KEY POINTS:
Property Finance Group in Christchurch looks likely to become the next casualty in the finance company shakeout that began last year.
Managing director Daryl Queen says the firm has been directly affected by the international "credit crunch" troubling financial markets, rather than having problems with its loan book or debenture funding.
There are signs that market turmoil may begin to affect some finance companies' back-up funding facilities, at precisely the time they need them most.
Property Finance Group's board suspended trading of its NZAX-listed shares yesterday morning in response to a letter from New Zealand Exchange to all listed finance firms asking if they were disclosing all material information to the market.
By the end of trading yesterday, Cynotech Holdings, Strategic Finance, Dorchester Pacific, Lombard, South Canterbury Finance, PGG Wrightson Finance and its parent Pyne Gould Corporation had responded, saying they were complying with the relevant market rules.
Meanwhile, in response to questions the Business Herald asked New Zealand's top finance companies this week about their financial health, most said they were seeing some fall-off in debenture reinvestment rates and flows of new money as investors sought safer havens.
Property Finance's $82 million debenture programme is a relatively small part of its funding for its $630 million in loans under management.
Queen said debenture funding had been weak "for obvious reasons" but the real problem was difficulty selling its mortgage-backed securities.
Property Finance is one of a handful of companies active in New Zealand's relatively small mortgage securitisationsector.
Mortgage securitisation is the process by which lenders package up largenumbers of loans into a vehicle that can be sold in units to institutional investors.
In the United States, only a minority of mortgage debt is now held by banks. Most, about US$6.5 trillion ($8.8 trillion), has been securitised and is held by Wall St investment vehicles.
However, the presence of riskier sub-prime loans within these securities has seen their value plummet, precipitating the market jitters that have wiped trillions off the value of equities around the world and seen high-yielding currencies such as the New Zealand dollar sold off sharply by increasingly risk-averse investors.
But Queen maintains Property Finance's lending is not sub-prime.
"Our philosophy is prime stuff - high volume, low margin, low risk, sleep at night and have a sustainable business on that basis," he told the Business Herald several months ago when the company doubled its mortgage securitisation programme to a projected $800 million for the next 12 months.
Yesterday, he continued to emphasise the quality of Property Finance's lending.
"We are very comfortable with the quality of the company's loan receivables. We have no concerns on that side of our business and that has been verified by third parties."
Property Finance's problem stems from the fact that given the current market turmoil the appetite for mortgage-backed securities around the world, including New Zealand, has dried up.
"We are caught up in a domestic and international change in the way the markets work in terms of credit and liquidity.
"We're unsure where this market is going. So clearly we could not continue to operate knowing that these tensions were about and were impacting on our liquidity in terms of issuing new mortgage-backed securities and in terms of selling existing ones."
Queen did not respond to the Business Herald's questions this week as he was in Australia and before that the US.
In both countries, he said, the credit markets were "just a mess".
"We are embroiled in a major market event. This is a very significant market change which we're in and in the last eight or nine days we've got to grips with how bad it is and how bad it's going to be for a while."
According to the responses to the Business Herald's questions, some companies are seeing little effect from the debenture funding squeeze, particularly those widely regarded as operating at the top or quality end of the market.
That underlines the fact that despite the string of recent failures, there are well-run, sound finance companies in which investors can continue to have confidence.
More than a few made the point that while reinvestment rates have been hit by recent failures, they have alternative means of funding their lending operations. That is undoubtedly a wise strategy, although in many cases that backup funding is likely to be lines of credit with banks.
While some companies such as Geneva Finance have solid agreements with banks over the terms and rates of that credit, others will have less-reliable arrangements.
Given the recent squeeze on short-term funding for banks, those finance companies that rely on lines of credit from banks are vulnerable to increased costs.
Furthermore, it is conceivable that the banks, which generally tend to be fair-weather friends to borrowers, may choose to withdraw the facilities altogether as they seek to reduce their own risk profile.
That has the potential to transform the present string of finance company failures, which has already put more than $1 billion of New Zealanders' savings at risk, into something altogether more serious.
Brian Jolliffe of Marac and PGG Wrightson Finance said the company was unable to disclose the information requested by the Herald ahead of Pyne Gould Corporation's annual result next week.
Mascot Finance declined to respond. "We didn't think the questions were worthy of answer to be totally frank," said chief executive Dean Snelling.
Motor Trade Finance and Lock Finance did not respond to emails or phone messages.
Debenture stock investors reassured
Property Finance Group says its 4000 debenture stock investors will receive all of their $82 million in principal back over time, whether it is forced into receivership or not.
The Christchurch-based company, which has $630 million in residential, commercial and reverse mortgage loans under management, yesterday suspended trading in its shares.
But managing director Daryl Queen emphasised the company's assets were of high quality.
"We are comfortable, even under different receivership scenarios, that we are in a position to repay our liabilities in full." But there was "a major issue in terms of the timeliness with which we could do it," he added.
Queen said PFG was in "serious negotiations about restructuring this business so it can continue on in a new form".
Those discussions would continue over the weekend and the company planned to update the market on its situation on Monday.
Should the company be forced into receivership, it would be the sixth finance company failure in little more than a year.
Meanwhile, VTL Group, which said this week it was insolvent due to the collapse of its finance company Nathans Finance, yesterday said parts of its business could resume trading if a deal could be done with Nathans' receivers.
VTL's directors were working closely with John Waller and Colin McCloy of PricewaterhouseCoopers to restructure the firm's operations across New Zealand, Australia, Europe and North America with a view to restoring solvency.
The directors and receivers were reviewing options to sell the businesses as a going concern "in a controlled manner to preserve the value for all stakeholders", VTL said in a statement to the exchange.
Nathans Finance owes 6000 investors $166 million and most of its lending was to VTL.
Fallen five
* Nathans Finance
Collapsed in August 2007. Deposits of $166 millionLoan book of $170 million.
* Bridgecorp
Collapsed in July 2007. Owed $450 million
* Western Bay Finance
Collapsed in August 2006. Owed $48 million
* Provincial Finance
Collapsed in June 2006. Owed $300 million
* National Finance 2000
Collapsed in May 2006. Owed $25.5 million
