Reserve Bank issues warning to Asset Finance after blowout in related party credit exposure caused by the pledging of a motor home as loan security

By Gareth Vaughan

The Reserve Bank has warned Asset Finance after its related party credit exposures blew out well above the legal limit of 15% of its capital after its then-CEO provided an asset, a custom built motor home, as security against a non-performing loan.

The Whakatane-based lender's CEO, Blair George, told interest.co.nz the 15% threshold was exceeded through a trust related to Asset Finance's major shareholder and EX-CEO Clive George adding "an asset of real value" to a non-performing loan - that wasn't to a related party - to shore up the company's balance sheet. Blair George, Clive George's son who took over as CEO last September, said Asset Finance's related party exposure had peaked at 39.4% at end of June last year.

The asset pledged as security was a custom built motor home valued at NZ$650,000. It was pledged, by the McCormick Family Trust, against a loan originally made in 2007 to Hawkes Bay Wine Country Marine Assets Ltd, now Experience Hawkes Bay Ltd, which now has a gross balance of NZ$1.115 million. The company operated both a catamaran and an amphibious vehicle, - a Duck. Asset Finance also has a separate loan to the company, originally made in 2006, with a gross balance now of NZ$1.523 million. Both loans are classified as specifically impaired in Asset Finance's most recent prospectus.

Asset Finance puts its current exposure to the NZ$1.5 million loan at NZ$368,121, with a "specific allowance" of NZ$1,155,547 made against the loan, and says it's secured by the Catamaran, which is valued at NZ$385,000 plus GST. Current exposure to the second loan is put at NZ$309,027, after making "specific allowance" of NZ$820,374, with this one secured by the motor home, the amphibious vehicle, GST, and a bus valued at NZ$28,000.

The Reserve Bank is the second regulator Asset Finance has run foul of in two years. Last year the Financial Markets Authority temporarily blocked Asset Finance from raising money from the public. The FMA's concern stemmed from a separate loan against which the same 2005 Mercedes-Benz Atego, custom built into a motor home, had been pledged as security. That loan has now been repaid by the McCormick Family Trust.

Asset Finance's prospectus notes that use of the motor home as security in the loan to the tourism operator is a financial guarantee of NZ$650,000, and is therefore recorded as an asset in the company's financial statements.

"As at the date of this prospectus and at certain times in the past, a reduction in shareholder capital equal to the amount of the financial guarantee would trigger a Trust Deed default, due to a shareholder capital ratio of less than 8% of risk weighted assets. To avoid a material reduction in shareholder capital, a trust associated with Clive George pledged the security as described," the prospectus says.

'We didn't breach the essence of the related party rules'

Blair George said that while technically Asset Finance might have "inadvertently" breached its related party exposure limit, "we feel that a related party voluntarily pledging additional security on a third-party (non-related) loan is not breaching the essence of the related party rules."

Asset Finance offers personal and business loans ranging from NZ$400 to NZ$400,000, debt consolidation services and factoring services. Its trustee is Covenant Trustee Company. It hasn't been fined by the Reserve Bank, or suffered any penalties other than the issuing of the warning.

"There is no doubt in my mind that had we breached the essence of the related party exposure rules, the powers that be would have had no hesitation in throwing the proverbial book at us," Blair George added.

In its warning the Reserve Bank says it's reminding deposit takers of their obligations under Part 5D of the Reserve Bank of New Zealand Act 1989.

"It does this after sending a warning to Asset Finance Limited for failing to comply with the legal requirements concerning related party exposures. These legal requirements state that the aggregate credit exposures of a deposit taker, or its borrowing group, must not exceed a maximum limit of 15 percent of capital. This 15 percent limit was exceeded in the case of Asset Finance Limited," the Reserve Bank says.

"Related party transactions played a significant part in the finance company failures that have occurred since 2006. The requirements that are now in place are vitally important in terms of limiting the harm that can arise from such transactions. While such harm has not eventuated in the case of Asset Finance Limited, related party exposures can be detrimental to the interests of investors."

"The Reserve Bank warns the deposit taking sector to be mindful of these obligations and the other prudential obligations under Part 5D of the Act."

Asked for further comment a Reserve Bank spokeswoman said; "The Reserve Bank has no reason to believe Asset Finance Limited is not compliant with the legal requirements concerning related party exposures. The matter referred to in the Industry Notice appears to have been resolved."

Asset Finance's latest financial statements show it had NZ$13 million worth of secured debenture stock on issue at September 30 last year, plus NZ$644,274 worth of unsecured capital notes. It had total loans of NZ$16.2 million and, after impairments, net loans of NZ$13.5 million. It had total equity of NZ$3 million.

In its current prospectus, seeking minimum deposits of NZ$500, Asset Finance says it borrows money from investors and lends that money to borrowers at a higher interest rate. It's currently advertising secured deposit rates ranging from 5% per annum for nine months up to 7.75% for five years. Asset Finance has a "B" speculative, or "junk", credit rating from Standard & Poor's. See credit ratings explained here.

"A bank is like a supermarket and Asset Finance is like a dairy or service station. Everyone goes to the supermarket. A supermarket normally has smaller markups on products they sell; they generate profits by selling a large quantity of each product. Many people also purchase goods from a dairy, but they do so less frequently and they try to limit their purchases to what they really need at the time because they are often paying a higher price for speed and convenience," the prospectus says.

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