Equitable Mortgages plug pulled 2 working days before new Reserve Bank regulations begin

By Gareth Vaughan

Government guaranteed commercial property financier Equitable Mortgages has been placed in receivership just two working days before the December 1 introduction of new Reserve Bank enforced non-bank deposit taker (NBDT) regulations.

Equitable Mortgages said late on Friday it had asked its trustee, Trustees Executors, to appoint receivers with Deloitte's Rod Pardington given the job. Equitable Mortgages is one of just seven entities covered by the extended Crown retail deposit guarantee scheme, which replaced the initial Crown guarantee scheme from October 12.

The extended scheme, which runs until December 31, 2011, guarantees NZ$2.3 billion worth of investors' deposits but the Crown accounts for the three months to September show no provision for default under the new scheme.

Equitable Mortgages being a party to the extended guarantee scheme means about 6,000 depositors in the Auckland-based firm, with about NZ$178 million in Crown guaranteed deposits, are guaranteed by the taxpayer. However, Equitable Mortgages also has about NZ$12 million of non-guaranteed deposits marketed as “Classic Debentures” that aren’t covered by the Crown guarantee.

Equitable Mortgages is the 62nd financial entity to fail since 2006, bringing the total deposits involved to NZ$8.575 billion, involving more than 200,000 depositors accounts. The full list of failures is in our Deep Freeze list here.

Philip Combes, Treasury’s Deputy Secretary of Financial Operations, said the Treasury would work with the receivers to secure “sufficient information.”

“We anticipate that information gathering will take about eight weeks, given the Christmas and New Year holidays, and ask depositors to be patient,” said Combes.

“Depositors can be assured that the Crown stands behind its guarantee,” Combes added.

'Orderly scaling down' would've been preferred

On its website Equitable Mortgages, part of the Equitable Group which is owned by rich listers the Spencer family, says that although it would’ve preferred an orderly scaling down of its activities, this couldn’t be readily achieved under the current regulatory regime.

“Accordingly, the company has determined that the best interest of all stakeholders lies in the appointment of a receiver. To this end Trustees Executors has appointed Deloitte as the receiver on 26 November 2010.”

Sister company Equitable Life Insurance, which as of September 30 had NZ$22 million of bonds on issue, isn’t impacted by the Equitable Mortgages receivership, the website says.

Late last month Equitable said it was chasing a slice of the NZ$1.6 billion Crown retail deposit guarantee scheme payout to South Canterbury Finance investors' by looking to raise NZ$14 million before November 30. CEO Peter Thomas told interest.co.nz then there was no link between Equitable wanting to raise NZ$14 million by November 30 and the introduction by the Reserve Bank of new NBDT regulations, including liquidity requirements, capital adequacy ratios and related party transaction limits on December 1.

In September Thomas told investors in a new prospectus that changes were being implemented to enable Equitable to better position itself to meet the NBDT regulations due for introduction in December. This could include diversifying into a wider range of lending activities. An updated prospectus shows Equitable Life has ceased offering bonds to the public and redeemed all its units in the Equitable Property Mortgage Fund.

From November 1 Equitable Mortgages became the sole investor in the Equitable Property Mortgage Fund with the Fund terminated and Equitable Mortgages acquiring the portfolio of loans (valued at NZ$189.9 million at September 30) secured by first mortgage securities and other assets. Equitable Group, as shareholder, effectively shifted NZ$10.5 million worth of equity to Equitable Mortgages from Equitable Life.

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.

Equitable Mortgages' September debenture reinvestment rate was 62.2% with NZ$6.9 million of new money invested.

S&P warning & 'last man standing' falls over

Peter Sikora, Standard & Poor’s (S&P) director of financial institutions ratings for Australia and New Zealand, last month told interest.co.nz that given Equitable Mortgages' debenture reinvestment rates- which ranged from 53% to 63% between June and August – the group needed to find new money or liquidate assets to meet liquidity requirements. Equitable Mortgages' total new investments were NZ$12 million over the three months. Sikora described Equitable as a company "that will need to continue to actively manage their funding and liquidity profile.”

Earlier this year KPMG's annual Financial Institutions Performance Survey noted 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. At the time Thomas said Equitable had survived by being steady, boring and unexciting.

He said Equitable's hierarchy had watched on somewhat bemused as previously smaller rival companies achieved massive growth over short time periods and moved outside what he terms prudently acceptable business in terms of risk and return. For Equitable, sticking to its knitting included being a first mortgage lender and making sure customers who paid their interest on a monthly basis comprised at least 70-80% of its loan book.

"We’ve always had cashflow coming in the door every month whereas a lot of these others, they were roll ups of capitalized interest and so therefore if you didn’t get the asset price appreciation then there were significant difficulties," Thomas said earlier this year.

He also said then that property finance represented about 10% of Equitable's loan book with the rest commercial finance, mortgages on buildings, land developments, industrial finance and a couple of hotels.

Meanwhile, S&P said it has down graded its long-term issuer ratings on both Equitable Mortgages and Equitable Life to C from BB-. S&P said Equitable Mortgages had confirmed it has about NZ$32 million in cash, a net carrying value of NZ$188 million of mortgage property loans, debenture liabilities of NZ$191 million and book equity of NZ$31 million.

Read S&P's statement below:

Standard & Poor’s Ratings Services said today that it has lowered its long-term issuer credit ratings on Equitable Mortgages Ltd. (EML) and Equitable Life Insurance Co. Ltd. (ELIC) to 'C/C' from BB-/Negative/B. The ratings have also been placed on CreditWatch with negative implications. EML and ELIC are the key issuers and considered core subsidiaries of the New Zealand Equitable group (Equitable), which is wholly owned by the Spencer family (not rated).

“The lowered ratings and the CreditWatch action come after EML's announcement that it has decided to appoint a receiver,” Standard & Poor's credit analyst Mark Legge said.

“This decision stems from the view of Equitable's board that EML is no longer a viable business. Although EML has indicated its preference to execute an orderly wind down of the group’s activities without the appointment of a receiver, such an appointment could not be avoided due to requirements under the extended Crown Guarantee Scheme, to which EML is a party. Our rating action on ELIC reflects its core status as a member of the Equitable group.”

The appointment of a receiver will trigger a default under EML's debenture trust deed. The decision to place the ratings on CreditWatch with negative implications reflects our view that EML could fail to meet its obligations if all debenture investors needed to be repaid quickly as a result of the default. EML has confirmed that it has sufficient cash to meet scheduled liability obligations until about May 2011, without accounting for any funds that may be generated from any repayments on outstanding mortgages within its loan portfolio.

That said, a heavy discount on its mortgage portfolio due to a deterioration in the portfolio or stemming from any efforts to exit these exposures quickly, could result in a shortfall in funds needed to full satisfy all future obligations.

EML has confirmed that it currently has about NZ$32 million in cash, a net carrying value of NZ$188 million of mortgage property loans, debenture liabilities of NZ$191 million and book equity of NZ$31 million.

The CreditWatch will be reviewed over the next three months after some additional clarity is gained around the receivership action.

The ratings will be lowered to ‘D’ if EML fails to meet any of its obligations in a full and timely manner or if we believe that EML will not be able to generate sufficient funds to meet obligations in full and in a timely manner in the future, stemming from our view that it will not be able to realize sufficient value from its mortgage loan portfolio.

(Updates add S&P downgrade & statement, plus background on Equitable Group restructure).