KEY POINTS:
A comprehensive review of the finance company sector paints a gloomy picture for all but the biggest firms.
McDouall Stuart's New Zealand Finance Companies 2007 report, released yesterday, analyses the performance of all firms which raise money from the public and have loan books of $35 million or more.
Since the company last prepared the report, the number covered has fallen from 38 to 29 largely due to "a mixture of failures, mergers and acquisitions".
The report's main author, John Kidd, said: "Continuing weakness in debenture flows, an easing in activity levels and the arrival of a tighter regulatory framework in 2009 are all factors likely to encourage greater consolidation.
"All companies, regardless of size, are likely to be considering consolidation options over the next 12 to 24 months. Some will be beneficiaries, most will not.
"In our view, consolidation will likely come in the form of company amalgamations, managed wind downs, and unfortunately, the likelihood of some further failures."
The report finds that the funding pressure on finance companies that led to at least some of the recent failures "is likely to intensify as companies prepare for the arrival of a new regulatory regime".
The new regime will make credit ratings from one of the big international agencies compulsory. "A majority of those 29 companies would not get an investment grade rating. That's one of the key collective challenges for the sector, to educate the investing public about the implications of credit ratings along the spectrum."
While a sub-investment-grade rating would not necessarily mean a company was no longer viable, it did mean a higher cost of funding.
"Pricing needs to adjust, to move upwards to reflect that credit risk."
Kidd said the report's key conclusion was that those companies with funding sources other than retail debentures were the best placed to manage the downturn.
"Not only do those that have access to alternative funding lines have a considerably better outlook because they're able to substitute, but also the cost of those lines is not actually far over what they're paying for debentures anyway." He estimated, for the better firms, the additional cost of funding sources such as bank lines was only about 50 or 60 basis points above the cost of debenture funding.
Of the 29 firms covered, 18 had credit lines in place at present, although some companies were already close to their limits on the facilities. For those that did not have such funding, the outlook was bleak.
"Except for the strongest companies, or those willing to issue a prior charge, we do not expect bank funding to emerge as a viable option for those that don't already have it."
For those companies without other funding lines, the prospects of riding out the current debenture squeeze were poor. Although there were some signs that debenture reinvestment rates were starting to recover, Kidd said recent failures would have an "enduring impact".
HEALTH CHECK
McDouall Stuart's New Zealand Finance Companies 2007 report:
* Estimates New Zealand has about 400,000 retail debenture investors.
* Of those, 50,000 have been affected by the recent failures.
* As investors avoid finance company debentures, other lines of funding will become crucial for most firms.
* Those that don't have them already will find it difficult to get them.
