GFNZ Group, formerly Geneva Finance, hopes to secure fresh debt and/or equity within 12 months

By Gareth Vaughan

GFNZ Group, formerly Geneva Finance, which is currently not seeking to raise money from the public after Financial Markets Authority (FMA) intervention last month, hopes to secure new debt and/or equity funding within 12 months.

GFNZ's managing director David O'Connell told interest.co.nz that because the company needs to borrow money to lend money it was therefore keen to attract new equity and debt. However, no announcement by the sharemarket listed GFNZ, which changed its name from Geneva on April 7, was imminent.

"Nothing is likely to be announced in the next few month," O'Connell said. "But certainly in the next 12 months we would hope to be in a position to do that."

His comments come hot on the heels of GFNZ revealing a NZ$8.6 million audited after tax loss for the year to March. That's wider than the previous year's NZ$5 million loss and eight times higher than the NZ$1 million March 2011 year loss projected ahead of GFNZ's March 2010 capital reconstruction proposal. See the independent report on this plan here.

O'Connell said NZ$7.4 million of the loss came from the company's "old business model." This consists of loans written before O'Connell took over from Glenn Walker as managing director on April 1, 2008 after joining Geneva as chief financial officer in July 2006. GFNZ's new business - loans written since April 1, 2008, insurance operations and property - with its only directly owned property being its Mt Wellington headquarters some of which is tenanted, contributed profit - between them - of NZ$1.2 million.

However, the bottom line was also hit by the write-off of a NZ$2.4 million deferred tax asset, whose carrying value auditor Staples Rodway had flagged as  "fundamentally uncertain" in the company's interim report.

GFNZ now largely does two types of loans, O'Connell said, motor vehicle loans typically worth NZ$13,000, and personal loans, typically for about NZ$6,000 after "refining" both its lending criteria and target market.

"What we've done is we've built a scorecard, a computer based electronic scorecard that ranks applicants according to a weighting which looks at factors such as stability of residence, stability of employment, affordability, prior credit history and age is quite important," O'Connell said. "Young people are higher risk than more mature people and depending on how a person scores, they then qualify for a loan with a profile whether it be amount, interest rate or term."

FMA intervention

On June 15 the FMA announced it had moved to stop GFNZ from borrowing money from the public after the company breached a loan agreement with its primary funder the Bank of Scotland. However, GFNZ's prospectus expired on June 30, as did the FMA's interim order preventing the company from raising money from the public.

The FMA's move against GFNZ represented the first exercise of a new Securities Act power to be used when the regulator believes a registered prospectus may be false or misleading. The move came after GFNZ breached a covenant on its debt with Bank of Scotland in the March quarter meaning the bank could demand repayment immediately.

The breach was of the "minimum new lending" covenant with GFNZ about NZ$400,000 short of the lending level required by this covenant at March 31. Subsequently GFNZ has announced it received a waiver to the breach.

An FMA spokesman told interest.co.nz that given GFNZ didn't have a prospectus in the market,  the FMA no longer had any issues with the company.

"There was an issue about whether the prospectus they had out there was fully disclosing everything that people needed to know and if they issue a new one (prospectus), we'll have a look at it," the spokesman said.

O'Connell said GFNZ's board would have to consider issuing a new prospectus, but that there were no immediate plans to issue one.

GFNZ's financial statements show it had NZ$25.8 million worth of debentures on issue at March 31 to about 2,700 debentureholders, owed Bank of Scotland NZ$23.2 million and had finance receivables of NZ$48.9 million down from NZ$59.2 million a year earlier. At March 31 it had cash of NZ$2.3 million versus NZ$4.7 million a year earlier.

Three capital reconstructions in four years

The company executed a debt-for-equity swap earlier this year, effectively a third capital reconstruction in four years, when GFNZ, then Geneva, convinced enough subordinated noteholders to back a planned conversion of NZ$4.4 million worth of subordinated notes to equity despite some opposition. See more on than that here.

Back in 2007 Geneva subordinated noteholders backed a moratorium - as opposed to winding the company down or appointing a receiver - that ran from November 2007 till April 30, 2008. They received all their interest monthly during this period at an average rate of 13.25%.

Then in May 2008 subordinated noteholders agreed to convert 55% of their subordinated notes to equity at a price of 36.492 cents per share. In the following two years the noteholders received all their interest on their remaining 45% of subordinated notes at an average rate of 13.25%.

Then, in late 2009, Geneva said a "real risk" emerged that it wouldn't be able to refinance or extend its NZ$35 million bank loan from Bank of Scotland, which was due to mature on April 30 this year. (As of March 31, 2008 the Bank of Scotland facility had stood at NZ$43 million.) The company reached a deal to pay off Bank of Scotland in half-year installments with the final installment due on March 31, 2015.

Subordinated noteholders were therefore asked to extend the term of their investment out 30 months to dates between October 31, 2013 and April 30, 2015.  The noteholders again threw their weight behind Geneva's plan and continued to receive monthly interest payments - on the 45% of their original noteholding they retain - at 13.25%.

'Most debentureholders are shareholders too'

O'Connell, who has a NZ$273,711 loan from the company that has been interest free since October 1, 2007, said given most debentureholders are also now shareholders it's "logical" they should choose to support the company. The company's shares are now worth just 2.5 cents each. Debentures rank equally with the Bank of Scotland loan.

"The story of Geneva is we were in trouble, we committed to a path of paying investors down (and) we've now repaid over NZ$112 million to investors (including millions of dollars to Bank of Scotland)," O'Connell said. "Parallel with that we have sought to rebuild a new business model based around some pretty stringent lending criteria."

"We've generated a lot of cash to pay people back. We've reinvented the business along the new lower cost, more focused business model." Operating expenses in the year to March were NZ$9.9 million, down from NZ$26.6 million in the year to March 2008.

After what was still then known as Geneva won backing for its debt-for-equity swap on March 31, Standard & Poor's lowered its credit rating on the company to SD (selective default) from CC. S&P said the support from shareholders and subordinated noteholders to convert debt interests to equity constituted a distressed exchange, given the conversion price was higher than the then market value of Geneva's shares, and noting their limited liquidity.

"We anticipate that the rating on Geneva will revert to a level no higher than 'CCC', following our further discussions with Geneva's management and our subsequent analysis of the insurer's business and financial profiles--including an evaluation of its prospects of operating as a viable entity in the future," S&P added.

GFNZ's trustee, Covenant Trustee Company, didn't respond to requests for comment on its outlook for the company.

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