NZF Money boss says no cash crunch at finance co despite S&P fears and banks' reluctance to lend

By Gareth Vaughan

Fresh from having his finance company subsidiary's credit rating cut to CCC, the CEO of NZF Group is hitting out at Standard & Poor's "arbitrary" move and banks' "flat refusal" to talk about extending a credit line.

NZF Group CEO Mark Thornton told interest.co.nz that S&P's cutting of NZF Money's long-term credit rating to CCC from B was frustrating. S&P cited a material rise in past due loans and a weakened liquidity position, which the ratings agency said left the company "delicately placed" in a position where it could potentially "run short of cash".

NZF Money has NZ$22 million worth of secured debentures outstanding and NZ$105.79 million drawn on a NZ$225 million loan with Westpac that's part of a residential mortgage backed securities programme and is due to mature on October 18.

Thornton said S&P had used NZF Money data from November in its calculations, and hadn't looked at the company's current figures which was "disappointing."

"They’ve just come up with their announcement and they didn’t even bother getting an update, " he said. "They come out with an arbitrary announcement – 'this is your rating', and unless there’s something factually incorrect, that’s what you’re stuck with."

"We’ve got S&P who rate big corporations," Thornton added. "With such a tiny little entity when you start applying some of the macro rules to a small entity like this, the answers aren’t pretty."

NZF Money's loan book has halved to about NZ$35 million, from about NZ$70 million a year ago, with 19 loans. The company hasn't loaned any new money in about a year. Thornton told interest.co.nz last September that NZF Money's loan book was being wound down with loans called in.

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

Unconditional property sales to settle

Now Thornton says NZF Money currently has unconditional sales agreements on four properties which, combined, are worth about NZ$5 million and are due to settle within a couple of months.

He declined to say what the value of NZF Money's past due loans was, but said the bulk of them the company itself had allowed to become overdue because this gave it the ability to "sell them up at our behest rather than having a loan extended where we have to wait for the term to expire before we can pull the plug."

"They (S&P) have taken the view 'well what if they don't settle?' Well, yes we probably do have a problem (then). But the likelihood of them not settling is pretty remote." 

The four properties were all in Auckland and deposits had been paid by the buyers, who were all different parties. The properties are a mixture of commercial, land bank and a property with a building consent, with the sellers both vendors and mortgagee sales.

S&P's two notch downgrade of NZF Money due to concerns about past due loans and its cash position, comes after the credit rater's analytical manager for financial institutions in the Pacific, Peter Sikora, told interest.co.nz last week that past due loans were always a key area of focus for S&P.

"We look at them both with respect to ultimate losses but also the impact they’re having on liquidity," Sikora said. "(Because) when loans are past due they’re not paying (interest)."

'Prudent approach'

Thornton said NZF Money was taking a "prudent" approach until it could secure a funding line which no major bank was prepared to consider at the moment.

"We’ve talked to banks about a loan but they’re all driven out of Australia and finance companies are just a big no. Flat refusal, they just don’t want to talk about it," said Thornton.

For now both NZF Money and NZF Group's 70% owned Finance Direct, were effectively in "a bit of a hiatus" and being run down. NZF Money probably required a funding line of between NZ$10 million and NZ$20 million, which would give it "a nice little business." Finance Direct probably needed about NZ$5 million.

"There are a lot of opportunities out there for small residential type lending (for NZF Money), low geared, short-term stuff which the banks don’t want to touch. We’d be very happy to play in that field. We see the opportunities daily but we don’t have the opportunities to do that," said Thornton.

That said, if property sales come off as planned, NZF Money will have some money which it could use to restart lending within about six months. This would include bridging lending where, for example, a buyer might want to buy a property and needs to sell one first but the banks won't provide a loan.

"We’d do a security lend on residential property," Thornton said. "That's pretty much how the company started business back in the late 1990s. We have stuck to our guns of first mortgage security."

Meanwhile, NZF Group, which owns 50% of Mike Pero Mortgage Holdings and is chaired by Peter Huljich, has as its top priority getting its home loan division "working." It has been looking for a partner to bring onboard, with Thornton saying talks only really began in November after the Crown retail deposit guarantee scheme, which NZF Money was covered by, had ended.

Deal with residential mortgage partner possibly close

"We’re still in negotiations with two parties and we expect that to happen," Thornton added. He expected "finality" on the talks “very soon”, potentially this month. The two parties in the talks were a New Zealand one and a "big" Australian one. Thornton wouldn't name either but said the Australian party isn't either Liberty Financial, which owns the other half of Mike Pero, or non-bank lender Resimac.

In the meantime NZF Money, which had cash of just NZ$2.8 million at September 30 according to its financial statements, wasn't short of cash.

"Debentures mature at about $1 million a month with reinvestment rates at 40% to 50%," said Thornton. "So all we need to repay debentures is $500,000 a month, that’s roughly all our cashflow that’s needed (because) operating costs on top of that aren’t huge."

The company "stress tests" its cash model based on a reinvestment rate of just 25% and unconditional sales.

"We’re confident we have plenty of cash to keep the business operating," said Thornton.

* This article was first published in our email for paid subscribers earlier today.  See here for more details and to subscribe.