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Good news from the finance company sector

Wednesday, November 21st 2007, 6:28AM 2 Comments

by Philip Macalister

It’s pleasing to see that the finance company scene has been quite quiet recently and it is appears to be in a bit of a rebuilding phase. I understand another finance company should have an S&P rating by the end of this month. This is one a well-established company which, earlier this year, restructured its business and has also secured a couple of good wholesale funding lines. When it gets its rating that it will be the fifth company to have an S&P rating, joining; UDC, Marac, South Canterbury and Geneva. In addition to this Allied Nationwide has also announced it is going for an S&P rating too. Feedback from the sector is encouraging at the moment too. Many companies say they are coming across more and better deals than they have seen in the past. This is partly because of the changes going on in the industry. At the recent SIFA Conference one of the speakers who made this point says they are doing good quality loans at 20-22% rates. (My eyes watered too). Also South Canterbury is seeking more funds, partly to take advantage of the opportunities in the market place. On the flip side we are seeing more and more finance company rates edging up to and over the 10% mark. I understand there is a lot of internal discussion about whether rates should cross this double- digit threshold. The downside being that many investors may look at rates at this level and say the risk is too high. Clearly that isn’t the case. With bank one-year IAM rates sitting at 9% and offers like Rabo’s perpetual bonds going out the door at 9.48% for the first year it seems finance companies have little choice but to go into double digits. Maybe these increases will address some concerns that finance companies aren’t offering sufficient reward for the risk?
« Will there be a guy at Geneva's meeting?What can we learn from the C+M collapse? »

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Comments from our readers

On 21 November 2007 at 11:52 pm Barrington Smythe said:
It's good to see more finance companies obtaining credit ratings from reputable sources, as this can only help investors to assess the risk/return for each company. There really is no problem with companies being rated as high risk, as long as they pay enough to investors to reward that level of risk. That's how the global high yield market works.

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.
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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