Taxpayer guaranteed firms free to offer investment guarantee for terms beyond Dec 31 deadline right up to year's end

By Gareth Vaughan

Companies covered by the extended Crown retail deposit guarantee scheme are free to continue offering guaranteed deposits for periods stretching beyond the scheme's expiry date right up until it ends on December 31 this year, Treasury says.

Three of the four entities covered by the guarantee, Fisher & Paykel Finance, Building Society Holdings (the merged Marac Finance, CBS Canterbury and Southern Cross Building Society), and PGG Wrightson Finance are offering guaranteed debentures for terms as long as five years even though any money invested loses its guarantee at the end of the year.  The fourth, Wairarapa Building Society, stopped offering the guarantee in January.

Treasury spokesman Angus Barclay said the guaranteed entities must be clear to their depositors about what is guaranteed and what is not, so they can’t state after December 31 that deposits are guaranteed.

Nonetheless Barclay said the offer and issue of Crown guaranteed debt securities maturing beyond the scheme's end should be an easy concept to understand.

"Because it applies to most guarantees – whether they’re for something inconsequential like a toaster or something that’s quite valuable like a building or financial investment. When the guarantee expires, the product or service continues as it always has," Barclay said. "But if a problem arises after expiry of the guarantee then the guarantor is no longer obliged to resolve it."

The same applied to any Crown guaranteed debt securities with a post 2011 maturity date.

"They continue as they always have, but the depositor can call on the Crown only if there is a default before the scheme expiry date."

NZ$1.9 billion guaranteed by taxpayer, no provision

The taxpayer is guaranteeing up to NZ$1.9 billion worth of retail deposits covered by the extended Crown retail deposit guarantee scheme. Treasury says the risk of default by any of the four entities left in the scheme is unlikely and therefore has made no provision in the Crown accounts. See a detailed run down of the four entities covered by the extended guarantee and their positions ahead of its expiry here.

Equitable Mortgages, which was covered by the extended guarantee, was placed in receivership on November 26 last year. Equitable had NZ$188.4 million worth of loans outstanding when the receivers were called and owed about 6,000 secured debentureholders NZ$192.3 million. Its receiver's first report said it was too soon to estimate how much of Equitable's loans - first ranking loans for commercial, industrial and residential property - would be recovered but noted the firm had a "significant" amount of cash on hand.

Meanwhile, taxpayers' have been left with a NZ$1.2 billion tab from the initial Crown retail deposit guarantee scheme after nine finance companies - led by South Canterbury Finance - collapsed whilst carrying the guarantee that ran from October 2008 until October 2010. Under the initial scheme fears over a wall of debenture maturities due at the end of it developed. In the case of Allied Nationwide Finance, one of the nine to fall, its trustee pulled the plug in August last year because it was concerned about how the company would've coped with NZ$70 million worth of debenture repayments due by October 31 last year.

This time around, with the extended guarantee scheme, Barclay says Treasury is "not concerned about the maturity profile of debt securities that are Crown guaranteed." 

F&P has NZ$100 million due by December 31

Alastair Macfarlane, F&P Finance's managing director, told interest.co.nz in an interview after the company's annual results announcement last Friday that the consumer lender has about NZ$100 million worth of debentures due to mature before its guarantee expires on December 31.

But Macfarlane said any perception F&P Finance is dependent on the guarantee is misplaced.

"The position we have is we have about NZ$140 million of debentures in the market at the present time," Macfarlane said. "NZ$30 odd million of that is going to expire beyond the Crown guarantee period. So we’ve got in order of magnitude of NZ$100 million between now and December 31 and we’ve got bank lines and cash roughly in the order of NZ$200 million or more if we had to redeem all of those debentures on bank debt."

F&P Finance's debenture reinvestment rate fell to 60% in the six months to March from 67% at September 30 last year. However, debentures make up just 24% of the firm's funding. As of March 31, it had NZ$77 million of a NZ$285 million securitisation programme unutilised and NZ$160 million of NZ$385 million worth of bank loans - through ANZ, BNZ and Westpac - untapped. 

Macfarlane said he was comforted that F&P Finance recently had its bank loan facilities extended by NZ$50 million. And by offering less attractive rates on guaranteed debentures than on non-guaranteed ones, the company was "trying to incentivise" customers to start to think about life after the Crown guarantee.

"We’re offering attractive yields in periods beyond December 31," Macfarlane said. "What that’s starting to see is investors becoming more aware of the reality that this guarantee is a subsidy. If they want to continue to have bank deposits at 4% versus finance company deposits, say with us at 7% or 8% depending on the term, then the time is going to come that they’re going to have to make a call."

F&P Finance is currently offering a one-year guaranteed investment rate to new investors of 6.25% and 6.75% to existing investors. Its non-guaranteed one-year rate for new investors is 7% and 7.5% for existing investors. See all the company's full rate card here.

Will there be a retail debenture market beyond 2011 for non-investment grade rated entities?

 Meanwhile, Macfarlane said F&P Finance couldn't withdraw from the guarantee scheme prematurely because it has obligations to existing investors.

"But it’s not something that keeps me awake at night I can assure you," Macfarlane said. "Because we are so well funded from other sources and we have indicated to the market that there are other options for us to access the retail market, bond issues or something different to what we’ve traditionally offered. We remain particularly confident that funding liquidity is not an issue for us like it used to be. It really is one that we’ve addressed and I think we’re getting pretty much confirmation from the banks."

 That said, he acknowledged that it remained to be seen whether there will be a retail debenture market post the Crown guarantee period for finance companies without investment grade credit ratings. In its recent Financial Institutions Performance Survey Review of 2010, KPMG suggested in the future investors will move their money far more regularly than they traditionally have. Reinvestment rates will fall with the market more price sensitive as investors seek a "real return" on their money.

KPMG said the current premium from banks with AA credit ratings to BB rated finance companies was between 150 and 300 basis points.

"The future may see a BB+ rated instrument demanding a return of 300-500 basis points, but a BB- rated instrument would require an additional 150-200 basis points to reflect the additional risk," KPMG said.

Macfarlane acknowledged many finance company investors had been "hammered." 

"They lost tens of thousands of dollars, if not more, and some of them life savings. So to go back to the well and drink again, it’s an awfully brave investor until they start to see some positive reason why they would."

'Match funding to assets'

The key to a finance company was matching your funding liabilities with your asset maturities, and many of the finance companies that collapsed failed to understand this need to match cashflows to their balance sheet, Macfarlane suggested.

F&P Finance's consumer finance book has a very short lifecycle with cash from customers coming in at a rate of about NZ$50 million per month.

"So if we ever did get into a situation where funding became an issue we could very quickly slow down the rate of lending of our business to match the cash maturities that we’re getting on our assets," Macfarlane said. "So we have a lot of levers to pull."

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