KEY POINTS:
The Government's retail deposit guarantee scheme has breathed fresh life into surviving finance companies but investors in stricken firms should not shrink from pushing them into receivership where appropriate, a report on the sector says.
Sharebrokers McDouall Stuart yesterday released their annual report on finance companies which noted
the "distortions" caused to the debenture market by the retail deposit guarantee scheme introduced in October.
About 17 finance companies are now covered and their investors effectively need no longer fear not getting their money back.
"The distortion created by disconnecting risk and return in this way goes against the most basic principle of investment," McDouall Stuart observed.
This had already had the effect of substantially increasing funding inflows to some finance companies, it said.
With the current guarantee due to expire in October 2010, "Unsurprisingly the majority of new fund flow is as 12 or 18-month money".
In fact, McDouall Stuart expected the previously moribund debenture market to "re-blossom" as firms returned to the market, in some cases with products tailored to exploit the new environment.
But the report warns of a resultant "indirect moral hazard" where guaranteed companies attract funds excess to their immediate needs. "They may therefore lend more loosely than they otherwise would have."
While the retail deposit scheme was acting as a lifeline to the finance company sector, it "will provide serious challenges and uncertain outcomes if it is not either extended or gently unwound on current expiry".
Elsewhere in McDouall Stuart's report, the firm notes the reluctance among investors in failed finance companies to properly consider receivership as opposed to management-fomulated moratoriums or restructuring plans.
"A morbid fear of the 'R' word by most Kiwi investors means that whatever the 'whatever else' is will likely gain its required support." It also noted that the "stigmatising" of the receivership process as expensive, inefficient and likely to result in fire sale outcomes had been overdone.
The report argues that the cost structure of a distressed finance company operating as a going concern under the control of existing management and board is also expensive.
It is also critical that material sent to investors which is supposed to explain moratorium or restructuring proposals, "Is so overly complex to make it virtually meaningless to many voters".
SAFETY NET
Finance companies accepted into the retail deposit guarantee scheme and the size of their loan books.
Allied Nationwide - $158m
Asset Finance - $20m
Avanti - $33m
Broadlands - $32m
Finance Direct - $5m
Fisher & Paykel - $361m
MARAC - $1303m
Medical Securities - $198m
Mutual Credit - $17m
Mutual - $9m
NZF Money - $68m
Oxford - $52m
PGG Wrightson - $505m
Priority - $4m
Savings & Loans - $3m
South Canterbury - $1379m
UDC - $1966m
