NZF Group sees funding future in RMBS with debenture investors "burnt"

NZF Group, whose interests include a 50% stake in Mike Pero Mortgage Holdings and finance company NZF Money, says it prepared for a “worst case” scenario of no debenture reinvestment as the expiry of its Crown retail deposit guarantee rapidly approaches, but has so far actually seen 60% of its debentures renewed beyond October 12.

Executive director Mark Thornton told interest.co.nz that NZF group was now winding down its NZ$35 million debenture funded NZF Money loan book as it prioritises the home loan market and securing funding through Residential Mortgage Backed Securities (RMBS). Thornton said the bulk of the largely short-term loans being called in were against residential property, plus some in land banking and commercial property.

“Those are the ones that we’re forcing out,” Thornton said.

“We’ve taken the view that once they reach maturity, if the borrower is unable to pay, we’ll force the issue,” he said.

With debenture reinvestment rates dropping, NZF Group had noticed the effect of the recent receiverships of South Canterbury Finance and Allied Nationwide Finance. He wouldn’t specify actual reinvestment rates saying the information was commercially sensitive but said they were down about 10%.

Debentures comprise about 15.3% of NZF Group’s funding. Both NZF Money, which had secured debenture stock of NZ$58.2 million on issue at March 31 and NZF Group's 70% owned Finance Direct with NZ$5.6 million at March 31, are covered by the Crown retail deposit guarantee scheme due to expire on October 12.

Thornton said NZF hadn’t been eligible for the extended guarantee scheme, which begins on October 12 running till December 31, 2011, and wouldn’t have wanted to join it anyway because it would've just pushed cashflow problems out 12 months. NZF needed a BB rating to participate in the extended scheme and only has a single B rating. Anything below BBB minus is considered sub-investment grade, speculative or "junk" by the investment community.

“We don’t see a great future for a finance company funded purely off debenture investments because so many people have been burnt it’s going to be hard to get trust back in the market from a significant number of people,” Thornton said.

“So that’s why we’re really just concentrating on getting our loans back and in the finance company book.”

Given this was 97% secured by first mortgages, NZF Group believed it was in a position to recover its loans without “too much” impairment and meet all cash obligations with maturing debentures.

Preparing for the worst

Thornton said NZF Group had prepared for a worst case scenario of a zero reinvestment rate as the Crown guarantee expiry approaches with no new money coming in. What had actually happened was that 60% of its debentures had been renewed beyond the Crown guarantee expiry and new money had been coming in. The single B sub-investment grade rated NZF is offering between 8.25% and 8.75% for one to two year debentures expiring after the guarantee, which compares with AA rated bank term deposit rates of 5.25% to 5.75%.  See all term deposit and debenture rates here.

Without providing a specific figure, he said the group’s cash was down from the NZ$15.3 million it held at the end of its financial year on March 31 and its NZ$225 million Westpac loan was now about NZ$200 million drawn down. The Westpac loan, which funds the group’s residential mortgage activity, was recently rolled over for a year meaning it’s now due to expire in October 2011. Thornton said this had included a “slight” margin increase on fees.

Thornton was "confident" NZF Group had enough cash in the bank.

NZF Group launched a NZ$100 million RMBS programme managed by Westpac earlier this year. Thornton said the group hoped to get another RMBS issue of the same size away shortly given there was “huge” demand from institutional investors for RMBS. And whilst the debenture funded finance company business was risky, there was “virtually no risk” in the home loan business given the loans are reinsured by a third party. Furthermore, NZF Group was able to “dovetail” on the bank’s margins, making RMBS very profitable.

"Dovetailing" on Westpac

“The banks are trying to make a lot of profit to cover losses that they’ve had. Their margin is significantly higher than it was 18-24 months ago,” said Thornton. “It’s a fact of life, the banks can charge."

"So the fact that we’re getting a bank-funded line out of Westpac, we’re able to almost replicate the sort of margins that the banks are making and it’s pretty riskless so that’s where we see our future,” he added.

“I think once we’ve made it through the (Crown guarantee) expiry people will see that we have a model that works.”

 NZF is working with Ecko Capital, a merger and acquisition advisory firm co-run by former Hanover Finance CEO Andrew Schmidt, as it looks for potential capital partners for its RMBS programme. Thornton said, however, this work wasn’t of the highest priority.

New product related opportunities were being looked at for the Mike Pero business, whose carrying value NZF wrote down by NZ$6.9 million, or about half, in its last annual results, citing the reassessment of short-term growth rates and profit projections. The other half of Mike Pero is owned by Australia's Liberty Financial.

Meanwhile, Thornton said NZF Group was yet to decide what it would do when its NZ$20 million worth of unsecured capital notes mature next March. The notes pay 9.75% interest per annum. The company’s options at maturity are to renew the notes on new terms and conditions, convert them to ordinary shares at a discount to NZF Group’s then market share price, or redeem them for cash. NZF's shares halved yesterday to 10c, but rebounded to 20 cents on Thursday in light trade.

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