Heat goes on drip-feeding finance firms

Photo / NZ Herald

The Government is taking a closer look at finance companies with deferred repayment plans and is concerned about the standard of disclosure in the sector.

More than $1.7 billion of investors' money is tied up in finance company moratoriums, including those of Hanover, Dorchester and Strategic Finance.

The repayment plans allow those companies to keep operating while drip feeding money back to investors and avoiding a potential receivership. But some commentators and investors have questioned the sense of moratoriums over receivership given the same people who got the company into strife are allowed to keep running it.

A spokesman for Commerce Minister Simon Power yesterday confirmed the Ministry of Economic Development (MED) was in the process of "scoping out moratoria".

Power said he had been approached by the commerce select committee in May over the issue of moratoriums and had requested the MED investigate the scale of the problems and whether there were any grounds for Government intervention.

"There is obviously a great deal of public concern about the issues faced by the finance company sector generally and the use of 'moratoria' by finance companies specifically."

Power said in particular there were concerns about the standard of disclosure by finance companies to their investors and he had asked the MED to investigate the issue.

Power said he expected to announce the findings of a preliminary report soon as well as the Government's proposed response.

Financial adviser and finance company critic Chris Lee said the Government investigation was sensible and would likely put the heat on auditors and trustees who approved the moratoriums as well as the finance companies.

"It's really an area in which there is a great culture of shrouding of what can and can't be said."

But he believed the main problem with those in moratorium was an underestimation of the decline of the property market and when they went to realise their assets they were often worth a lot less than valuations made just six months earlier.

Geneva Finance was the first finance company to use a moratorium period to give it some breathing space in October 2007.

It asked investors for a six-month delay on paying back principal while it renegotiated a deal with major lender Bank of Scotland International.

After the six months Geneva restructured and listed on the stock exchange.

But its move was followed by a raft of other finance companies. Not all have been successful in keeping the promises made to investors to pay back their money within specific timeframes.

Boston Finance, a wholly owned business of failed Australian investment company MFS, asked investors to agree to a moratorium in March 2008 and promised to pay them back 77 per cent of their money by the end of 2008.

But by Christmas last year it had paid back just 21c in the dollar.

Property Finance Securities had to go back to its investors for a second moratorium agreement last month after it was unable to meet a $15.5 million repayment in full.

Other moratoriums have promised repayment periods that stretch years into the future.

St Laurence Finance's capital noteholders have been told they are unlikely to receive their full money back until 2034.

IN MORATORIUM

Money owed to investors:

* Strategic Finance: $325m
* Hanover Finance, United Finance: $527m
* Dorchester Finance: $168m
* North South Finance: $102m
* St Laurence: $250m
* OPI Pacific Finance: $313m
* Boston Finance: $38.5m
* Beneficial Finance: $24.2m
* Property Finance Securities: $79m