Third used-car finance company crash

Ailing Western Bay Finance last night became the third used car finance company to hit the wall in the past three months.

The company's directors said an offer from Southland Building Society subsidiary Finance Now for a chunk of its assets that would have enabled it to pay out at least some of the $48 million it owed to its 3000 debenture stock investors was not acceptable.

As a result, they had requested the company's trustee, Covenant Trustee Co, to appoint receivers.

Grant Graham and Brendon Gibson of Ferrier Hodgson have been appointed.

Like the two previous recent finance company failures, Provincial Finance and National Finance 2000, Western Bay came unstuck by lending to used-car buyers.

The three finance company failures are regarded by many commentators as the start of a "shakeout" in the industry. After spectacular growth during robust economic conditions, the sector faces increasing headwinds as the economy cools.

However, John Roberts, New Zealand director of credit-checking agency Baycorp Advantage, blamed the failures on management deficiencies.

"It would be their practices that have caused the issue, not the economy.We have probably seen the car market flatten out now, so you'll see a bit of confidence return to that sector."

Western Bay had been negotiating a deal with Finance Now that would have seen it sell "a significant proportion of the trading assets and branch network for an amount approximating book value", the company said two weeks ago.

That would have enabled it to pay its investors about 60c in the dollar.

However, after a 15-day due diligence period, Finance Now amended its offer.

Last night, Western Bay's directors said they were "unable to determine if this offer could reasonably be accepted".

In light of the company's existing breach of its trust deed's total liabilities to total tangible assets ratio, they had requested the trustee to call in receivers, they said.

Mr Graham told the Herald the revised offer differed "both in quantum and the nature of the assets they were looking to acquire".

Nevertheless, the receivers would still evaluate the offer in the interests of debenture holders.

Mr Graham said he and Mr Gibson would also look at whether collecting on the loan book rather than selling it was a better option. He expected to be able to give investors more details next week.

Mr Graham said the company had a loan book of $53 million made up of about 10,000 loans, mostly on cars.

Western Bay stopped making loans in June, with managing director Jim Smylie blaming a lack of incoming funds from investors due to the negative publicity generated by the failures of Provincial and National Finance 2000.

Later, Mr Smylie said the company had breached its ratio of net assets to net liabilities set out in its trust deed after the provision for bad and doubtful debts on its $50 million loan book ballooned to $12.4 million from $2.67 million.

The company subsequently investigated "a range of options to see if there was an alternative to receivership".

One Western Bay investor who did not wish to be named said last night she was pleased the receivers had been called in.

She feared that Finance Now would "cherrypick" the stricken company's best assets, leaving little of value to be used to meet the shortfall to investors.