It seems like a bomb has gone off in the finance company sector and things are total chaos. Seems like Iraq. The reality is quite different.

The two latest companies are collateral damage in the whole finance company explosion

One feels for Propertyfinance (PFS). My impression of them is that they were a good company with an innovative approach to business. When I say innovative, I mean it in the true sense.

PFS has been caught out by the global credit crisis.

There are three ways a finance company can fund their operations. One is through investors (either direct or through advisers), the second is to have a wholesale funding line and the third is securitisation.

With the latter companies package up loans and sell them to institutional investors. Following the sub-prime collapse in the US institutional investors aren’t interested in buying loans from crowds like PFS.

I have heard news that Marac was looking to do some securitisation, but I guess those plans maybe shelved now.

Five Star looks like collateral damage. It only had one funding line – investors. Reports seem that reinvestment rates and new money dried up pretty quickly.

No money in the door spells trouble. As regular Blog readers will know this was part of the problem with Bridgecorp.

Around two thirds of their money came from advisers. Over the past few months support fell and they ended up with a liquidity problem.

The two big things for me are that not all finance companies are bad or at risk of falling over. The good, big companies are increasing their disclosure and showing they are in good shape. The caveat here is that one still has to be careful about what finance companies are saying about themselves. At least two, Nathans and Five Star, had made public comments days before their collapse saying they were in good shape.

Secondly, investor panic will cause a widespread collapse.

If everyone clamours for their money back there is only one outcome. Chaos.

My suggestion is that investors make an informed decisions about whether their company is sound or at risk.

Readers of depositrates.co.nz know I outlined a five point plan people should consider when looking at finance companies. Use it as a starting point to understand each company.

One of the things which perplexes me at the moment is why advisers aren’t out their defending themselves. Currently they are taking a pretty big hit in the mainstream media – in my view unfairly.

Indeed this week I have done two television interviews and one made a strong stand for advisers. The other on Campbell Live was a checklist retail investors could use when they look at finance companies.

However, when I see comments like this in the NZ Herald I wonder whose side the IFA is on:

“David Hutton, chief executive of the Institute of Financial Advisers, said investors had to balance the risk against the reward and do their own research, and not rely solely on financial advice.”

I thought it was the job of the IFA to encourage people to see and use advisers. This quote (it was in the main news section of the paper, not the business pages) has been described to me a “silly” and I agree.

Man there are a lot of strange things happening in the market at the moment.

So we have another finance company collapse. This time the relatively small Nathans Finance which has about quarter the amount of investor money as Bridgecorp.
There are some interesting similarities and differences between the two. Perhaps the most telling similarities are that both organisations had complex structures and deals out there which made them difficult to understand.
I have been watching the announcements Nathans’ listed parent company VTL has been making to the NZX over the past two weeks.
They are complex and convoluted and may not necessarily have been delivering what they appeared to deliver.
The second comparison is that both organisations are led by colourful characters with, let us say, interesting backgrounds.
Two protagonists involved with Nathans/VTL are former financial planners Roger Moses and Gary Stevens.
In their backgrounds there are a myriad of achievements and a couple of less pleasant events. One of the latter is that they ended up in court some years back on charges relating to a contributory mortgage business they were involved in. They were, after a number of hearings, cleared of all charges. However, one of the others, closer to the firm’s dealings, ended up in jail.
Why highlight this? Because it is important for investors and potential investors to understand the track record of the people running these finance company businesses. A blot in the copybook is quite possibly a flag which should be observed.
The key differences between Bridgecorp and Nathans are that the former sourced around two thirds of its money from advisers. It is understood most of the Nathans money came directly from the public.
Secondly Bridgecorp was a lender in the property sector while Nathans was used to finance a vending machine company.
These collapses provide some useful lessons for investors.
The two lessons highlighted here are; Look at the business, if it has complex deals you can’t understand, be careful.
The second lesson is watch the news and check out the people running the business.
The key point is that there are many choices in the finance company sector and differentiating can be hard. If these issues above raise flags with you then move onto another company.

PS: A very odd twist to this latest collapse is that Moses and Stevens are both life members of the Institute of Financial Advisers. No doubt someone will pick up on this and use it against the advisory industry.

Roger Moses responds:

The original judgement you will be referring to was from the  District Court which heard the evidence in the case against us and dismissed all of the numerous charges. The Crown appealed on questions of law alone to both the High Court and The Court of Appeal and were unsuccessful.

