By Gareth Vaughan
The chief executive of property financier Equitable Mortgages, which called in receivers late on Friday, says the group believes the property market could remain in the doldrums for up to another five years.
Equitable CEO Peter Thomas told interest.co.nz that it was a “$64,000 question” as to how the property sector sources a significant chunk of its funding in the future given Equitable is the last of the major debenture funded property finance companies to bite the dust.
He also said the taxpayer shouldn’t be left facing a shortfall from the receivership of Equitable, which has about NZ$178 million held by 6,000 depositors covered by the extended Crown retail deposit guarantee scheme.
Deloitte’s Rod Pardington was appointed receiver late on Friday, just two days before the introduction of new Reserve Bank non-bank deposit taker regulations covering capital adequacy, related party transactions and liquidity.
Thomas said with the plug being pulled now, if the receivership was managed correctly, the taxpayer shouldn’t be left short changed.
“To give you two extremes the receiver could decide to sell all the assets tomorrow and if that was the case there would be a significant shortfall,” said Thomas.
“However, if he took five years, then there wouldn’t be a shortfall and there would be an opportunity for some equity to be retained.”
Somewhere in the middle of those two scenarios was likely to be how the receivership played out, and Thomas warned that a further deterioration in the property market could make the outcome worse.
“(But) we haven’t done this lightly and it’s not a hand the keys back situation,” Thomas added. “We asked the Government and there was no other option but to do it the way it was done. But effectively it (Crown guarantee money) should be in essence a bridging loan.”
'Orderly wind up'
Equitable’s board and management had wanted to conduct an orderly wind up of the business rather than place the company in receivership. But, unfortunately Thomas said, under the Crown guarantee there was no mechanism for an orderly withdrawal. Representatives from the Auckland-based Equitable, part of the Equitable Group owned by the rich lister Spencer family, went to Wellington to explain their plight to the Government.
Thomas said they told officials there was no immediate need for a cheque to be written and that’s Equitable’s liquidity position could easily have seen it through to June next year. What the company wanted to do was cease taking deposits, withdraw its prospectus and meet payments in full as and when they fell due.
“However the Treasury’s advice was ‘we understand what you want to do and we’re very supportive of that. However, we’ve only got one mechanism and either you’re in the current (Crown) guarantee or you’re out of it,” Thomas said.
“So in the best interests of all stakeholders we had no other option but to ask the trustee to appoint a receiver.”
“The business is solvent and doesn’t have a liquidity issue.”
44% of core loan portfolio past due
According to its most recent prospectus, Equitable had a 58.3% debenture reinvestment rate in the three months to September. The biggest percentages of its NZ$189.9 million loan portfolio, secured by first mortgages and other assets, were in the land (24.8%), commercial (24.3%) and accommodation (22.6%) property sectors, with just 4.1% in development and 0.7% in residential.
The prospectus shows as of September 30, the value of core past due assets in the Equitable Property Mortgage Fund - including where interest payments have been in arrears for more than 60 days and total loan balances when principal is unpaid when due plus impaired assets - stood at NZ$83 million, or 44% of the total loan portfolio. That's up from 37% at June 30, and up from 27% at March 31.
Just under 14% of the loans were being repaid on a capitalizing interest basis when interest isn’t paid on a loan until the loan term ends, meaning Equitable was receiving regular cashflow from the bulk of its loans. Many of the property financiers to collapse in recent years, such as Hanover Finance and Strategic Finance, had big percentages of capitalizing interest loans on their books.
Thomas said that after “three years of headwinds” Equitable had formed the view that the property market would remain in a similar, or worse, state for another three to five years.
“So therefore we wanted to conduct an orderly wind up of the business,” said Thomas.
“We just don’t think that the business model’s there for property finance as a non-bank deposit taker.”
Asked how the property sector could fund itself if the debenture funded finance company model was dead Thomas said: “That’s the $64,000 question.”
In April KPMG noted in its annual Financial Institutions Performance Survey 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.
Thomas said one of the reasons the property sector was struggling so much was because aggregate credit growth in the New Zealand economy was nil compared to historic growth rates of between 4% and 10% per annum. The latest Reserve Bank monthly figures show total lending to businesses fell 6.6% year-on-year to NZ$72.1 billion at October 31.
“So without that access to debt you normally end up with some sort of asset deflator and that’s what’s going on,” Thomas said.
