Trustee monitors struggling Western Bay Finance

Jim Smylie

Western Bay Finance is believed to have suspended payments to investors as it tries to stave off receivership by selling assets.

It comes as the finance company sector faces a shake-out.

A Western Bay debenture stock investor spoken to by the Business Herald said his investment had matured on July 6 and, despite instructions to the company that the money be repaid, he had yet to receive it.

The investor, who did not wish to be named, said a spokesman for Tauranga-based Western Bay told him last week the company was "holding all the refunds because people had not been renewing their debentures with the company".

The investor was told the company would update them on the situation by Friday July 14. "I still have not heard from them," he said.

Yesterday, Western Bay, which has $47 million in debenture stock outstanding, would not confirm whether it had suspended payments to its 3000 investors. A spokeswoman said the company's chairman, Jim Smylie, was the only person who could comment on the matter, but Smylie did not return Business Herald calls.

Western Bay, with a loan book of more than $50 million and 12 offices around the country, is the latest finance company to run into trouble as softening economic conditions place pressure on loan repayments and demand for debenture stock.

The company stopped making loans last month after its supply of debenture stock funding dried up. Smylie blamed the negative publicity generated by the Provincial and National Finance failures.

Provincial was placed in receivership last month owing 14,000 debenture stock holders $324 million. National Finance 2000 went under in May owing investors $25.5 million.

Commentators have warned of a "flight to quality" as investors withdrew money from smaller, and less established firms in the previously fast-growing finance company sector in favour of investments they believed would be more secure.

However, it is understood Western Bay was now examining alternatives to maximise returns to investors.

Southland Building Society chief executive Ross Smith has confirmed that one of its subsidiaries, Finance Now, has been negotiating to buy some of Western Bay's assets.

Smith said a decision on such a purchase was likely by week's end.

A source close to the situation said Western Bay's position was "clearly unsustainable".

While the prospect of an asset sale might help and was "a step in the right direction" for investors, "where that leaves Western Bay is perhaps a separate question".

Yesterday,Western Bay's trustee, Graham Miller, of Covenant Trustee Co, who has the final say on whether the company goes into receivership, said: "Certainly we are aware of the situation and are monitoring it."

The company's troubles deepened last month when ratings agency Standard & Poor's lowered its rating on associated insurance company Linsa from B- (weak) to CC (extremely weak).

"The rating actions follow heightened financial difficulties facing sister company Western Bay Finance," S&P said.

"The liquidity position of Western Bay Finance has deteriorated markedly as the company faces difficulty raising debenture funding from a retail market wary about the recent collapse of other finance companies.

"As a result, Western Bay is believed to have breached its trustee covenants, and has stopped lending activities."