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Learning from Lombard

Monday, April 7th 2008, 7:16AM 4 Comments

by Philip Macalister

The past week was always going to be a useful one to get a fix on the state of the finance company sector. As Monday was the end of the March quarter companies were due to send out payments to debenture holders and if there was any bad news it was likely to come out during the week. For a while I thought it was OK, but then down came Lombard. Was this a surprise? On balance probably not. Lombard was an average finance company that tried to look extraordinary. It didn’t appear to offer any clear competitive advantage and if you measured it against a set of criteria I produced last year you would have stayed clear of the company. The company, through its name, its TV advertising and use of former MPs, puffed itself up and made it look bigger, stronger and more important than it in fact was. Perhaps of more concern is that the company had some black marks to its names including problems with contributory mortgages and the not-too-pretty sight of its chief executive ending up in court over various matters. Thirdly, and this is the bit which is harder for investors to see, is that some of its lending was not too flash and there was a huge concentration of loans. This is yet another warning bell. At a finance company sector level, the Lombard situation is being portrayed a number of ways. One being that it was the first property lending company to run into trouble. The conclusion then being that maybe this is the first of a number of collapses. I don’t buy that line as Bridgecorp was clearly property-related. Secondly, Lombard blamed the property market. On balance it seems that has had an impact, but one can’t dismiss the observations about how the company itself. Perhaps the most salient point is that companies who aren’t well-prepared and don’t have contingency lines of funding in place, are the ones which are going to struggle. It’s a no-brainer to realise that reinvestment rates are down and will stay down, and that new retail money is scarce. Added to that wholesale money in this credit crunch constrained environment is almost non-existent too. A key to success is having lines of funding. Asset quality and loan repayments are vital, but in some ways the latter is nearly out of the control of the lender, sure if someone doesn’t make a payment they can get whacked with penalty interest, but that isn’t much use if they have no money. Thirdly finance companies need to focus on what they are good at and manage the size of their business.
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Comments from our readers

On 7 April 2008 at 3:49 pm Janet said:
I had a ring from Lombard about a week before they ceased trading, I had asked for my investment to be paid out, they went on with a lot of speelon how good they were, very convincing it was, but my confidence has been badly shaken after another couple of losses, and went ahead with the withdrawl, thankful that I had, I still have one investment with them, hoping I get some of it back.
Finance companies for me for future investment is a no, no.
On 7 April 2008 at 5:27 pm Barrington Smythe said:
Whatever Lombard say about this being as a result of a 'systemic failure' in the finance company sector, it's actually a failure of a weak business model and unbelievably poor risk control. Lending 25% of your book (and 165% of your equity) to a single counterparty on what became a second mortgage is not smart. Refer to Bridgecorp and Momi also.

The pattern here is clear; many people thought that setting up a finance company was an easy way to riches. You put up a minimum amount of equity, pay rates to naive debenture investors which are nowhere near enough to compensate for the risk, and cream lots of lovely profit off the top.

Will this be the last finance company to go under? No. I suggest that anyone looking at the sector simply reads Chris Lee's website to see which companies might be next.

A good way to operate otherwise would be simply to avoid to companies which advertise the most. The emptiest vessel makes the loudest noise, as Janet above found out.
On 9 April 2008 at 1:52 pm Peanut H said:
The old homily about how to make a small fortune should now be, "start with a large fortune invested in debenture stock".

Sadly for investors Lombard will not be the last finance company to run into trouble. It all started with the Provincial collapse. We witnessed, arguably for the first time in NZ, disillusioned investors venting their frustrations via a vitriolic website. The Kapiti Coast sharebroking expert shouting fire and brimstone and grabbing journalists column inches with his views about the E grade finance companies on the brink of oblivion. The creation of the exposing unethical financial advice organization. All of these events conspiring to make even the most robust disciple of debenture stock investment positively winch at the thought of even mentioning investment in debenture stock and not even daring to talk the blasphemy of renewal.

