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Billion dollar booby but finance company sector fights on, RBNZ finds

Finance company failures to date could see direct losses to investors of just over $1 billion, according to Reserve Bank Financial Stability Report published yesterday.

Thursday, May 8th 2008, 5:44AM

by David Chaplin

The report, which provides a snapshot of New Zealand's financial sector, says the 13 finance companies in receivership at the time of publication have debentures outstanding of $1.4 billion with a recovery rate expected of between 30-60%.

"Estimates based on receivers' reports suggest that the direct loss to creditors of the finance companies in receivership ranges between $625 million at the most optimistic, to $1,060 million," the Reserve Bank report says.

The estimates do not take into account the fate of a further $530 million of debentures placed with four finance companies which are currently in moratorium.

Poor asset quality, related party lending, credit mis-management and liquidity pressures have all played a part in the string of finance company failures, the Reserve Bank says.

As well, the report says a growing weakness in the Australian property market is starting to affect New Zealand "with some companies dependent on a parental guarantee from an Australian company".

Since the September 2007 outflows from the finance company have amounted to about $400 million each quarter, adding substantially to liquidity pressure in the sector, the report found.

The finance company crisis has resulted in investors being more discriminating, the Reserve Bank says.

"Those with lower-quality asset portfolios are struggling to access new funding facilities and are having to sell assets to remain liquid," the report says. "Meanwhile, better quality institutions are seeking to differentiate themselves through credit ratings and to protect themselves from liquidity pressures through increases in cash holdings, committed facilities and other wholesale funding initiatives, albeit at greater cost."

Despite the rash of collapses the Reserve Bank says New Zealand's financial system and broader economy are unlikely to suffer any serious knock-on effects.

The report says while some sectors, such as property development, may feel the heat in the short-term, other lenders such as banks and superannuation funds should soon fill the gap.

"This funding may be provided on different terms or through different funding instruments. In some cases, funding may involve reduced recourse to related party lending, and some projects will need a larger proportion of equity contributed by the owners in order to proceed," the Reserve Bank says.

"This will tend to help ensure risks are fairly priced and borne by investors with an ability to manage them."

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