
"Mark Hotchin and fellow shareholder Eric Watson have pledged continued support for the business and will also work closely with the trustees to deliver the restructure arrangement.
"Mark Hotchin says the suspension of capital and interest repayments, effective today, will enable the business to be managed in a measured way as it works through a restructure plan to allow investors to be repaid over an agreed time period. The action also applies to investments with Hanover Finance subsidiary United Finance Limited, and sister company Hanover Capital Limited.
"A detailed proposal will be presented to investors, targeted for late August but with the exact timing to be determined in consultation with the trustees - New Zealand Guardian Trust for Hanover Finance, and Perpetual Trust for United Finance and Hanover Capital.
"'We are disappointed to take this action given that the business is still projecting a cash positive position. But, given the future uncertainty for the industry and the impacts now being felt by even the most well-established finance companies, we believe it is prudent to act early to preserve value for all,' Mark Hotchin says.
"'Hanover Finance is now becoming caught up in this widespread uncertainty around borrowers' ability to meet their obligations. In this environment, we think it's sensible to take some time to work through all this in an orderly way. It also gives us more time to realise value from all borrowers,' Mark Hotchin says.
The Hanover Finance book comprises approximately 13,000 investors with $465 million in debentures. United Finance has around 2,400 investors with $65 million in debentures. And Hanover Capital, offering secured preferential bonds, has around 1,100 investors with $24 million worth of bonds.
As a consumer finance business FAI Finance Limited, which is also a Hanover Finance subsidiary, is not proposed to be included in the restructuring."
Even those who many said were well managed have been hit by a complete collapse of investor confidence in them, with few, if any, investors choosing to keep their money invested in such vehicles.
Today's news comes near the end of a big month for Hanover, as it has gone on the attack over non-performing loans it had made. It appointed a receiver to recover a $70 million loan it had made to the developer of a $2 billion Queenstown project.
The action was one in a string of attempts to recover bad debts after Hanover struck problems with loans for the Kinloch golf resort and an Auckland apartment block.
Hanover has a BB+ long-term credit rating from Fitch, which is not considered investment grade. It is owned by shareholders Eric Watson and Mark Hotchin.
In January this year the company reported a 40 per cent fall in half-year pre-tax profit but said the result was "very solid" given market conditions.
"While our top-line profit figure is lower, this is in line with the tighter market conditions and remains a very solid performance," said Hanover Finance chief executive David Bryan.
"We will continue to manage the business judiciously, keeping prudent levels of cash on hand, sticking to our core business, focusing the loan book on quality assets and picking out the best lending opportunities," said Bryan.
Hanover Finance chairman Greg Muir said the result demonstrated Hanover's "resilience and underlying strength".
"In addition to Hanover Finance's strong liquidity, shareholder equity is well above trust deed requirements and the company operates in accordance with stringent prudential and financial standards.
"We believe the outlook remains positive for finance companies that are well-run and have strong governance and management, a consistent record of profit and an international credit rating."
- NZPA, NZ HERALD STAFF