Actual businesses who take tenancies were finding operating times tough meaning there were issues with surety of tenancies and there was little or no rental growth. And a low level of sales was causing valuation uncertainty on clearing prices.
“So you can turn around and say ‘this is what the price of something’s worth but if there’s historically been 4,000 to 5,000 transactions a year and at the moment we’ve only got 200 transactions a year, then you have to say 200 is not necessarily the correct underlying asset price and asset prices could be higher and they could be lower’,” said Thomas.
“If you go and talk to a (property) valuer, that’s the problem. They’re saying there is no true willing buyer-willing seller anecdotal evidence to give any sales comparisons.”
* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.
17 Comments
Peter Thomas doesn't have a clue, does he!... "However, if he took five years, then there wouldn’t be a shortfall and there would be an opportunity for some equity to be retained.”. Tell me Peter ~ Did you see the world as it is today, five years ago? I very much doubt it! So how do you know there won't be a shortfall in the next 5? I can't even find two expert to agree on what the next 5 weeks will hold, let alone 5 years. And re ".. Somewhere in the middle of those two scenarios was likely to be how the receivership played out.." is just as unknowable. Though,Peter, you are speaking with all the wisdom of someone who has just defaulted under the GG....get real.
Nicholas Arrand - the assessment of the market is factual. Don't know where you get the summation that he hasn't a clue! Not too many shareholderss would walk away from equity like this by appointing a receiver and losing control of ones destiny. This is the honourable thing to do and in the best interests of investors in Equitable after taking advice no less from Treasury. The Board can only prepare financial statements based on a point in time. They rely on experts in order to value securities and if those independant experts can't or won't give a value because there are no willing market participants then you can hardly be critical! This is reality and being repeated right across the counrty by ALL credit providers. Presumably as Equitables book is winding down past dues will rise - so what? provided they are generating positive cash and revenue. and the values hold up then the Board can fully expect an orderly wind down. What else can you expect from the Board - blood!
"He hasn't got a clue". ie: he can't know what is going to happen ~ I don't, you don't, he doesn't. He sholudn't say "wouldn't", but mayn't". Besides; if the family has $700m+, and it's a certainty, why don't they put their money in to fund a sure thing? Answer: They don't know either!
Gareth - It would be interesting to compare Peter Thomas's forecast of how much will actually be paid back to the Gov't, as the new owners of the company, with the actual amount in the future. One clear result of all these finance company liquidations is that the amount forecast to be paid back has been significantly less than that actually realised. Thank God for the NZ taxpayer who is able to make good all the losses to stupid finance company investors and their company directors.
Will do Andy. For a story on Strategic Finance a couple of months ago I took a look at all the failed property financiers in our Deep Freeze list and what they had paid back, or what their receivers were predicting they would return.
The range was from Capital + Merchant at 0-2% up to St Laurence at 34%. Equitable ought to do better than that...
Shareholders have forgone an investment of $23,000,000 based on September financial statements. also any investments made by directors as secured debenture stock will also be lost under the GG. they will be the biggest losers here and will undoubtedly also come under the microscope of the SFO at a later date. would you be willing to trade places with them knowing full well should you make one mistake, you risk a criminal prosecution. Its lambs to the slaughter and i certainly don't envy them. Again not trying to repeat myself but crystal ball gazing 5 years out is not the issue, and neither is the company in default so I ‘m not sure what you take issue with? tax payers should recoup all funds in due course.
Kane02. Here's the thing. If you take on a directorship, you should be liable for the performance of the company. A directorship isn't just 'getting shares allocated' and no responsibility if the venutre fails. If you don't have accountability then how can you expect shareholders to follow your lead? Directors in this country ( amongst others, granted) need to be reminded of 'for whom they work'. Not themsleves, buy the shareholders. ( NB: At least you had the education to realise that it's 'should', not will!)
Peter Thomas: " What the company wanted to do was cease taking deposits, withdraw its prospectus and meet payments in full as and when they fell due". """
So why did the Treasury insist the company appoint a receiver ? It seems Equitable would have paid out depositors on time and, more significantly, the investors would have earned interest on those deposits up until the maturity date.
However, under the receivership/government guarantee option, no post-default interest will be paid. Therefore depositors will miss out due to bureaucratic inflexibility on the Treasury's part.
Given the track record of the Treasury in previous defaults, it will take them 3 or 4 months to repay depositors the principal amount owed.
