Hotchin: Why we pulled the plug

Mark Hotchin. Photo / Richard Robinson

Former Hanover boss Mark Hotchin is hoping to jointly fund his finance company FAI Money with bank money after pulling the plug on its debenture borrowing.

Hotchin yesterday said he and co-owner Eric Watson had decided to stop taking money from the public because it would have been "too hard" to raise cash without the Government's extended guarantee covering their finance company FAI Money.

Debenture investors in the consumer and property finance business received letters this week telling them their money would be repaid in full with accrued interest on March 22 and the company would no longer be accepting deposits.

Hotchin said FAI Money had decided to pay investors back because the business was too small to qualify for the rating requirements needed to get into the Government's extended retail deposit guarantee scheme.

"Without that it would have been too hard," he said.

FAI Money is included under the guarantee but would have had to obtain a BB rating or above to be eligible for the extension which starts on October 12. Hotchin said he had informally talked to the agencies about getting a rating but had been told it was unlikely because of the size of the company and its reliance on debenture funding.

The firm had to apply for a rating exemption from the Reserve Bank because of its current debenture investors but had decided not to wait until the guarantee finished before paying them back.

Hotchin did not know the exact amount due to be paid back to debenture holders but said it was in the range of $15 million to $20 million.

FAI Money would continue to operate as a consumer finance and property lender but would now source its money privately. Hotchin said he hoped some would come from joint venture lending with bank funding.

Hotchin denied that the decision to pull out of the public debenture market had come as a result of criticism in the media.

On Saturday business commentator Brian Gaynor criticised the firm for continuing to raise money from the public.

He said FAI Money's accounting policies and disclosures were just as poor as Hanover's and it had failed to disclose the Hanover debacle in its prospectus, despite Hotchin and Watson's involvement.

The pair sold Hanover to NZX-listed Allied Farmers before Christmas leaving 15,000 investors out of pocket.

But Hotchin said it was "ridiculous" to insinuate that the criticism had driven the decision.

"The letter went out a week ago. The decision was made late last year."

Yesterday Gaynor said the decision to stop borrowing money from the public came as no surprise.

"I think the funding model from the public is the old model that is not going to work any more. If a lot of finance companies are finding it hard to raise money, they [Hotchin and Watson] are going to find it even harder."

Gaynor said it would be an industry problem for some time to come although he expected it to repair itself over time.

Meanwhile it seems directors David Henry and Mark Hotchin are stepping back from the day-to-day running of the business.

When the Business Herald rang FAI Money asking to speak to Henry, the receptionist said he no longer worked at the firm and had not been there in months. A consultant in charge of managing the firm referred all inquiries to Hotchin.

Speculation surfaced yesterday that Hotchin had sold the business to finance company Working Capital Solutions.

But its chief executive, Edward McKee Wright, said it had not bought the business but had been awarded a contract to manage the loan book.

Hotchin would not confirm the appointment. "We have spoken to a couple of companies about doing work on recoveries. He may be taking on part of that."

FAI MONEY

* Formerly called FAI Finance.
* 90 per cent of loans to consumer.
* $15 million to $20 million to be paid back to debenture investors early.
* Sold by Hanover Group to Mark Hotchin and Eric Watson.