Look out for Monday's special section in The New Zealand Herald reviewing the state of our finance companies.
KEY POINTS:
As the wolves circle the finance company sector, scrutiny is growing on better ways for mum-and-dad investors to pick out the weak and lame from the strong.
Commerce Minister Lianne Dalziel says many investors are not understanding the level of risk they are taking - because they "haven't
been properly advised and it is also clear that some products are underpriced".
Inexperienced investors should be asking questions about the level of risk, she says, whether the risk is appropriately priced, and whether the adviser is receiving financial gain from signing them up.
The chairman of the latest casualty, Property Finance, says that his company's problems have been caused by the drying up of credit in the debenture and wholesale markets.
About 4000 investors have lent the Christchurch-based company $80 million in debenture stock.
One company that's been trying to help investors choose which of the many finance companies to put their money into is Grosvenor. It provides administration services for independent financial advisers.
Its Bondwatch service assesses the risks of different investments, rating companies from G1, the best to G8 - for "sophisticated investors only".
Grosvenor chief investment officer David Beattie says ratings, which are likely to soon become compulsory for finance companies, are not a "pass/fail" mark or "magical point" beyond which risk suddenly disappears.
Bondwatch does not assign any "investment grade" blessing because that is up to investors to decide the level of risk that they are happy with.
When you get into G6 "we then say their ability to meet their current obligations is dependent on favourable economic and business conditions".
Nathans, which collapsed this week, was downgraded by Bondwatch 18 months ago because it was "highly exposed" to unfavourable business conditions - with 67 per cent of its assets in one loan to a parent company, secured over vending machines. Related party lending such as this "gets big black marks" on the Bondwatch ratings says Beattie.
"If I was going to be critical - I would say the mum-and-dad investors have let themselves down a little bit by not simplifying it down to 'I'm going to lend this person money. Would I lend someone money and have it all tied up in a loan to a parent company lent on vending machines? How secure are those?'
"The other main point people just don't think through properly is that investing is two dimensional - there's risks, there's returns.
"When you are investing it's a matter of getting that balance right."
Beattie says people need to ask: "Am I getting enough return for this risk? or given this return, what are my risks and are they appropriate? People are looking at one without the other."
And, he says, investors sometimes do themselves no favours by refusing to consider companies further down the ratings.
"Some of the best interest rates in terms of value for money are in the G5 space," says Beattie.
He thinks that the move towards compulsory ratings should have a positive impact.
"It will force people to start the financial literacy path. The problem at the moment, there's a bit of a hole."
Shaun Riley, chief executive officer at Geneva Finance, says of Bondwatch's G7 rating: "Any other ratings on Geneva have not involved any review of our business and processes or communication with the company.
"They also use what is outdated financial information to form their opinion."
He points to Geneva's own Standard & Poor's B+ rating. S&P ratings below BBB, such as BB or B+ are considered below "investment grade".
South Canterbury Finance and Marac Finance have the higher BBB- rating from Standard & Poor's.
Investment analyst and broker Chris Lee also rates finance companies on his website, but says he likes to focus on those good companies, those people should invest in, rather than the bad.
"You've got the dual emotions - what is fair and what will cause queues outside the banks," says Lee.
"There are some companies that are unarguably good - Marac, Strategic, St Laurence, South Canterbury and UDC.
"They are not in the argument and it wouldn't be a bad thing for people to contrast those with Nathans, which was clearly a rubbish company and had been identified - certainly by anyone who does analysis - as a rubbish company a long time ago."
Lee says he correctly identified five of the past six failures as high-risk investments.
"It is possible for an experienced person to get hold of information that allows them to differentiate between the best and the worst.
"None of the As and Bs that we've got have had any trouble."
In the past, under normal market conditions, C- and D-rated companies could be a reasonable part of an investment portfolio.
But, with the current level emotion and concern caused by the finance company failures, Lee is telling his clients to keep only a percentage in "B" companies, while still investing heavily in the "A" companies.
"But, until we know the bottom of the hole, I would not be renewing Cs and I've never recommended using Ds and E's," says Lee.
He is also advising against putting money into his lowest ranked companies, regardless of the interest rate that is being offered.
"I am not forecasting that they will all go broke in the next few months. What I'm saying is that they are extremely vulnerable and, in bad market conditions, they are possibly and in some cases, even likely victims."
One thing Lee does not want to see happen is a flight away from the good finance companies he rates highly.
"I would hate it if the public ended up queuing outside really good companies - the public hurts themselves, hurts the companies with no good reason," says Lee.
He says compulsory ratings should drive out a lot of small operators that won't be able to get credible ratings.
Such companies will have to find a different funding model, such as from the banks, by putting their own assets as security. "I think that is a bloody good thing. I look forward to that day happening," says Lee.
- Additional reporting by NZPA
How some of the finance companies score
Grosvenor Financial Services Group rates NZ finance companies.
It rates them from G1 - excellent ability to meet obligations, high level of security - to G8 - recommended for sophisticated investors only.
The investment statement and prospectus are unlikely to contain sufficient information on which to evaluate credit risk. Grosvenor does not give an "investment grade ranking" but some consider G5 to be a useful limit, above which investment can become a higher risk.
Marac Finance Secured Debenture Stock - Bondwatch: G4
Investors' money is lent for plant, equipment and business finance.
Rates: From 8.2 per cent for 30 days (amounts of less than $50,000) to 8.85 per cent for 15 months.
Hanover Finance Secured Deposits - Bondwatch: G5
Has a Fitch credit rating of BB+.
Investors' money is lent mainly for property and "property related transactions". It is the parent company of United Finance and FAI Finance.
Rates: From 7.35 per cent for one month to 9.2 per cent for 24 months.
Five Star Consumer Finance Secured Debenture Stock - Bondwatch: G6
Investors' money is lent for consumer hire purchase deals. A large number of relatively small loans on short terms.
Rates: From 7 per cent for three months to 10.5 per cent for 24 months.
Geneva Finance Secured Debenture Stock - Bondwatch: G7
Investors' money is lent to people wanting car loans, debt consolidation, HP, weddings, furniture and so on.
Rates: From 9.55 per cent for 15 months to 9.95 per cent for 36 months.
Capital & Merchant Finance Investment Debentures - Bondwatch: G7
Investors' money is being used for mortgages in both the commercial and private sectors.
Rates: Range from 9.6 per cent for secure debenture to 10.53 per cent for investment debenture.
Numeria Finance Secured Debenture Stock - Bondwatch: G8
Investors' money is used for "providing financing in the IT, communications, investment, home improvement and personal loan or small business rental market". Supplies leasing finance to customers of Provenco group, which supplies EFTPOS machines.
Rates: 8.5 per cent for three months to 10.10 per cent for 18 months.
Finance company researcher and investment adviser Chris Lee rates finance companies from A to E. His A grade companies include UDC, Marac, South Canterbury Finance, Strategic Finance and the St Laurence Group.
He currently gives an E rating to 23 finance companies, which includes some well-known companies, such as Broadlands, Lombard, Capital & Merchant and Blue Chip Finance.
On the web:
Grosvenor: www.gfsg.co.nz
click on "bondwatch"
Chris Lee: www.chrislee.co.nz
click on "articles and ratings"
