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.