KEY POINTS:
Fresh signs of stress are emerging in the finance company sector with two listed companies suffering sharp sell-offs yesterday as the credit crunch shuts down options for firms reliant on the domestic debenture market.
Shares in Dorchester Pacific, which last week downgraded its profit guidance, fell as much 23 per cent, ending the day 13c lower at 66c. Shares in New Zealand Finance were down 25 per cent at one point but recovered to close 5c lower at 55c. A year ago, Dorchester shares were trading at $2.32 while New Zealand Finance's were at $1.50.
On Friday, Dorchester told the market its annual profit was likely to be between $3 million and $4 million against $6 million last year due to reduced lending volumes, lower fee income and increased provisioning.
Yesterday, chief executive Andrew Walker said the company was focusing on preserving liquidity, aggressively realising assets and looking for sources of funding beyond the retail debenture market.
"We'd rather have a strong balance sheet than super normal profits, that's what's going on."
NZ Finance chief executive John Callaghan said his company's share price decline was a result of being lumped in with other finance companies.
"We're being seen as a vanilla finance company, whereas we have multiple funding and distribution channels.
"We haven't come out with any disclosure that performance will be substantially lower, we're still tracking well and still growing."
Analyst John Kidd, of McDouall Stuart, said the finance company situation appeared to be playing out along expected lines. Large, secure companies with diverse funding sources were benefiting from attractive lending opportunities thrown up as less secure companies, particularly those overly reliant on retail debenture funding, struggled.
Fifteen finance company failures in less than two years have seen investors largely shun all but the most secure finance company debentures.
Walker said Dorchester's reinvestment rate was running at a comparatively low level of about 30 per cent.
"That's not unexpected and we would like it to be higher but we're not, by any stretch of the imagination, the lowest in the market."
Pressure on debenture funding has been tipped to intensify with two major banks, ANZ National and Bank of New Zealand, announcing plans to issue competitive fixed-interest products aimed largely at retail investors.
The outlook was looking increasingly grim for those firms unable to secure alternate funding from the likes of banks, who were themselves now more cautious about who they extended loans to due to the ongoing international credit crunch, said Kidd. "They're taking a very risk averse approach. Only the strongest companies will be able to secure bank lines." Walker confirmed Dorchester was finding it difficult to secure alternate funding.
"You can imagine it's not the easiest job to diversify funding when the international debt markets are suffering a rather large correction."
Brian Jolliffe, managing director of Pyne Gould Corporation, which owns finance company Marac, said that should have been a priority long before recent events unfolded.
"If diversification wasn't part of the funding strategy particularly in the last 12 or 18 months then the reality is that it's going to be extremely difficult in this marketplace to be able to put those alternatives in place now."
He confirmed Marac was enjoying increased profitability from new loans it was writing.
Jolliffe said the mezzanine property finance niche was now "practically dead" and the Business Herald understands receivers are finding it difficult to secure completion finance for a number of property developments funded by failed companies.
SHARES SLUMP
* Big share price falls in listed finance companies Dorchester and NZ Finance suggests sentiment towards the sector is deteriorating further.
* Commentators say the credit crunch means it is more difficult for debenture-reliant finance companies to secure alternate funding.
* Secure, well-funded companies report they are enjoying more profitable business as their smaller rivals struggle.
