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Equitable aiming for more non-guaranteed money

Equitable Mortgages has already raised $14 million through its latest prospectus and has now cut its interest rates to limit its funds inflow.

Tuesday, November 2nd 2010, 5:57AM

by Jenny Ruth

Chief executive Peter Thomas says Equitable cut the rate it was offering for one-year debentures, which come with a government guarantee, from 6.50% to 5.50%.

While the prospectus is open-ended with no minimum or maximum amount specified, "we're not a bottomless pit." Equitable has learnt from its own and other finance companies' experience that it isn't a great idea to have too large an influx of funds, Thomas says.

Equitable is offering debentures which aren't government guaranteed but the lion's share of funds attracted is for the guaranteed debentures, he says. Of the $187.2 million in debentures Equitable currently has on issue, $12.2 million is non-guaranteed, he says.

Still, the company needs to prepare for when the government guarantee runs out at the end of next year. Thomas is hoping non-guaranteed funding will have risen to about half the company's inflow by the middle of next year.

The company, which is owned and backed by the Spencer family who committed a further $4 million in equity in the year ended March, is working on managing down its large level of loan arrears with a view to getting its credit rating restored - in August, Standard & Poor's cut Equitable's rating from "BB" to "BB-" with a negative outlook.

To get the government guarantee extended to December 31, 2011, finance companies had to have at least a "BB" rating but they don't lose the guarantee if their rating is subsequently cut.

Equitable's prospectus shows at June 30 $103.2 million, or 53%, of its loan book was past due or impaired. Thomas says that includes all loan arrears, even those overdue by just one day.

A truer measure is the core past due assets, which at $71.8 million at June 30, still represented a high 37% of the total loan book.

Slow progress on managing down those past due assets was a major reason for S&P's downgrade. Thomas says it's taking much longer than normal to sell properties. "Buyers are reasonably thin on the ground. Every deal you do seems to be subject to 90 days due diligence."

On the positive side, all Equitable's loans are secured by first mortgages. While it aims to keep its portfolio's loan-to-valuation ratio below 70%, it is currently slightly above at 72%, up from 69% at June 30, reflecting the weak property market


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