National Finance collapse 'highlights flaws'

The collapse of National Finance 2000 this week has highlighted the lack of transparency about risks facing investors in finance companies, international ratings agency Standard & Poor's says.

More than 2000 holders of National Finance debenture bonds are owed more than $25 million after the used car finance company and its related firm, Payless Cars, were placed in receivership when National Finance failed to meet its debt to asset ratios.

Receiver Colin McCloy last night said he and colleague John Waller of PriceWaterhouse Coopers hoped to advise debenture holders next week of their initial view on potential recoveries and timeframes for payment.

Standard & Poor's said yesterday the failure of the unrated National Finance "shows that parts of New Zealand's non-bank financial institutions sector exhibit high risk".

However, S&P pointed towards the difficulty investors faced in identifying that risk.

"Transparency of companies in this sector remains low, with debenture holders experiencing difficulty in identifying relevant benchmarks to guide their investments," said S&P credit analyst Craig Bennett.

Last week KPMG banking group chairman Andrew Dinsdale called for a system of comparable standard ratings for all finance companies.

"All companies should be evaluated against an internationally recognised and accepted standard, for example, Standard & Poor's or Moody's," Dinsdale said in KPMG's annual Financial Institutions Performance Survey.

The Ministry of Economic Development is working on changes to the regulatory environment for non-bank financial products and providers including finance companies. Mandatory credit ratings are believed to be among the options.

Yesterday KPMG partner Godfrey Boyce said: "National Finance has only confirmed what's been discussed in the working groups.

"It points to the fact that there is at the moment a difficulty for some investors to differentiate between finance companies. Credit ratings are one way of doing that on an independent basis."

Meanwhile, PriceWaterhouse Coopers' McCloy said last night that initial information supplied by National Finance indicated it was holding deposits of $25.5 million on behalf of 2026 investors with the average deposit being $12,586.

In addition, National Finance had made loans totalling $27.3 million to 3765 individuals or companies. The average loan value was $7251.

McCloy said he had not had a chance to verify those numbers independently yet "but they provide us with an idea of the size of the problem".

He added: "We'll continue to assess and analyse the financial position of the company over the next few days with a view to determining the realistic value which depositors can expect to recover."

He also said Payless Cars, to which National Finance had made several loans, had incurred "significant trading losses over recent times".

The receivers had secured the vehicles Payless Cars had in stock at the time of the receivership and were exploring the options for their sale.