More finance crashes feared

The collapse of National Finance 2000 could be followed by the failure of other small companies in the same low-end auto financing niche but damage to the wider finance company sector will be limited, industry insiders say.

National Finance 2000 and related used car dealership Payless Cars were placed in liquidation late on Tuesday owing upwards of $25 million to debenture holders and suppliers.

The failure of National Finance has sparked fears it will trigger a wave of failures in the fast-growing debenture finance market.

The sector, now consisting of between 60 to 70 companies, has been growing rapidly in recent years, taking billions of retail investment dollars away from rival investment classes.

Banks and managed funds have responded with a number of shots, saying the returns offered by the companies in many cases do not reflect the risks involved, especially heading into an economic downturn.

But interest.co.nz publisher David Chaston did not believe National Finance's misfortune was a sign of things to come in the wider sector.

He said there had been so much written in recent years about finance company risk, "that it's just in the general public's psyche that just because they are finance companies they're risky".

"I don't think there's going to be a rout of finance companies but I do think there's going to be a couple that are problematic.

"Of the 70 or so I think there are going to be two or three that are especially vulnerable because they don't have strong enough balance sheets and they don't have proper liquidity management."

Chaston said in the current slowing car market the used auto finance sector was particularly risky. When loans defaulted and cars were repossessed it was difficult to recoup much value.

Terry Butler, chief executive of Dominion Finance Group, agreed. "I wouldn't like to be at that lower end of the consumer area, the very cheap motor vehicle finance. I think that's got potential major difficulties.

"We stay in the property sector with first and second mortgages. A borrower will let his car go but he won't let his house go," Butler said.

"There are a lot of small finance companies chasing after that same dollar, lending on secondhand imported motor vehicles. You didn't have to be a rocket scientist to know that there was going to be a problem coming up there in due course.

"You don't use investors' money to import motor cars for yourself, that's a bit of a no-no. It was always going to happen, it was just a question of when."

However Butler expected to see consolidation among the smaller players in consumer finance rather than a lot of failures.