Good news from the finance company sector
Wednesday, November 21st 2007, 6:28AM 
2 Comments
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On 30 November 2007 at 6:08 am Barrington Smythe said:
It's clear, now that Capital & Merchant has failed, that they were indeed paying north of 13% to Fortress for their funding, and they gave Fortress first lien on that borrowing, ahead of the debenture holders. So Fortress get their $75m before debenture holders see a cent.
If large international lenders would only lend to an unrated NZ finance company at 13%+ with first lien, then why oh why did advisers recommend that mums and dads lend at 9%-9.7%, with second ranking?? It's not as though the Fortress deal was not public knowledge.
I suspect that once things start to come out in public, it'll be the same set of advisers in the news for recommending C&M that were in the news for recommending Bridgecorp. In many ways the two companies were remarkably similar, not least in the level of commissions they paid to advisers.
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If Rabobank is paying close to 9.5% with a AAA rating, then using current global high yield market comparisons, a company with a BB+ rating should be paying around 400 basis points more (or 13.5% p.a.) to reflect the risk, and a company with a single B rating should be paying aroung 500 basis points more (or 14.5% p.a.) to reflect the risk.
Why on earth anyone would want to lend to a BB, B or unrated local finance company paying less, the same or slightly more than a AAA rated international bank is beyond me.
If finance companies are indeed able to lend to good quality counterparties at 20% - 22% , the surely they should be paying debenture holders 13.5% to 14.5% to source those funds?
My guess is that many of the companies that have diversified their funding lines will be paying rates of 13% plus for the loans, probably with first lien on the assets (i.e. ranking ahead of debenture investors).
If I were to invest in the debentures of lower rated or unrated companies, I would want to see significantly increased rates first, and I'd be asking exactly who ranked ahead of me and how much they were being paid for lending to the company.