Jenny Ruth: Listed finance firm still a family affair

Concerns are growing about the financial stability of some finance companies, many of which have sprung up in the last few years, and into which mum-and-dad investors have pumped more than $10 billion in the past seven years.

But there are finance companies and finance companies. Dominion Finance Holdings is clearly not in the worrisome category.

For a start, it has been going since 1954 under various names, and its major shareholders, Terry and Ann Butler, have run the company since 1987 and 1990 respectively.

Terry Butler had worked for Broadlands, Dominion Finance's previous owner, and so knew the business well. Having just sold a business when Broadlands was looking to sell the finance company, he says, "I grabbed it."

The couple floated the company last June and listed it on the New Zealand exchange but have kept a 72 per cent stake. The prospectus said the Butlers sold "reluctantly" to meet the exchange's requirements, to achieve the status of being listed and to provide equity to fuel growth.

The $15 million float included $5 million of fresh equity, with the remaining $10 million going to the Butlers in exchange for their shares. They have agreed to keep their remaining shares until at least May next year.

Dominion Finance has certainly participated in the rapid growth the sector has enjoyed. If the company achieves its forecast $7.068 million net profit (revised up from the prospectus forecast of $6.068 million) for the year ending this month, that will be a 32.3 per cent increase on the previous year.

It will also be the company's slowest growth in profit in five years. In 2004, the increase was 49.7 per cent, down from 76.4 per cent the previous year and 69.3 per cent in 2002 and just below the 32.4 per cent rise achieved in 2001.

"Our growth has been a lot more measured than a lot of other [finance] companies," Butler says.

The secret has been in holding its costs down through this growth, he says.

While the buoyant economy has undoubtedly helped, Butler says the company grew all through the 1990s at a steady pace, even in 1998 when interest rates soared and the economy was buffeted by the Asian and other crises.

In 1993/94, the company's capital was just $1 million. Equity at September 30, including the capital from the float, stood at $23.4 million.

But the balance sheet is far from stretched. At September 30, total assets were just 6.4 times equity, down from 7.75 times at March 30 last year.

Finance companies are supposed to be higher risks than banks, but Dominion's ratio is considerably more conservative than most banks.

ANZ/National Bank's total assets at December 31 were 10.3 times equity, and ASB Bank's were 17.2 times.

The trust deed for Dominion Finance's debentures allows it to take in up to nine times shareholders' funds, but at September 30 its debentures on issue were just 4.8 times shareholders' funds.

You could argue that the company has an over-reliance on property as security for its loans. About 85 per cent of its portfolio is secured against property, although only 38.6 per cent of the loans are against subdivisions and developments.

Butler clearly likes property as security: "It's always there and we know where it is."

The company's policy is to lend a maximum of 75 per cent of any property's value, which is established by an independent valuation, and it also has a policy of having its people personally inspect all properties offered as security.

Dominion Finance is also picky about what type of property it will accept as security.

"One area where we don't deal is inner-city high-rise residential. That's not us. We feel uncomfortable about that," Butler says.

The company's basic strategy of borrowing long through its debenture programme and lending short should also comfort investors.

At September 30, 58.3 per cent of its loans, or $87 million, was due to be repaid within six months, but only 37.8 per cent, or $47.6 million, of its debentures and other liabilities were maturing within six months.

A further $43.6 million in loans and $37.5 million of debentures and other liabilities were due within 12 months.

Just 13.2 per cent of the company's loans were for longer than 12 months, while 32.5 per cent of its debentures and other liabilities were due later than 12 months.

Interest rates on its debentures ranged from 7.69 per cent to 8.3 per cent and it was getting 9 to 15 per cent from its loans.

The company does have large exposures, although not as large as some finance companies - one reportedly has a loan on its books worth eight times equity. At September 30, Dominion Finance's biggest exposure amounted to between 50 and 60 per cent of equity, although that was down from 70-80 per cent of equity at March 31 last year.

Butler says that particular exposure was over about five or six different projects and should be completely repaid by this month or next, although the company is likely to extend more loans to that customer.

"These are clients that we deal with all the time. They may be on the balance sheet at September and not there by March," he says.

"We're short-term lenders so we have substantial cashflow.

"That also gives us the ability to react reasonably quickly to anything we feel is going to be a problem."

While Butler supports the Securities Commission's desire to increase controls on finance companies, he isn't sure that will fix the basic problem of retail investors chasing high yields and ignoring the associated risks.

"It's hard to educate the public as to what's a reasonable risk and what's a high risk," he says.

Some might view Dominion Finance's float as part of a retirement strategy for the Butlers: Terry is 57 and Ann is 56.

Both pledged to stay on for at least three years after the float, but Butler says they have no intention of retiring.

"I couldn't even imagine walking out the door one day and saying, 'That's it', and blobbing out.

"I enjoy what I'm doing and I've done it all my life. It's too much fun."

In any case, it looks like Dominion will remain a family affair - the couple's son, Hayden, joined the company in January 2003 after gaining banking experience in London.

But Butler says there won't be any automatic succession.

"That's for the board to determine and that's for Hayden to prove himself. He has to be able to want it."

The what and where

* Dominion Finance Holdings headquarters: Plaza level, Parnell Towers, 308 Parnell Rd, Auckland.

* Profile: The company reported a $3.87 million profit for the six months ended September 30 and in December revised its prospectus forecast for the full-year's profit from $6.068 million to $7.068 million.

* Key financial statistics: The company raises funds from retail investors buying its debentures and uses the money to make mostly short-term loans that are usually secured by property.

* Market capitalisation: $58.3 million.

* Major shareholders: Terry and Ann Butler with 72 per cent.

* Key executives: chief executive Terry Butler and chief financial officer Ann Butler.