Equitable Group chases SCF payout, says doesn't need cash to meet NBDT regulations

By Gareth Vaughan

Diversifying commercial property financier Equitable Group is hoping to grab a slice of the NZ$1.6 billion Crown retail deposit guarantee scheme payout to South Canterbury Finance investors by raising NZ$14 million before November 30.

Peter Thomas, CEO of the The Equitable Group, which is quitting its life insurance business and focusing on Equitable Mortgages as it moves to diversify lending away from commercial property, says like all other financial institutions it’s interested in the South Canterbury Finance payout. Debenture and deposit holders in South Canterbury Finance, which is now in receivership, were paid NZ$1.25 billion last week, meaning 35,000 investors have now been paid out following the payment of NZ$350 million to the company’s bond holders on September 23.

Thomas says, however, there’s no link between Equitable wanting to raise NZ$14 million by November 30 and the introduction by the Reserve Bank of new non-bank deposit taker regulations (NBDT), including liquidity requirements and capital adequacy ratios, on December 1.

Rather, he says the reason for the dollar cap is because Equitable doesn’t want to get swamped, as Allied Nationwide Finance was at the initial Crown retail deposit guarantee investiture, and thus is retaining the ability to “cap out” the offer its required. Allied Nationwide Finance was placed in receivership by trustee Guardian Trust on August 20 due to concerns it couldn’t meet NZ$70 million of debenture repayments due by October 31.

Equitable is one of just seven companies approved for the extended Crown retail deposit guarantee scheme, which began on October 12 when the initial scheme ended, and runs until December 31 next year. For non-guaranteed debentures Equitable’s website is advertising rates ranging from 4% per annum for a three month term to 8.50% for 60 months. For guaranteed deposits it's offering 3% for three months, 5.50% for six month terms and 6.50% for 12 and 18 month terms.

Thomas says Equitable is also trying to give investors some certainly around its rate card, i.e. by setting them for a fixed period, rather than have rates "yo-yoing around,." Therefore, it has set a coupon rate with a maximum acceptance date.

“30th November is more just a calendar end date than NBDT regulation specific,” says Thomas.

“Also we expect there maybe some wholesale rate changes in the later part of November given the pending (November 2 & 3 US Federal Reserve) FOMC meeting and the potential for QEII (further quantitative easing) and the knock-on effect on the dollar block economies,” Thomas says.

“The rationale is so we can protect our weighted average cost of funds and the duration of the debenture portfolio.”

'No specific cash needs'

He says Equitable has “no specific cash needs” for the pending NBDT regulations.

The Reserve Bank has set a minimum capital ratio for inclusion in NBDTs’ trust deeds from December 1. It must be at least 8% for NBDTs with a credit rating from an approved credit rating agency, or at least 10% for those without a credit rating. Equitable has a BB- rating from Standard & Poor’s, having been downgraded from BB in August. BB is the minimum rating that was required for entry to the extended Crown guarantee scheme.

Peter Sikora, S&P’s director of financial institutions ratings for Australia and New Zealand, recently told interest.co.nz that given Equitable’s debenture reinvestment rates- which ranged from 53% to 63% between June and August  – the group needed to find new money or liquidate assets to meet liquidity requirements. Equitable's total new investments were NZ$12 million over the three months.

Sikora described Equitable as a company "that will need to continue to actively manage their funding and liquidity profile.”

Earlier this year KPMG's annual Financial Institutions Performance Survey noted that of the 10 property development and commercial finance companies with total assets of at least NZ$50 million covered in last year's survey, only one - Equitable - was left with what could be termed "normal" operations. At the time Thomas said Equitable, owned by rich listers the Spencer family, had survived by being steady, boring and unexciting.

In September he told investors changes were being implemented to enable the group to better position itself to meet the NBDT regulations due for introduction on December 1.

"After a detailed review of the business, the directors and management agree that Equitable will benefit from committing to just one regulatory regime, being the NBDT sector, i.e. Equitable Mortgages Ltd," Thomas said. "Equitable will therefore look to exit the life insurance sector, ie Equitable Life Insurance Company."

At June 30 the group had NZ$190.87 million of debentures and NZ$27.96 million of bonds on issue, giving a total of NZ$218.8 million outstanding.

This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.