Jenny Ruth: Disclosure helping financiers expand

Concerns expressed by the Securities Commission and others about the financial stability of many finance companies have resulted in some seeking ways to differentiate themselves from those in the worrying category.

North South Finance does share one characteristic that has attracted official eyes to the sector: it has grown spectacularly since it was founded in early 2001.

Total assets have increased to $76.7 million at the end of March and net profits have gone from $108,201 in 2002 to $3.1 million last financial year. Cashflow from operations in the latest year was $4.6 million.

But that growth has been supported by increasing amounts of equity provided by its five executive directors, rising from the initial $2.2 million to $5.2 million by March this year which, including retained profits, took total equity to $8.7 million.

Total assets are a conservative 8.8 times equity and the trust deed for the company's debentures limits total liabilities to 90 per cent of total assets.

North South is certainly keen to be regarded as one of the sound finance companies.

Director Mark Auld claims that no other finance company can manage the five "ticks" his firm uses in its advertising. These are that it has no related-party lending, that it has no prior charges ranking ahead of its debentures, that it has had no loan write-offs to date, no subsidiaries or associates and no subordinated notes or bonds. A number of finance companies treat the latter as if it were equity, even though it is debt paper issued to investors other than their owners.

The company does have an $8 million banking facility from ASB Bank that it uses for liquidity management, but that ranks equally with the debentures. At March 31, the company had drawn down $3.7 million.

What four of the five founders have in common is that they all met when working for Countrywide Bank (since taken over by National Bank) in the early 1990s and the other is a director's brother. They specialised in property financing and that is what North South Finance is about.

All the company's lending is secured. At March 31, 86 per cent was secured by first mortgages, comprising 16 per cent secured over developments and 70 per cent over existing properties.

The other 14 per cent of the total was secured by second mortgages, comprising 9 per cent over existing properties and 5 per cent on developments.

Residential property accounted for 79 per cent of lending and commercial property 14 per cent. A further sign of the company's conservatism is that it will only lend to 75 per cent of a property's value and its average loan-to-value ratio at year end was 66 per cent.

The Auckland region accounts for 67 per cent of the company's lending, with lending outside that area coming from relationships with existing borrowers.

Managing director Darryl Eastgate says the company always does due diligence before lending: "We kick the tyres".

In one case where the directors didn't have time for the valuer involved, they personally inspected the property.

"We're very hard on reading valuations and making a critical assessment of them. Quite often we get another valuation from somebody that we have a little more time for."

Most of North South's lending is for less than 12 months. Eastgate says the company has made longer loans on two occasions, one for 14 months and one for 24 months, but it intends to mainly stick with shorter loans.

While $26.7 million of its debentures at March 31 were due to mature within 12 months, the bulk - $36.7 million - were due to mature between one and five years.

Concentration of lending has been gradually decreasing in line with the company's growth. It had three loans worth between 50 and 60 per cent of its equity at March 31, 2004, but by March this year its three biggest loans were between 40 and 50 per cent of equity.

Auld says the company has had "the big fat number, zero" of loan write-offs, but one loan did turn sour. A developer had a few things go wrong and decided to disappear.

Eastgate says as soon as he found out he got a locksmith and changed the locks on the property securing the loan, just in case the developer turned up again.

"We take a personal approach when people don't pay us back."

The directors take this personal approach to the extent of putting their addresses in the prospectus. "It's quite a risk. You don't want a disgruntled borrower turning up on your doorstep."

In a cheeky reference to finance companies that use famous people either on their boards or in their advertising, North South's latest prospectus invites readers "to note that we do not have ex-politicians on our board or known personalities marketing the company."

The prospectus acknowledges concerns about finance companies and says North South's response has been to increase its disclosure.

"We are not a developer disguised as a finance company. We have no subsidiaries or associates or convoluted company structures which can make understanding a prospectus difficult."

North South also rewards its investors for loyalty, paying existing investors a further 25 basis points above the advertised rate.

"It just makes sense," says Eastgate. "I will always remember the name of the first person who gave us $1000. Why get a new customer when you've already got a customer."

He says the company has forecasts showing it can continue to growth over the next three years using retained earnings and without requiring further equity.

Sooner or later, the directors' ability to continue supplying equity will run out. Eastgate's title was general manager until March last year, when he managed to pay off his 10 per cent shareholding.

The possibility of a float is on the board's agenda, but they won't be drawn further than that.

Auld attributes North South's fast growth to the risk-averse nature of the major banks and to changing banking practices. "The bank manager now isn't who he once was. He doesn't have the experience or the skills. He's turned into a tick-the-box lender."

Eastgate adds that you no longer get to meet the person who makes the lending decision. Many of North South's clients don't have the time or patience to deal with the major banks and prefer to deal with his company to get deals done fast.

North South Finance

Head office: Level 2, Windsor Court, 128 Parnell Rd, Auckland.
Profile: The company raises funds from debentures issued to the public and lends the money on property, mainly in the Auckland region.
Results: North South's net profit rose 139 per cent to $3.1 million in the latest March year.
Management: The five shareholder directors.
Shareholders: Ross and Brett Lornie with 36 per cent, Mark Auld 36 per cent, Craig Alexander 18 per cent and Darryl Eastgate 10 per cent.