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Provincial rescue plan failure sensible

Wednesday, June 14th 2006, 5:38PM

by Philip Macalister

Like most people in the financial advisory industry I have pondering the collapse of Provincial Finance. The questions at the moment are not why it fell over - as we have a pretty good idea already, rather it is the reaction of competitors and advisers.

Once news of the receivership was announced people moved pretty fast to talk to each other and get together to put together a rescue plan.

I know the publicly stated reasons sound good and convincing, but is it good business sense for competitors to try and prop up a failed company to save their collective face?


At first I thought it was, but now I am not so sure.

I have to say it has been quite surprising how quickly others rallied around the fallen, especially since it is an industry that traditionally is fiercely competitive and takes a spare-no-prisoners attitude.

While South Canterbury Finance were the ones most publicly associated with the failed rescue attempt, others were in there too.

I would have thought the idea only stacked up if the Provincial has a sound business proposition and can generate sustainable margins between its borrowing costs and lending returns.

The answer has to be reasonably obvious at this point, so does it really make sense to put good money after bad? Is Provincial really recoverable? (And if it is, would you give them your money next time around?)

Assessing the raters
The issue of ratings is also raising its head. As Good Returns reports government officials are not too keen on imposing mandatory requirements for ratings on finance companies, apparently on the grounds of moral hazard.

But hang on a minute don't they force insurance companies to have claims paying ratings? Could someone tell me what the difference is?

On this topic it was curious to read the Sunday Star Times piece. Full credit to Chris Lee for talking openly and frankly about his views. Likewise Grosvenor gave a good account of itself. Pity the same can't be said for Interest which gave Provincial, arguably, the most positive score of anyone providing rankings/ratings.

I felt that the article should have asked some more questions about this. To me it seems saying a system is a ranking and not a rating and that it shouldn't be used as a rating is disingenuous.

The punters see a company given an ABA (with the highest possible score being AAA and the lowest EEE) as being a fantastically safe company.

I am on record as saying ratings from reputable agencies with credit analysis skills should be mandatory. I repeat that call again...and again...and again.

My message here is that people (investors and advisers) need to understand issues such as what a rating means in terms of probability of failure, as well as whether they are getting adequate return for risk and thirdly if a company falls over what are the prospects for recovery.

It's a difficult set of sums to do.

As Grosvenor's David Beattie pointed out to me this morning you can get some contrary outcomes. For instance there are some companies with a G3 Bondwatch rating that do not adequately reward investors for risk and others at the opposite end of the table (G7 and G8) which do provide returns commensurate with risks.

« Fascinating Provincial questionsWhy the silence on Provincial? »

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AIA - Back My Build 6.19 - - -
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ANZ 8.64 7.74 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
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BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
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CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 6.79 - -
Co-operative Bank - Owner Occ 8.40 6.99 6.79 6.65
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Co-operative Bank - Standard 8.40 7.49 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.89 6.55 6.35
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.69 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.74 7.35 6.99
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 7.99 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 6.99 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.65 7.25 -
Pepper Money Advantage 10.49 - - -
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Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.09 7.59 7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.09 8.59 8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.74 ▼7.09 ▲6.95
SBS Bank Special - 7.14 ▼6.49 ▲6.35
SBS Construction lending for FHB - - - -
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SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 7.79 7.55 7.45
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TSB Special 8.64 6.99 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - 6.55 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.84 7.35 6.99
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.24 6.75 6.39
Median 8.64 7.19 7.17 6.65

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