The Treasury insisting it get involved will help nobody .......
if you are prepared to wait and have a good book then over time you should recoup all funds and do nicely. most investors in equitable are presumambly elderly and they don't have the luxury of time - the state however does. that is the key and that is partially what treasury weighed up when adding fiannce coys to the gg scheme. that's not to say that in 5 years time the market recovers. NZs stock or property, motor vehicles, fridges, freezers etc will begin to age / fall apart and at some point demand will exceed supply. it is a waiting game ...
For me the really scary part is, "September 30, the value of core past due assets in the Equitable Property Mortgage Fund - including where interest payments have been in arrears for more than 60 days and total loan balances when principal is unpaid when due plus impaired assets - stood at NZ$83 million, or 44% of the total loan portfolio. That's up from 37% at June 30, and up from 27% at March 31".
If this rate of deterioration is happening across the economy, the mother of all depressions is just around the corner.
Or am I missing something?
FYI, another S&P downgrade:
Standard & Poor’s Ratings Services said today that it has lowered its issuer credit ratings on Equitable Mortgages Ltd. (EML) to 'D/D' from 'C/C'. The 'C/C' ratings on sister company Equitable Life Insurance Co Ltd. (ELIC) remain on CreditWatch with negative implications.
EML and ELIC are the key subsidiaries and are considered core entities of the New Zealand-based Equitable Group (Equitable: not rated), which is wholly owned by the Spencer family. On Nov. 26, 2010, EML announced it had decided to appoint a receiver following the Equitable board's conclusion that EML was no longer a viable business. Although EML's preference was to execute an orderly rundown of its business, the appointment of a receiver was mandatory under the Crown Guarantee Scheme to which EML is a party.
“The rating action reflects our view that EML is unable to service, on time and in full, its debenture obligations due today,” Standard & Poor’s credit analyst Mark Legge said. “Under the receivership arrangements, the trustee has crystallized its charge over the company's assets including a NZ$32 million cash holding. As a result, EML has informed us that it does not currently have access to funds to enable it to make payments on its debenture liabilities, of which NZ$1.4 million is due today. In total, EML has about NZ$191 million of debenture liabilities.”
The 'C/C' rating on ELIC recognizes that it continues to make in-full and timely payments on its bond obligations. ELIC has about NZ$3.9 million of bonds outstanding, which are backed by an equivalent amount of cash and government stock. While ELIC is currently not part of the receivership process, the CreditWatch Negative on its 'C/C' rating reflects the risks it faces stemming from the receivership action on its sister company.
nay. you are correct. this is happening around the country. one of the banks (can't remember name?) recently reported a reduced impairment allowance with a big increase in past due receivables - both 30 days and 90. counterintuitive don't you think? or could it have something to do with the new basil brush capital requirements that are being implemented by the IMF? having said that provided you are writing new loans and your book isn't falling past due as a %age of your portfolio can be buried in the back of your financials. equitable presumably are into the hard end of the book and have not been writing new business so don’t have this luxury.
Southern Dude,
Your comment is specific, legally dangerous and unsupported by any evidence.
It has been deleted.
Please avoid any comment that makes specific allegations (or implies motives) about any individual without such allegations being made by an official body
Bernard
Bernard
You astound me. I have not incriminated myself at all with my blog that you refuse to publish. All the information is public and all I posed was that Sandy Maier was CEO of SCF and was conflicted with his involvement or association with two of the three bids - one of which he and the SCF board recommneded as the preferred bid. My final comment was just pondering whether this was part of a end game already planned by the Government. This comment in itself is robust in that the RBNZ released documents evidencing that the Treasury and Government wanted just that.
I thought that you were intelligent enough to understand this.
1) NgaiTahu Holdings Companies Office director details
- http://www.coys.co.nz/company/?no=561568-NGAI+TAHU+HOLDINGS+CORPORATION+LIMITED
2) Ngai tahu websiteconfirming that Maier was appointed in Augiust 2010 even though the registration was not registered until 1 Sept
- http://www.ngaitahuholdings.co.nz/GroupGovernance/BoardOfDirectors.php
3) NBR article on Equitable involvement with Shearwater bid
-http://www.nbr.co.nz/article/rich-listers-doomed-bid-south-canterbury-finance-134040
You could check the companies office to confirm when - I can't do all the work for you Bernard. Do your job Bernard and stop being a prima donna
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