KEY POINTS:
Financial experts are warning investors they need to do more homework before putting their money into finance companies as a fifth one goes belly-up.
The collapse of Nathans Finance and its parent company VTL comes just weeks after Bridgecorp went into receivership and there are fears more finance
companies will follow.
Roger Murphy from accountancy firm Deloitte says investors need to ask some hard questions of their financial advisor, including whether they have read the prospectus, why they are recommending a particular investment and what do they know about the directors and financial management of the company.
Mr Murphy said investors need to do their homework and understand the risks.
Financial writer Mary Holm also believes investors need to be more aware of the risk they are taking on.
She said most people only look at the returns but if they are not prepared to do research into the products they are investing in, they should not be parting with their money.
Ms Holm said that although interest from term deposits may be slightly lower, at least an investor will be able to sleep at night.
She believes a lot of finance companies do not pay sufficient extra money to allow for the risk people are taking.
Western Bay Finance, Provincial Finance and National Finance 2000 have also failed in the last year.
More finance companies are in danger of failing as investors shy away from them, analysts warned last night.
Nathans Finance yesterday became the latest casualty, and was this morning put into receivership.
It stopped distributing its prospectus, preventing it from raising any more money, after its parent, listed vending franchise company VTL Group, declared itself insolvent.
Both companies were facing receivership unless new capital could be raised.
Nathans owes about $150 million to debenture investors.
Nathans' problems follow the $450 million Bridgecorp collapse at the beginning of last month, and are likely to worsen a cash squeeze on other finance companies.
Brook Asset Management portfolio manager Paul Glass said he was so concerned about the outlook for finance companies that he had reduced his exposure to New Zealand shares and put unprecedented amounts of cash into the bank.
"That's because I'm concerned about a number of factors, including a major economic down draught caused by the finance companies."
Mr Glass said finance companies performed an important function by providing money to many perfectly sound businesses that found it difficult to get loans elsewhere. "The follow-on effect of these companies not being able to lend to businesses that rely on them is very worrying."
The widely expected "flight to quality" after Bridgecorp's collapse means many companies at the smaller or less-well-capitalised end of the market are not attracting enough new money or re-investments of maturing deposits, commentators say.
Several market sources told the Herald yesterday that debenture flows had come to a virtual standstill for some finance companies.
"The weaker finance companies are getting almost no new money and very significant requests for repayment from investors when their moneys fall due," said Kapiti Coast financial adviser Chris Lee.
He said top companies such as South Canterbury Finance, Strategic and St Laurence still had healthy re-investment rates but the flow of new money had been affected.
"I would say the best finance companies are getting $1 million to $6 million a week, while a year ago they might have been getting $3 million to $10 million."
Mr Lee expected banks to compete more aggressively for retail deposits if global credit problems increased the cost of international funding.
"That's going to put terrific pressure on small finance companies," he said. "It's also going to put pressure on mortgage rates and it's going to hammer anybody who's been borrowing money for TVs, motorbikes, boats and stuff like that."
Lombard Finance and Investment chief executive Michael Reeves said his company had anticipated Bridgecorp's failure and associated problems months ago, so "we're sitting on about $40 million in excess of requirements".
Lombard's flow of new money had "dropped by several per cent, but not by as much as the general market".
Chief executive of Capital and Merchant Finance Owen Tallentire would not give any indication of his firm's funding flows. "I really don't have a view that I would be reporting to the public."
FIRST BRIDGECORP, NOW THIS
Retired Orakei resident John Bellingham has been stung twice, first by the Bridgecorp collapse and now by the troubled Nathans Finance.
Mr Bellingham knew he was taking a risk investing thousands of dollars into high-return finance companies.
He decided to spread the money around to reduce the overall risk.
But now he intends to pull out of the market entirely.
Mr Bellingham, who is in his 80s, invested "some thousands" with Nathans Finance about a year ago.
That investment now looks shaky after the insolvency and trading suspension yesterday of its parent company, VTL Group.
Mr Bellingham said what peeved him most was a letter he got from Nathans Finance after the Bridgecorp debacle reassuring him and other investors.
Signed by Nathans chairman Roger Moses, it referred to "recent developments in the finance industry" and said the firm wanted simply to confirm that it was "very much business as usual" at Nathans Finance.
Mr Bellingham said the letter was "full of baloney" by implying everything was going to be all right.
Other Nathans Finance investors were also smarting.
A Tauranga couple, who did not want to be named, said they had $55,000 tied up in the company, money that was intended to help pay for their children's tertiary studies and overseas travel.
"We compounded the interest and watched it grow."
It was now a "very scary" situation as they feared for the fate of their investment, which accounted for about one-third of their savings. "I wanted to scream and yell," the wife said.
Her husband said it was the worst news he had received in his life.
- with NEWSTALK ZB
