NZ Herald
  • Home
  • Latest news
  • Herald NOW
  • Video
  • New Zealand
  • Sport
  • World
  • Business
  • Entertainment
  • Podcasts
  • Quizzes
  • Opinion
  • Lifestyle
  • Travel
  • Viva
  • Weather

Subscriptions

  • Herald Premium
  • Viva Premium
  • The Listener
  • BusinessDesk

Sections

  • Latest news
  • New Zealand
    • All New Zealand
    • Crime
    • Politics
    • Education
    • Open Justice
    • Scam Update
  • Herald NOW
  • On The Up
  • World
    • All World
    • Australia
    • Asia
    • UK
    • United States
    • Middle East
    • Europe
    • Pacific
  • Business
    • All Business
    • MarketsSharesCurrencyCommoditiesStock TakesCrypto
    • Markets with Madison
    • Media Insider
    • Business analysis
    • Personal financeKiwiSaverInterest ratesTaxInvestment
    • EconomyInflationGDPOfficial cash rateEmployment
    • Small business
    • Business reportsMood of the BoardroomProject AucklandSustainable business and financeCapital markets reportAgribusiness reportInfrastructure reportDynamic business
    • Deloitte Top 200 Awards
    • CompaniesAged CareAgribusinessAirlinesBanking and financeConstructionEnergyFreight and logisticsHealthcareManufacturingMedia and MarketingRetailTelecommunicationsTourism
  • Opinion
    • All Opinion
    • Analysis
    • Editorials
    • Business analysis
    • Premium opinion
    • Letters to the editor
  • Politics
  • Sport
    • All Sport
    • OlympicsParalympics
    • RugbySuper RugbyNPCAll BlacksBlack FernsRugby sevensSchool rugby
    • CricketBlack CapsWhite Ferns
    • Racing
    • NetballSilver Ferns
    • LeagueWarriorsNRL
    • FootballWellington PhoenixAuckland FCAll WhitesFootball FernsEnglish Premier League
    • GolfNZ Open
    • MotorsportFormula 1
    • Boxing
    • UFC
    • BasketballNBABreakersTall BlacksTall Ferns
    • Tennis
    • Cycling
    • Athletics
    • SailingAmerica's CupSailGP
    • Rowing
  • Lifestyle
    • All Lifestyle
    • Viva - Food, fashion & beauty
    • Society Insider
    • Royals
    • Sex & relationships
    • Food & drinkRecipesRecipe collectionsRestaurant reviewsRestaurant bookings
    • Health & wellbeing
    • Fashion & beauty
    • Pets & animals
    • The Selection - Shop the trendsShop fashionShop beautyShop entertainmentShop giftsShop home & living
    • Milford's Investing Place
  • Entertainment
    • All Entertainment
    • TV
    • MoviesMovie reviews
    • MusicMusic reviews
    • BooksBook reviews
    • Culture
    • ReviewsBook reviewsMovie reviewsMusic reviewsRestaurant reviews
  • Travel
    • All Travel
    • News
    • New ZealandNorthlandAucklandWellingtonCanterburyOtago / QueenstownNelson-TasmanBest NZ beaches
    • International travelAustraliaPacific IslandsEuropeUKUSAAfricaAsia
    • Rail holidays
    • Cruise holidays
    • Ski holidays
    • Luxury travel
    • Adventure travel
  • Kāhu Māori news
  • Environment
    • All Environment
    • Our Green Future
  • Talanoa Pacific news
  • Property
    • All Property
    • Property Insider
    • Interest rates tracker
    • Residential property listings
    • Commercial property listings
  • Health
  • Technology
    • All Technology
    • AI
    • Social media
  • Rural
    • All Rural
    • Dairy farming
    • Sheep & beef farming
    • Horticulture
    • Animal health
    • Rural business
    • Rural life
    • Rural technology
    • Opinion
    • Audio & podcasts
  • Weather forecasts
    • All Weather forecasts
    • Kaitaia
    • Whangārei
    • Dargaville
    • Auckland
    • Thames
    • Tauranga
    • Hamilton
    • Whakatāne
    • Rotorua
    • Tokoroa
    • Te Kuiti
    • Taumaranui
    • Taupō
    • Gisborne
    • New Plymouth
    • Napier
    • Hastings
    • Dannevirke
    • Whanganui
    • Palmerston North
    • Levin
    • Paraparaumu
    • Masterton
    • Wellington
    • Motueka
    • Nelson
    • Blenheim
    • Westport
    • Reefton
    • Kaikōura
    • Greymouth
    • Hokitika
    • Christchurch
    • Ashburton
    • Timaru
    • Wānaka
    • Oamaru
    • Queenstown
    • Dunedin
    • Gore
    • Invercargill
  • Meet the journalists
  • Promotions & competitions
  • OneRoof property listings
  • Driven car news

