KEY POINTS:
Concerns about Australian private equity's buy-up of New Zealand companies overstate the risk involved in such transactions, says Bank of Scotland International, which has financed several of the deals.
BOS International, an Australasian subsidiary of Halifax Bank of Scotland (HBOS), set up an Auckland office two years ago, partly because it saw that private equity firms with which it has relationships were becoming increasingly active in New Zealand.
The bank now has about $3 billion of lending in New Zealand, including $300 million for Australia's Catalyst Investment Managers' purchase of Metropolitan Glass last year.
The deal raised eyebrows because Catalyst outbid Fletcher Building by about $100 million, despite many commentators believing the company was worth more to Fletchers because of synergies.
Departing Fletcher Building chief executive Ralph Waters predicted "some train smashes" for high-bidding private equiteers should interest rates stay high and the economic cycle deteriorate.
The number and size of the often highly leveraged deals has created concerns that the companies involved could collapse if interest rates rose.
But BOS International's Sydney-based chief executive, Jack Dykes, said the anxiety over private equity was largely misplaced.
He said private equity firms analysed possible deals carefully.
"They're in the business of looking for a return on equity, nobody's in the business of losing money," he said.
"You've always got to remember, certainly in our lending book, the bulk of these transactions are well hedged until maturity, so the risk of interest rate rises is minimal.
"I think it's more carefully controlled and analysed than some of the press comments would have you believe.
"We don't have any concerns because we look at every transaction on its own merits."
BOS International's New Zealand business is split between corporate lending, including acquisition finance, and property development loans.
Those include $350 million to IMF Westland to develop a shopping centre at Tauriko in the Bay of Plenty, and more than $100 million to Infinity Investments Group, which is developing the $1 billion Pegasus Town north of Christchurch.
BOS International's corporate lending includes a $75 million line of credit to Strategic Finance, now 100 per cent owned by Allco Equity Partners, a $30 million line of credit to Geneva Finance and initial finance for Goldman Sachs JBWere and Quadrant Private Equity's purchase of clothing maker and retailer Kathmandu.
Dykes said BOS International's decision to open a New Zealand office - which now has eight staff - was a response to the increase in opportunities it saw here.
"We decided we could do it more efficiently and effectively if we had a presence there."
The bank had some loans in New Zealand before establishing its Auckland office, and its parent HBOS owned Countrywide Bank for ten years up.
"So as a group we had a comfort with the market, economy, legal and regulatory environment."
New Zealand's relatively high interest rates were "neither a plus or a negative".
"We lend New Zealand dollars, so we have to borrow New Zealand dollars. Even if we borrow US dollars or other currencies they've got to be converted into New Zealand dollars, so it doesn't really matter where you're sourcing these funds."
But HBOS had a very good credit rating and obtained its funds "very effectively and efficiently".
No Worries
* Bank of Scotland International is downplaying concerns about private equity debt levels.
* It has financed several deals in New Zealand including Catalyst Investment Managers' purchase of Metropolitan Glass last year and Goldman Sachs JBWere and Quadrant Private Equity's purchase of Kathmandu.
* Its $3 billion in New Zealand loans is split between corporate loans - including to private equity and finance companies - and property developments.
* It says New Zealand's high interest rates are "neither a plus or a negative".
