Jenny Ruth: Green-friendly firm looks at share issue

The Green Party's candidate for the Napier electorate, whose campaign mantra is "Don't vote for me, give the Green Party your party vote", is unlikely to be giving up his day job for the hurly-burly of Parliament come Sunday - he's No 35 on the party list.

Terry Creighton's day job is director and loans manager of a finance company, although one with a difference.

Prometheus Finance is owned by a charitable trust, the Prometheus Foundation, which aims to finance "socially responsible and environmentally friendly" projects, otherwise known as ethical investment.

Its borrowers include Rudolph Steiner schools, a natural foods distributor, organic growers, native tree regeneration projects, a homeopathic remedy manufacturer and medical herb growers, an arts and crafts outlet, a supplier of solar-powered hot water systems and a wind-turbine manufacturer.

While its loan portfolio was quite small at $6.26 million at March 31, its borrowers range throughout the country from Kaitaia to Invercargill.

Creighton says most borrowers find it through word of mouth and one loan often leads to another with similar groups of people. The company also advertises in niche publications. No doubt his Green Party membership also helps.

Prometheus is contemplating undergoing its third major transformation since it was founded in 1983 which may see it issue shares and become a public company.

In 1993, when its activities had outgrown its charitable trust structure, it started the Prometheus Credit Union. Then, from March 31 last year, the credit union was folded into a finance company.

"We were growing really fast, about 25 per cent a year, and we had to put the brakes on,"Creighton says. "We didn't have the capacity to grow at that rate."

That's because the only way credit unions can grow their equity is through retained earnings. At March 31, 2004, the credit union's assets totalled $5.68 million and its net profit was $50,000. Creighton says since he joined Prometheus in 1999, profitability has been in the range of $30,000 to $60,000.

Another drawback of the credit union structure was that it could lend only to individuals, not groups or companies, activities that the foundation had carried out until the finance company was formed when both types of lending were combined.

That meant the finance company's total assets at March 31 this year had jumped to $9.52 million.

The balance sheet shows equity is indeed a scarce commodity at just $105,378 at March 31. The position isn't quite that precarious since the foundation, the shareholder, has also contributed $571,580 in subordinated debt. Together, the equity and subordinated debt made up 7.1 per cent of total assets.

This is unlike other similarly structured finance companies where the subordinated debt is contributed by third parties.

While the finance company was paying the foundation 16.75 per cent on interest on the subordinated debt, that's a bit of a moot point since the foundations earnings get ploughed back into the finance company.

In the year ended March, the foundation contributed $197,228 in subordinated debt on top of the $374,352 it contributed the previous year. The finance company paid the foundation $84,583 in interest on the subordinated debt in the latest year, so the finance company was the net gainer.

The finance company's trust deed allows total liabilities to go as high as 15 times equity plus subordinated debt. At March 31, it was 13.9 times.

Creighton says the subordinated debt situation is unlikely to persist. "To fund growth, we're going to need more equity. It's really just been a holding situation. We are a slightly resource-constrained organisation."

Prometheus borrowers pay much lower interest rates than the foundation is paid. The effective interest rate they were paying at March 31 was 9.35 per cent.

Considering the types of borrowers and projects Prometheus funds, you would expect a significantly higher interest rate.

"We're trying to keep it affordable. We're trying to balance the fact that it's not a level playing field," Creighton says. There's a cost to being environmentally friendly. "Until we bring in legislation about polluter pays, it's not going to be a level playing field."

Creighton says Prometheus will do deals other companies will not finance. He cites one $250,000 loan to complete an "eco village" for which the company accepted a collection of personal guarantees from a large group of people as security.

"It was only a short-term bridging loan." Once the units were completed and sold, the loan could be repaid.

All the company's lending is done at call, meaning it can demand repayment at any time, but, in practice, most of its lending is for between 10 and 20-year terms.

"We've only ever called up loans when people are seriously in default," Creighton says.

That doesn't seem to happen often. Prometheus had $69,863 in non-performing loans at March 31, 1.1 per cent of its loan book.

Creighton says people have mothballed their projects and taken up other work so they can pay the company back.

The flip side of borrowers paying relatively low interest rates is that Prometheus depositors have to accept returns that are significantly below market rates, sometimes as low as half what the trading banks pay for term deposits.

That goes completely against the usual pattern in which finance companies succeed by offering significantly higher interest rates than the "safe" returns the banks offer.

"The reason we're making the loans is because we're trying to achieve social and environmental outcomes," Creighton says. "Our depositors also want to see that happen. They see that they're getting a dual return."

Prometheus has between 1200 and 1400 investors.

Who, what, where

Prometheus Finance headquarters: 27 Tennyson St, Napier.

Profile: The company raises funds from the public to lend on socially and environmentally beneficial projects.

Latest results: Prometheus made a net profit of just $4378 in the year ended March 31, but that reflected the one-off costs of transforming the former credit union into a finance company.

Management: director, treasurer and general manager Antony van der Meer and director and lending manager Terry Creighton.

Major shareholder: Prometheus Foundation with 100 per cent.