Puzzles & Quizzes

  • Puzzles
    • All Puzzles
    • Sudoku
    • Code Cracker
    • Crosswords
    • Cryptic crossword
    • Wordsearch
  • Quizzes
    • All Quizzes
    • Morning quiz
    • Afternoon quiz
    • Sports quiz

Regions

  • Northland
    • All Northland
    • Far North
    • Kaitaia
    • Kerikeri
    • Kaikohe
    • Bay of Islands
    • Whangarei
    • Dargaville
    • Kaipara
    • Mangawhai
  • Auckland
  • Waikato
    • All Waikato
    • Hamilton
    • Coromandel & Hauraki
    • Matamata & Piako
    • Cambridge
    • Te Awamutu
    • Tokoroa & South Waikato
    • Taupō & Tūrangi
  • Bay of Plenty
    • All Bay of Plenty
    • Katikati
    • Tauranga
    • Mount Maunganui
    • Pāpāmoa
    • Te Puke
    • Whakatāne
  • Rotorua
  • Hawke's Bay
    • All Hawke's Bay
    • Napier
    • Hastings
    • Havelock North
    • Central Hawke's Bay
    • Wairoa
  • Taranaki
    • All Taranaki
    • Stratford
    • New Plymouth
    • Hāwera
  • Manawatū - Whanganui
    • All Manawatū - Whanganui
    • Whanganui
    • Palmerston North
    • Manawatū
    • Tararua
    • Horowhenua
  • Wellington
    • All Wellington
    • Kapiti
    • Wairarapa
    • Upper Hutt
    • Lower Hutt
  • Nelson & Tasman
    • All Nelson & Tasman
    • Motueka
    • Nelson
    • Tasman
  • Marlborough
  • West Coast
  • Canterbury
    • All Canterbury
    • Kaikōura
    • Christchurch
    • Ashburton
    • Timaru
  • Otago
    • All Otago
    • Oamaru
    • Dunedin
    • Balclutha
    • Alexandra
    • Queenstown
    • Wanaka
  • Southland
    • All Southland
    • Invercargill
    • Gore
    • Stewart Island
  • Gisborne

Media

  • Video
    • All Video
    • NZ news video
    • Herald NOW
    • Business news video
    • Politics news video
    • Sport video
    • World news video
    • Lifestyle video
    • Entertainment video
    • Travel video
    • Markets with Madison
    • Kea Kids news
  • Podcasts
    • All Podcasts
    • The Front Page
    • On the Tiles
    • Ask me Anything
    • The Little Things
  • Cartoons
  • Photo galleries
  • Today's Paper - E-editions
  • Photo sales
  • Classifieds

NZME Network

  • Advertise with NZME
  • OneRoof
  • Driven Car Guide
  • BusinessDesk
  • Newstalk ZB
  • Sunlive
  • ZM
  • The Hits
  • Coast
  • Radio Hauraki
  • The Alternative Commentary Collective
  • Gold
  • Flava
  • iHeart Radio
  • Hokonui
  • Radio Wanaka
  • iHeartCountry New Zealand
  • Restaurant Hub
  • NZME Events

SubscribeSign In
Advertisement
Advertise with NZME.
Home / Business / Economy / Official Cash Rate

Sector will take time to heal

By Adam Bennett
3 Jan, 2008 04:00 PM9 mins to read

Subscribe to listen

Access to Herald Premium articles require a Premium subscription. Subscribe now to listen.
Already a subscriber?  Sign in here

Listening to articles is free for open-access content—explore other articles or learn more about text-to-speech.
‌
Save

    Share this article

Malcolm Tilbrook

Malcolm Tilbrook

KEY POINTS:

Last year the cracks that opened in the finance company sector in 2006 widened alarmingly.

Even excluding the failures of National Finance 2000, Provincial Finance and Western Bay Finance in 2006, the tally of companies that have bitten the dust is in double figures and there is every
indication that there will be more to come this year.

Close to $1.5 billion of savings is tied up in the failed companies, and investors have fled from the debenture market which has been the sector's lifeblood.

However the relatively small size of the sector means, according to the Reserve Bank, that the fallout for the rest of the economy will be slight.

Others tip a ripple effect - the retail sector hit by a shortage of consumer finance and businesses unable to secure bank finance and starved of investment capital.

Christmas sales figures will soon give an indication of whether the threat to the retail sector materialised, but as far as business finance goes, it appears that there are still enough big healthy companies willing to take up the slack - for a price.

Analyst John Kidd of McDouall Stuart - who wrote a detailed report on the sector last year - found that while the top firms were likely to continue to thrive despite souring investment sentiment, smaller, less well capitalised companies would struggle unless they found other sources of money.

