Fears raised over finance firm ‘meltdown'

An international credit rating agency and a local investment research firm have reinforced fears of a meltdown among the country's lower-grade finance companies.

Speaking at the annual FundSource conference on Friday, Standard & Poor's director of financial service's ratings, Gavin Gunning, said there is keen interest in how finance companies perform as economic conditions turn against them.

" There is a strong view emerging on many levels in New Zealand about impending risk in the finance company sector," Gunning said.

A relatively light regulatory framework, a fragmented industry with lots of small players and a lack of information of risk for investors - extending to evidence of misinformation in some cases - all point to a red flag, he said.

Mr Gunning added the rapid growth in the sector is another warning sign, as is a lack of diversification among the loan books.

"We believe when the economic and property cycles take a turn for the worse, investors in the [finance company] sector may be hurt."

Gunning's warning comes as FundSource releases a new study of finance companies - which shows that on average, liabilities exceed assets by over 30 per cent in the next year or so.

The study of 30 debenture-issuing finance companies doesn't assign ratings but does benchmark the companies operating in the sector against one another.

The non-bank finance company sector has grown rapidly over the last five years, with assets under management estimated at over $12 billion as at the end of last year. Lending activity has been largely funded by the investing public via deposits estimated at over $8 billion.

FundSource points out the light regulatory environment makes relative assessments difficult.

"There is a lack of disclosure as well as a limited standardisation of policies and reporting across the industry," the study says.

It says the heady pace of domestic economic growth, backed by low interest rates over the last few years has been prime for lending. Coupled with this, volatile global markets have shifted investors' appetite towards high yield and apparently certain returns.

The main risk to investors is that the company becomes insolvent - as the only security they have is over the assets of the company - therefore the level of equity within a finance company represents a buffer to investors against any loss that the loan portfolio may suffer.

FundSource's research found finance firms are highly leveraged investments with some having inadequate levels of equity to cover the risk of default.

Some do not even have enough equity to cover one single loan defaulting.

The Government is working to toughen disclosure regulations for finance firms, with a Securities Commission report expected in April.

The 10 most geared

1. Lombard
2. MFS
3. Speirs
4. Capital + Merchant
5. North South
6. Elders
7. St Laurence
8. South Canterbury
9. Bridgecorp
10. Nationwide

Source: FundSource