KEY POINTS:
The finance company sector is undergoing a substantial reshaping.
That change is a key theme in investment bank McDouall Stuart's report on the sector, published this week.
Principal author John Kidd says the response has been telling.
"Across some of the people that have been asking for the
report, you do get the feeling that there's some behind the scenes work going on for the sort of consolidation that we've been referring to".
Other signs have been apparent this month.
Last week Fisher & Paykel Appliances said it was reviewing "strategic options, including possible sale" for its finance arm and South Canterbury Finance secured more than $100 million in funding from investors amid a downturn in the retail debenture market some believe will be permanent.
With its $318 million loan book, F&P Finance is the eighth largest finance company overall. It has shown no signs of anything other than sound health, begging the question, why look at selling it now?
Perhaps the key lies in F&P Finance's funding profile.
According to McDouall Stuart's analysis, F&P Finance is facing a mismatch between its debenture and loan maturities over the next 12 months.
If F&P's maturing debenture funding is rolled over or any shortfall is covered by new money, there would be no issue.
"I don't think they have any show of raising money like they used to," says financial adviser and finance company commentator Chris Lee.
That a firm like F&P Finance is possibly facing funding pressures speaks volumes about the current state of the market.
Kidd believes reinvestment rates probably bottomed out a couple of months ago and are now recovering slightly for the best firms, but another sizeable failure would set things back again and probably permanently. Lee says this has already happened.
Apart from fears of another failure, investors face a much greater choice of attractive opportunities including bank deposits and debt issues like South Canterbury's which was increased from $100 million to $125 million, indicating it has been a hit.
Meanwhile, the options open to those firms under pressure include putting the brakes on lending, calling in loans, or selling some or all of their business to better capitalised rivals.
"The guys further up the food chain who don't have those capital constraints are realising some really good lending opportunities," says Kidd.
Meanwhile, funding squeeze or not, Goldman Sachs JBWere analysts Rodney Deacon and Adrian Allbon believe F&P Finance is still attractive.
They also observe that GE Finance has previously "stated its intention to increase its consumer finance book".
GE has acquired a series of consumer finance businesses here including Eric Watson's Pacific Retail Finance Group, and is arguably the biggest player in that space. On the strength of an AAA credit rating, it raises money overseas at competitive rates and is entirely unaffected by the debenture downturn.
Other possible contenders according to Kidd and KPMG banking group partner Godfrey Boyce are a number of cashed up high profile Australian companies and possibly private equity players and banks.
Meanwhile, for the dozens of smaller finance companies who will not be able to find alternate funding, willing buyers or even merger partners, the outlook is grim, says Lee.
