Retail deposit scheme modified

Mindful of the "wall" of finance company debentures which mature just before its existing retail deposit scheme expires in October next year, Treasury has tweaked the scheme to help companies wean themselves off Crown support.

Treasury said it was changing the terms and conditions of the scheme to make it "more flexible for deposit taking institutions, while continuing to protect current depositors".

The changes introduce a 14-day period between a potential default and the invocation of the guarantee to allow companies to attempt to resolve issues and avoid receivership. They also give Treasury the ability to set a timeframe for claims to be made.

However, the key new feature is that participating institutions will be able to offer both guaranteed and non-guaranteed debt securities or debentures.

That will give companies the opportunity to position themselves for the end of the existing guarantee in October next year. Since the guarantee was introduced in October last year many finance companies have only issued debentures which mature within its current period.

This has led to questions about what might happen when this so-called "wall of cash" matures, particularly for those companies that are unlikely to qualify for, or meet the steep additional cost of the extended scheme that supersedes it.

Expectations that a significant number of companies will fold or "hand the keys" to Treasury ahead of the expiry date have been fuelled by the fact that Treasury has set aside $816 million to cover claims it deems "more likely that not" to be made under the existing scheme.

Yesterday, Marac chief investment officer Craig Stephen told the Business Herald the logic behind the changes this week was sound.

"They're seeing a wall or a cliff of maturities that fall due in October next year and they're wanting to see the market push out beyond that if possible.

"It gives you some options. It just means you can offer guaranteed and unguaranteed debt and you can look to test the market."

Marac had lobbied Treasury for the flexibility to offer both guaranteed and unguaranteed products but that was in the context of the extended scheme.

Marac had issued longer dated securities which matured outside the period of the current guarantee and therefore had included an appropriate risk premium. As it intended to obtain coverage under the extended scheme it would have otherwise been obliged to pay Treasury an additional fee for coverage of those securities.

Stephen said Marac was pleased Treasury had seen the value in allowing issuers to offer both guaranteed and unguaranteed products, but particularly that it had seen fit to apply this to the current scheme.

"It allows both debt issuers and investors to wean themselves off the guarantee. In that respect I think it's quite inspired."

Institutions covered by the scheme have until December 4 to accept the revised conditions which will then come into effect on January 1 next year.

Should companies choose to decline the new terms, any new deposits or investments accepted after that will not be covered but existing eligible deposits will continue to be covered until the existing scheme expires.