It is obvious the life blood of even the best finance companies is investors renewing investments. Apart from one or two notable exceptions the major driver going forward for most Advisers is not high yield but safe yield. It may have been common a year or two ago to witness portfolios' with 20 -30% exposure debenture stock. I imagine these portfolios' are now fast becoming barren of such shunned investments. The debenture stock industry may not be ready for the last rites, but the Priest has a full bottle of holy water ready to go. Would you want to be the last man or woman Adviser standing who's clients own a large proportion of debenture stock in their portfolios'?
On 9 April 2008 at 7:32 pm Red Dog The pirate Guy said:
I note that Nicole Kidman and Keith Urban have purchased a home in the exclusive suburb of Brentwood in Los Angeles for the reported sum of $8.94 NZ million.Seems alot of money,but then film stars are renowned for being well paid.

Hold on though,what is this I see in a blog I have just discovered called Share Investor,which reported on 3 March 2008 that Carmel and Hugh Fisher have just paid $8 NZ million for a home in Auckland.

What insensitive timing for investors in Fisher Funds who are licking their wounds,and what a contrast to the status of those impoverished Polynesians recently reported living in single rooms in Auckland.
As Bob Dylan once said ''Money doesn't talk it swears ''.

The press in regard to Fisher Funds being disengaged from the NZ Super Fund is amusing reading,and as for the NZ equity fund being unlocked,my conclusion is that it is designed to try to source more cash to assist in repaying those who are exiting,rather than having to sell down equities and driving prices down further,which snowballs the drop in investor confidence.

Kimble comments on me prattling on about my Int fund investment.
Incorrect---The Int fund as my wise Italian friend comments,is not much less than entry price because they didn't get around to investing it.
It is the Aussie fund that annoys me.

As for Lombard,As the streetwise Barrington Smythe points out,read Chris Lee's website if you want to know about E rated investments.

The size of the dividends declared by Provincial Finance was in my opinion at a greedy level,which also concerns me in regard to Hanover Finance.
I voiced my concerns to Chris,and I am plesed to see that a number of planners I deal with have now ceased investing there.

I have seen no planners foolish enough to use Lombard,and the odd private investor I have seen involved,I have referred to Chris' website.
Another thing I learnt years ago was not to invest in a company just because you have some top National Party People involved.

Peanut H mentions the Provincial collapse.
My experience was that investors were largely philosophical in regard to this on the basis that everyone is entitled to one mistake but wanted assurance from their advisors that the rest of their portfolio was safe.
It was the Bridgecorp collapse that rattled their cages.

Peanut H's first paragraph sums up the motto of planners clipping the ticket.

Peanut H mentions investors venting their thoughts for the first time on a website.He needs to remember that during the last financial crisis of some magnitude which was 20 odd years ago,people didn't have PC's or websites with which to demonstrate such behaviour.Fax machines were a novelty.

I would like Peanut H to demonstrate where Chris Lee has held himself to be a sharemarket expert.NZ has had too many finance companies lending funds to those incurring debt in regard to the acquisition of assets they could not afford.

As we have seen,there is simply too much lending in the world to those who have neither the income or assets to be considered a bankable proposition.

High School Economics states that inflation is caused by too much money chasing too few goods.Tinkering with floating interest rates is an inadequate solution.

As Peanut H observes,the major driver for advisors going forward is safe yield.Of course it has to be,as that is what a heavily wounded clientele is demanding.

It was common twelve months ago to see supposedly low risk portfolios not with 20 to 30% in debenture stock,but with 100%.
The difficult issue for an advisor who constructed such a portfolio,is going to be to answer to a litigator as to why if the client had asked for a low risk portfolio,was it 100% in debenture stock.
The advisor will be unable to raise the defence that the client had asked for a high risk portfolio,as if that is the case,why did it not have an equity content ?
From what I see,non sharebrokers are now restricting their debenture investment to those used by the major sharebrokers.

I will finish with a question.
Why are financial planners permitted to borrow from their clients rather than having to source funds through an armslength financier ?
If financial planning associations are to have any credibilty,this practice should not be allowed[or at least discouraged].

Lombard failed due to bad management.
Commenting is closed



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