NZF Group has the following segment and financial structure as at the full year end 2010:

Property Finance Division: Assets $73.5m Liabilities $59.0m Operating Income $3.5m
Home Loans Division: Assets $202.9m Liabilities $201.1m Operating Income $4.8m
Consumer Finance: Assets $8.3m Liabilities $6.0m Operating Income $1.5m
Financial Services Distn: Assets $10.2m Liabilities $2.1m Operating Income $2.4m
Management & Holding: Assets $23.3m Liabilities $20.6m Operating Income ($1.6m)

The Home Loans Division (consisting of NZF Homeloans and the Mortgage Trusts) is funded by "bank debt". I expect it's structure (and operating contribution) will be fairly static.

Financial Services Distribution (consisting of NZ Mortgage Finance and 50% of MPMH) suffered the big impairment losses - but it is mainly equity funded.

The Consumer Finance unit (70% of Finance Direct) and the Property Finance Division (NZF Money) are the two units funded by retail secured debentures. Both businesses appear to be perfectly viable as long as a suitable long term funding source can be found.

Roughly, it looks to me as if funding for about $224m of liabilities has been found - generating some kind of return.

It looks like $65m of liabilities are being "weaned off" retail deposit money. Generally speaking, these assets are generating a return - but it looks like the key problem is keeping up with the maturity profile of the borrowings. (As an aside - the consumer lending seems to have a very short maturity profile (good news - lend short, borrow long)).

I am guessing that current strategy is to reduce the asset exposures funded by retail deposit money. I expect that deal that is being currently negotiated is to introduce partner money secured over existing assets in NZF Money (in much the same way that the Homeloans division produced the mortgage trusts).

Summary Conclusions:

1) I think that the new subordinated capital notes do actually offer genuine capital preservation advantages over taking equity (given the level of equity present in the operating units)

2) I think that equity is actually attractive at current shareprice levels because the business is not completely reliant on the recovery of Mike Pero - the Home Loans division should generate a nice income stream, if consumer finance and property finance can sort their funding issues - these units should be highly profitable even given the current state of the real estate market.

3) The big problem is the cost and liquidity available through the secured retail debentures. If this problem can be sorted - NZF looks to be in reasonable shape. If, on this, we get a real estate market recovery - they look to be in good shape to achieve some growth.

4) They have a good amount of imputation credits - if they can sort the primary issue of funding source - they can make some good money - and shareholders can get a payout tax efficiently.

5) Speculation: The new BSH "Heartland" bank will have lots of retail deposits - NZF could be a takeover target for them, because the central NZF problem is funding available, profitable business.

Happy to hear any dissenting views - but, please, lets keep the discussion grounded in fact!