If you had followed the proceedings carefully or at all you would also have been aware that we received the then record award of costs against the Crown, which reflected the view of the Court that the charges had no substance or merit.

We can only encourage you to read the judgements mentioned above, all of which are a matter of public record, before making any further statements about this matter.

The age old debate about commissions seems to have raised its head again recently, and this time strongly.

While it was the centre of a muddled discussion at the IFA Conference, it has been in the mainstream media over the past fortnight through a series of articles – or a so called special investigation – in the Sunday Star Times.

In addition to that the life insurance side of the industry has been talking to the Minister of Commerce about the subject this week.

Over on the investment side Bridgecorp and commissions are two things have been talked about too.

My take on commissions is that that are fine as long as they are disclosed. In the investment side it would be useful to see the amount disclosed in dollar terms.

I understand one finance company is even planning to write to all its clients and tell them how much commission they had paid the adviser who recommended their product. This disclosure was going to be in dollar terms.

It would be useful to see more advisers move to a fee-based model. My understanding is this is slowly happening and one catalyst for this change has been KiwiSaver.

On the insurance side the debate is raging over whether the commission should be disclosed in dollar terms. It is a die-in-the-ditch issue for leaders in this part of the industry. They oppose dollar disclosure.

I’m leaning towards their side of the argument at the moment.

On the SST piece last week I thought it was pretty sensational and not very balanced. Also I would be interested in your views.

What would be useful though would be to see better disclosure around the soft-dollar stuff. I’m not sure we should go as far as Australia where they require firms to keep a register of soft dollar payments. But I wouldn’t be surprised to see that forced on the industry unless changes are made.

Much of the comment and discussion around rising interest rates has centred on lending and whether the increases will slow the housing market down.

What’s been over-looked a little is the impact on investors, particularly those in the finance company sector.

The obvious point is that rates being offered to investors are increasing. Readers who follow depositrates.co.nz will have seen our commentary on the changes here.

The other piece of the equation is what finance companies and the like do with the money they raise from investors.

I have heard talk that now that to generate the income needed to fund the rates on offer, lending rates have also had to increase. They are reaching levels where potential lenders are saying no. They are too high and make projects uneconomic. And for the lender the risk premium has become too high.

One gentleman, whose company runs a fund in this space, even suggested that because rates are so high the future of his vehicle was starting to look marginal. Essentially, the fund couldn’t lend money at a high enough rates to generate the returns promised to investors.

Time will tell whether this happens or not. There is the option to tough it out through the top of the interest rate cycle. Nice idea, but it looks like we will be on the peak for some time.

Maybe this situation is one reason why many of the finance companies have such high amounts of cash on hand? Just a theory.

PS: As mentioned at the top of this Blog the focus of rate rises is to slow the housing market. To see what is happening with prices in your area go to landlords.co.nz and check out the housing stats section. Here you can graph and compare house prices in regions all around New Zealand.

I have read – with a degree of amazement – the receivers first detailed report on the real state of Bridgecorp.

It’s easy to sit here and say, with the benefit of hindsight, why would anyone have put money into this company?

The report shows the company, had a high concentration of loans. Just 69. Most of the loans were low security, that is something less than first ranking status. The lending was mainly on development properties and interest was accruing and being added to the loan balance as opposed to being paid to the company on a monthly or quarterly basis.

With even that amount of information a prudent investor or adviser could have seen that this was a high-risk company.

Bearing the above in mind, and looking at its rates comparative to other finance companies, why would anyone have gone near Bridgecorp?

Added to the points made above the report says that most of the good loans had been sold to other financiers. This fact was a pretty strong rumour in the market before the collapse.

So the questions I ask are this: Did investors and advisers know this level of detail? Is all this new information? Did any of the researchers/raters know this information?
If people did know this amount of information, why did they give the company money?

PS: This post isn’t aimed at trying to be smart after the event. It’s more about asking some questions. The first being if people had access to this information, why did they use Bridgecorp. Secondly, and more importantly, if the information wasn’t available, why not?

Use the Comments link below to have your say on this post.

PS: This post isn’t being critical of advisers. Rather it’s asking a couple of questions, namely if people knew this information why did they put money into the company. There may be good reasons. Secondly, and more importantly, if this information wasn’t known, why was that?