"Everything that we've flagged so far, I think we'll just see more of the same over the coming year. I don't see the debenture market recovering quickly," he says.

"Apart from the recent news from Capital + Merchant, Christmas usually impacts on investors' appetite to roll money over. That will continue to bite on those companies that are heavily debenture reliant. I don't think that will change in any respect." Kidd estimated that for companies without alternative cash a debenture rollover rate of 70 to 80 per cent with a new money rate of 10 to 15 per cent would be needed to maintain their book.

"For companies that are further down the food chain, at best you're looking at half of that these days and probably worse which is why they're going backwards so quickly.

"What I think will probably happen is a higher cost of capital across the finance company sector for those that are borrowing from the sector and those lending to the sector.

"It will become more expensive to access money and probably just as difficult as it has been over the last couple of months."

Lending activities were tightening simply because the flow of capital through the sector had ebbed away, he says.

"So I'd expect continuing pressure on those companies exposed to that dynamic really.

"I would expect to see more action in the wind-down end of things and possibly at the smaller end, some more failures. Those companies that are able to exploit that higher cost of capital by placing more money into the sector, they're in a very nice position at the moment and are earning a better margin."

Furthermore, with fewer of the second and third tier companies able to lend money in great volumes, "the universe of lending opportunities is much bigger".

"The quality of lending for the big companies is actually improving because these guys are literally able to cherrypick from a greater number of lending opportunities.

"There's nothing really surprising that has happened in the last month or two and it will just continue into the new year, there will be no short-term respite from this."

Kidd's view is reflected by Malcolm Tilbrook, chief executive of UDC Finance, the ANZ-owned, AA rated firm which with GE Finance is one of the market leaders.

During the rapid expansion of the finance company sector over the past half decade, UDC failed to keep pace, largely due to problems with its sales model, but Tilbrook says those issues have been addressed since he began with the company two years ago.

UDC's net profit rose 26 per cent in 2007, taking it back to the levels achieved a couple of years ago.

"We've done what we needed to do internally to get our business back on track and the market conditions are probably advantageous to us.

"Some of those things that people thought were weaknesses could now be considered strengths," Tilbrook said. "Our lack of exposure to property development for example.

"In recent times, most of those companies that have got under pressure are under pressure for two reasons, exposure to long-term assets, developments that take a long time to get payback, combined with pressure on liquidity, and that's just an environment that UDC won't have.

"Our book is as close to 100 per cent plant machinery and vehicles as you can get, and that generates monthly and quarterly repayments.

"With GE, we're probably the only two companies that can say we're not going to have those issues."

UDC is looking at acquisition opportunities on two fronts.

"We would look at many companies on a total buyout basis but the thing that's of most interest to me is to just take over their asset books," says Tilbrook.

However, as Kidd suggests, in the present environment UDC can afford to be discriminating.

Tilbrook rules out acquisitions in the property or consumer finance areas, apart from motor vehicle lending.

"We're more in traditional finance companies that have a book that's very compatible to our own - plant and equipment and vehicles."

Meanwhile, Tilbrook describes the debenture market as very interesting.

"Our reinvestment rate is steady at about 85 per cent which by the industry standard would be considered very good. But even with that level of reinvestment our debenture book is actually flat or in fact down a bit.

"That's because the new money is not coming in to finance companies at the moment." While ANZ doesn't guarantee UDC, Tilbrook says his company has "virtually unlimited access to funding lines" through its parent, a luxury few of its rivals have.

"UDC and GE will be the strength in the market and I think clients from an asset finance perspective will find we are the companies that have the advantage.

"Second tier firms, such as Marac and South Canterbury, will have to be careful with their liquidity and the third tier will find it very difficult in this market and you will see consolidation there.

"Whether they fall over or consolidate will be interesting. You even see now the latest ones are almost in voluntary administration."

Paul Cropp, chief executive of Dominion Finance, says Dominion's debenture reinvestment rate is fluctuating.

"In the old days you were always going to get 70 to 80 per cent. At present we're in the 25 to 60 per cent range. It goes up and down.

"A small finance company is now going to be below 20 per cent."

Dominion operates two brands, Dominion Finance and North South Finance, with a combined book of $500 million.

Cropp points out Dominion has about $50 million in shareholders' equity, $40 million in capital notes on issue and bank lines. "All up we have a couple of hundred million, in equity, long-term funding and bank funding. We're probably not as exposed in terms of debenture funding as a lot of others are."

Dominion lends primarily to the property sector. The development end of that area has been picked as the most problematic by a number of commentators.

"I don't really see that," says Cropp.

"Out of all the finance entities that have gone under only about three were property based."

However they include the two biggest, Bridgecorp and Capital + Merchant.

Nevertheless, Cropp is confident that his company and other lenders with significant property investments - including the likes of St Laurence, Hanover, South Canterbury Strategic Finance and Marac - are not having similar problems.

