NZF Group (NZF and NZF010)

[Enumerate]

NZF have announced a series of Residential Mortgage Backed Securities - each issued with a S&P credit rating and mortgage insurance.

I think this is a very good development. Further, I think this market could develop a nice niche for NZF as the packager and enabler of direct NZ investment into NZ mortgages. There is life (and brains) in the NZ Finance sector! Perhaps those interested in the security of NZ residential property will now be tempted by a financial instrument that collateralises this debt, directly. The Aussie banks have been making out like bandits in this sector - nice to have the opportunity to have a piece of this market ...

NZF Group Limited launches NZD$100 million RMBS's

26 May 2010

(NZF) - NZF Group Limited launches NZD$100 million Residential Mortgages Backed Securities (RMBS).

NZF Group Limited (NZF) would like to announce the launch of its first RMBS, a NZD$100 million NZF Mortgages Series 2010-1 RMBS. This transaction will be the first RMBS issue in New Zealand since late 2007 and will feature a pool of seasoned residential mortgages, all with 100% mortgage insurance cover.

Westpac Institutional Bank is arranging the deal and is the lead manager.

Details of the NZF Mortgages Series 2010-1 RMBS are:

Securities Issue Amount (mil.) Preliminary Rating
Class A1 NZ$87.8 AAA
Class A2 NZ$9.1 AAA
Class B NZ$2.5 AA-
Class C NZ$0.6 N.R.

[Alan3285]

NZF have announced a series of Residential Mortgage Backed Securities - each issued with a S&P credit rating and mortgage insurance.

I think this is a very good development. Further, I think this market could develop a nice niche for NZF as the packager and enabler of direct NZ investment into NZ mortgages. There is life (and brains) in the NZ Finance sector! Perhaps those interested in the security of NZ residential property will now be tempted by a financial instrument that collateralises this debt, directly. The Aussie banks have been making out like bandits in this sector - nice to have the opportunity to have a piece of this market ...

Hi Enumerate,

I haven't got my head around these, and it appears others are confused too:

http://www.nbr.co.nz/article/nzf-gro...urities-123631

What would I actually be purchasing? Are they loans to NZF that are secured by the mortgage charges over properties?

Thanks,

Alan.

[Enumerate]

My only information is what you read in the press release. I am presently digging into the Trust Deed:

http://www.nzf.co.nz/Shareholders/Do...st_Details.pdf

It seems that they are baskets of mortgages - on loans from NZF to the mortgagee, rated by an NZF grading and this grading is verified by S&P. You are purchasing a form of collateralised loan obligation - which is secured by a basket of mortgages - with insurance on the mortgages. I assume the insurance is provided by Westpac.

S&P AAA is investment grade.

[invessi]

Enumerate, each NZF residential loan is insured by Tower, if a specific loan went into default and the property was sold in mortgagee auction say, any shortfall would be covered by Tower and paid to NZF, Tower would then look to the borrower to recover that cost. This is an added bonus to RMBS institutional investors (the RMBS issue is not available to the public).

In my view, NZF have turned the corner, thanks to very cautious directors and board members with many years of experience (the two executive directors drive a commadore and a subaru, they are not flash Harry's!), expect some ramping up with new equity and jv activities!

[Enumerate]

Invessi, thanks for the information.

I note the Herald coverage, this morning ... http://www.nzherald.co.nz/financial-...ectid=10648785

Talk about putting a bad spin on things ... frankly I would be happy if they wrote off all goodwill ... it has no cash consequence and would improve the tax situation. The Herald also fixates on Huljich, when there are much more significant lines of revenue. It is like business journalism being written by gossip columnists. I must admit, the only thing I read, regularly, in the Herald is the Gaynor column (wife reads the MacNamara art column).

Herald coverage notwithstanding - I too believe that NZF will power ahead. I have some shares but see the most value in the Capital Notes NZF010 ...

[invessi]

Enumerate, why do you prefer the Capitol Notes, is it because they may convert to shares at maturity?

For existing NZF shareholders, particularly those that got in early or have been bottom feeding over the past year or so, I think there could be some nice surprises, NZF is starting to look attractive to other corporate players who want to take advantage of the lack of competition due to lack of lenders, John Callaghan has already eluded to jv possibilities in the RMBS arena. Recapitalisation of the finance company would be a plus because they have done very well with that division in the past however, the on balance sheet residential loan book is where the big money could be. You may not have picked it up from previous NZF news releases but they are also a long way down the track to developing the same transactional software that Kiwibank use. From what I have observed, NZF have a very experienced and loyal team with very few changes in personnel over the years, particularly the senior lenders, investment management and accountants.

I agree, the press have never had a balance when it comes to reporting on NZF, they look for any negatives and highlight them without saying much about what is good about the company.

[Enumerate]

Enumerate, why do you prefer the Capitol Notes, is it because they may convert to shares at maturity?

I do not believe that it is inevitable that the Capital Notes will be converted to shares. I do not think there is the necessity to massively dilute existing holders. The company is meeting the interest payments ... and is showing an operational profit. It is out of the retail deposit government guarantee scheme - which is a good thing in my view - and will maintain it's margin on lending with source funding from it's bank partners.

[winner69]

... frankly I would be happy if they wrote off all goodwill ... it has no cash consequence and would improve the tax situation.

Generally such things are not tax deductable

has no cash consequence but affects the equity figure which can sometimes affect key ratios

[Alan3285]

Generally such things are not tax deductable

has no cash consequence but affects the equity figure which can sometimes affect key ratios

Yeah - my experience has been that goodwill amortisation is non-deductible. There may be exceptions I guess?

Alan.

[Enumerate]

Generally such things are not tax deductable
has no cash consequence but affects the equity figure which can sometimes affect key ratios

I think there is a difference between the new IFRS requirements to report values based on fair value (for example, goodwill) and not to allow internally generated goodwill to be recognised. Since this is goodwill associated with a part owned investment asset (MPM) and not an internal, wholly owned, element - I'd say that there is the possibility of the write down having tax implications (for the positive, in the case of a write down).

Further, given this occurs at an annual review of asset values - I think this may be the correct interpretation. All will be revealed when we see the full accounts.

I think that under the old NZ GAAP - it was possible to slowly amortise this goodwill. I do agree with the point that concern about equity levels and triggering banking covenants, etc. may be something to carefully investigate.