KEY POINTS:
Self-imposed repayment moratoriums may offer a way forward for other struggling finance companies, a banking expert said yesterday as Geneva Finance investors voted in favour of a six-month freeze on repayments of principal.
Investors, including the Bank of Scotland International (BOS), threw Geneva the lifeline it was seeking.
The moratorium means all investments with the Auckland company will have a further six months added to their terms and no new investments will be accepted.
Geneva, which owes secured investors $112 million, said the moratorium was passed by "an overwhelming majority" at a special meeting in Auckland yesterday.
Other troubled finance companies are likely to be eyeing the deal as they struggle to survive the cash drought plaguing the sector as a result of 10 failures in the past 18 months.
"The vote is going to confirm that [a moratorium] is a way forward," said KPMG banking group partner Godfrey Boyce. "It's got to be a pretty attractive option for directors to think about for those companies that are under pressure. I'm expecting that it is going to be what people look to now that they have a precedent."
Boyce said the support of BOS, which the Business Herald understands is owed $43 million, was "pretty crucial".
He said banks in the past had generally shown little compunction about tipping stricken businesses into receivership if doing so would secure their funding.
However, BOS had ranked alongside debenture stock investors until Geneva's credit rating was down-graded last month, and under the terms of the arrangement, security stock issued to the bank will become repayable at the end of moratorium period unless BOS agrees otherwise.
That had raised concerns that BOS could demand repayment when the moratorium ended, leaving Geneva and its debenture stock investors in a parlous situation once again.
However, trustee Graham Miller of Covenant Trustee Company said that was unlikely.
"The issue was raised at the meeting and we made it very clear that there would need to be an ongoing working relationship with BOS, and that we certainly could not stand by and allow any one particular debenture holder to be paid such a huge sum of money to the detriment others and which would make the company insolvent anyway. It just won't happen."
Miller said the mood of the meeting, at which investors were given an overview of the company's position at August 31, was very constructive and positive, with several rounds of applause breaking out in response to management's responses to "intelligent" questions from investors.
Chief executive Shaun Riley said the moratorium would give his company "time to stabilise its investment position and business operations, generate cash reserves and focus on negotiating a significant debt and equity transaction that will secure the future of the company".
THE MORATORIUM
* All classes of investment maturities are to be extended by 6 months.
* All interest on all classes of investments will be paid monthly during the period.
* Geneva will accept no new investments during the period.
* The company will continue to trade and lend, through a revised business model, building up cash reserves and reducing costs.
* The company will be monitored by Ferrier Hodgson to ensure compliance with the terms of the moratorium.
