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The Blog is back: So too fin coys

Monday, August 31st 2009, 6:23PM 2 Comments

by Philip Macalister

With all the news happening around the industry at the moment it sometimes seems a little hard to decide what to focus on. Over the past week the finance company sector has again dominated the news for a variety of reasons. One is the government’s not unexpected extension of the guarantee scheme. The other is its announcement on reviewing the rules around moratoria. Dealing with the second one first it does seem like this is a waste of time. The large majority, if not all, the finance companies which are likely to seek support from their investors for a moratorium, rather than receivership, have wel and truly done so. It’s unclear to me whether reviewing what has happened is good use of time and resources? I agree that some of the companies which gained a moratorium arguably should have been put into receivership. However the investors had the choice and the overwhelming majority all voted for the stay of execution. To me it is little surprise. Human nature indicates that people don’t want to put one of their investments into receivership as it is an admission they made a bad investment. Added to that they are less likely to vote for the big R when an offer of redemption, no matter how good or bad, is put in front of them. I would add that judging the proposals in today’s environment is not necessarily a reflection of the decision made at the time. Back to the guarantee scheme. My guess is that the banks will opt out of the guarantee as it won’t stack up on a cost benefit basis. Banks have been able to reel in millions of term deposit dollars recently and I can’t recall one bank advertising the guarantee as the reason people should invest. It’s a different story for finance companies. Many have promoted their GG status, and it has helped them enormously. The big firms will no doubt use the scheme, however it will cost them more as the fee in the new scheme is based on the size of their total book, and not just the amount of money raised after the first GG came into force. I wonder whether some of the smaller firms will opt in; organisations like credit unions and building societies. My guess is probably not as they haven’t had the same issues as finance companies. It seems that in this second generation guarantee the rules have been tightened enough to force the much sought after finance company rationalisation to occur. If this happens and we end up with a strong, well regulated finance company sector, then that is a victory.
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Comments from our readers

On 31 August 2009 at 10:55 pm Peanut H said:
The call for the big "R" will be growing louder by the day for several Finance Companies currently favoured by moratoria. The current news oozing from the band aided entities is not giving the long suffering investors any encouragement. I imagine these companies Trustee's are weighing up the choice of death by the Black Plaque of the Receivership or death by cashflow hemorrhaging under continued moratoria. What is becoming apparent is the unbelievably stupid lending decisions made by the so-called lending experts charged with having another go at getting investors money back. It will be a very brave Trustee who doesn't smell the burning fuse of litigation as the moratoria assets burn value day by day.

There would not be an Adviser in NZ who thinks a BB+ Finance Company is worth recommending instead of a "A" rated or better bond, preference share or capital note.

I also have to wonder how South Canterbury Finance feel when they may have to pay guarantee fees of $24.8m a year, around 50% of their pretax profit last year and the PSIS, Credit Unions and Building Societies only have to pay a fraction of this cost.

I wonder why the Government wants to protect the PSIS, Credit Unions and Building Societies by offering them favourable guarantee terms? Perhaps it is to give them more time to get their houses in order before their inevitable extinction from the financial landscape.
On 1 September 2009 at 8:31 am Independent Observer said:
The past 2 years have been a delightful distortion of reality, whereby the decades of mistakes of financial corporates have been sheltered under a veil of government protection. The governments of most countries have been busy absorbing private debts and repacking these as public obligations through guarantees and the printing of more money.

Whilst NZ is not alone in this policy reaction to the past turmoils, we have allowed ourselves to fall into the trap whereby the hangover from decades of frivolity has been postponed for another day. Note the word postponed as opposed to canceled - as someone will ultimately have to pay for the debts that have been accumulated, and the behaviors that are unchanged.

What does this mean for finance companies? If any business chooses to play by / exploit the values of capitalism then they should also be subject to the pains of capitalism. If a finance company has failed to adequately match their assets and liabilities, then that company should be exposed to the forces of the free market - without any government protection. The short term pain of this experience will be significantly more tolerable that the long term cancer that now exists in the financial services industry.
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AIA 4.55 2.29 2.59 2.65
ANZ 4.44 2.89 3.25 3.39
ANZ Special - 2.29 2.69 2.79
ASB Bank 4.45 2.29 2.59 2.65
Basecorp Finance 5.49 - - -
Bluestone 3.49 3.34 2.99 3.34
BNZ - Classic - 2.29 2.59 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 2.89 3.19 3.39
BNZ - TotalMoney 4.55 - - -
Lender Flt 1yr 2yr 3yr
CFML Loans 4.95 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland Bank - Online 2.50 1.99 2.35 2.45
Heretaunga Building Society 4.99 ▼3.40 ▲3.50 -
HSBC Premier 4.49 2.25 2.35 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - ▲2.25 - -
ICBC 3.69 2.25 2.35 2.65
Kainga Ora 4.43 2.67 2.97 3.13
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.40 3.20 3.50 3.50
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.35 2.65 2.65
Liberty 5.69 - - -
Nelson Building Society 4.95 3.20 3.24 -
Pepper Essential 4.79 - - -
Resimac 3.39 3.35 2.99 3.35
Lender Flt 1yr 2yr 3yr
SBS Bank 4.54 2.79 2.79 3.15
SBS Bank Special - 2.29 2.29 2.65
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - 2.09 - -
The Co-operative Bank - Owner Occ 4.40 2.29 2.59 2.79
The Co-operative Bank - Standard 4.40 2.79 3.09 3.29
TSB Bank 5.34 3.09 3.29 3.45
TSB Special 4.54 2.29 2.49 2.65
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 3.09 3.29 3.39
Westpac - Offset 4.59 - - -
Lender Flt 1yr 2yr 3yr
Westpac Special - 2.29 2.69 2.79
Median 4.55 2.73 2.99 2.80

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