He says it's not all doom and gloom for those companies exposed to property so long as they have well-structured, well-managed loan books.

"I'm not so bullish about consumer or motor vehicles," he says.

At the smaller end of the scale, Broadlands Finance chief executive Rudi Kats said: "We're going to take a deep breath.

"From our point of view, while we're not in a rush, we have to diversify from debenture funds."

Broadlands has about $19 million in debentures on issue and Kats said the company had no problems attracting or retaining those funds until Nathans and Five Star went into receivership.

"They really closed the door on new money. Our rollovers are satisfactory.

"If we can hit that 30 to 35 per cent reinvestment rate we're pretty happy."

As for new money: "We just missed budget last month and this month looks just on budget."

However those were, he acknowledges, not big budgets.

Nevertheless, as Broadlands has a shareholder "with resources", it does have a backstop, one it hasn't been forced to draw on so far.

"Because we have considerable equity, we get more money in than we pay out, but there's no money for growth."

He says that is frustrating because opportunities are going begging.

"We see some of the loans that banks don't want to pick up that to us are just fantastic, but we just don't have the money."

LEGAL COMEBACK A SLIM HOPE

Among the many reasons given for the finance company receiverships to date, a common one has been the lack of liquidity due to deteriorating investor sentiment. That was really set off by the failure of high-profile company Bridgecorp.

While management of failed companies have invariably blamed plummeting reinvestment rates and new money inflows, it has emerged that at least some of the failed companies' business practices fell short of what was required by law.

It's safe to say many of the investors hurt by the collapses would love to see some legal comeback on the management, directors and owners of these companies. They shouldn't hold their breath.

Alan Ludlow's National Finance 2000 was the first finance company of the recent rash to go into receivership, on May 6 last year. The Business Herald understands there have been a number of issues raised with regard to its offer documents, but more than 18 months later there have been no proceedings initiated by the Companies Office or the Securities Commission.

It seems likely that will set the pattern for other failed companies where there were signs of gross mismanagement or worse.

Advertisement
Advertise with NZME.
Advertisement
Advertise with NZME.
Save

    Share this article

Latest from Official Cash Rate

Premium
Official Cash Rate

Economists divided over Reserve Bank's next OCR call

06 Jul 05:00 PM
Economy|official cash rate

'Least upbeat': Construction sector struggles as demand weakens

01 Jul 12:41 AM
Premium
Opinion

Liam Dann: Never mind the swear words, our politicians need to raise the quality of debate

28 Jun 05:00 PM

From early mornings to easy living

sponsored
Advertisement
Advertise with NZME.

Latest from Official Cash Rate

Premium
Economists divided over Reserve Bank's next OCR call

Economists divided over Reserve Bank's next OCR call

06 Jul 05:00 PM

Slow growth and sticky inflation are key issues.

'Least upbeat': Construction sector struggles as demand weakens

'Least upbeat': Construction sector struggles as demand weakens

01 Jul 12:41 AM
Premium
Liam Dann: Never mind the swear words, our politicians need to raise the quality of debate

Liam Dann: Never mind the swear words, our politicians need to raise the quality of debate

28 Jun 05:00 PM
Premium
Liam Dann: The upside to this painfully slow economic recovery

Liam Dann: The upside to this painfully slow economic recovery

22 Jun 07:00 AM
Solar bat monitors uncover secrets of Auckland’s night sky
sponsored

Solar bat monitors uncover secrets of Auckland’s night sky

NZ Herald
  • About NZ Herald
  • Meet the journalists
  • Newsletters
  • Classifieds
  • Help & support
  • Contact us
  • House rules
  • Privacy Policy
  • Terms of use
  • Competition terms & conditions
  • Our use of AI
Subscriber Services
  • NZ Herald e-editions
  • Daily puzzles & quizzes
  • Manage your digital subscription
  • Manage your print subscription
  • Subscribe to the NZ Herald newspaper
  • Subscribe to Herald Premium
  • Gift a subscription
  • Subscriber FAQs
  • Subscription terms & conditions
  • Promotions and subscriber benefits
NZME Network
  • The New Zealand Herald
  • The Northland Age
  • The Northern Advocate
  • Waikato Herald
  • Bay of Plenty Times
  • Rotorua Daily Post
  • Hawke's Bay Today
  • Whanganui Chronicle
  • Viva
  • NZ Listener
  • Newstalk ZB
  • BusinessDesk
  • OneRoof
  • Driven Car Guide
  • iHeart Radio
  • Restaurant Hub
NZME
  • About NZME
  • NZME careers
  • Advertise with NZME
  • Digital self-service advertising
  • Book your classified ad
  • Photo sales
  • NZME Events
  • © Copyright 2025 NZME Publishing Limited
TOP