Time to update the "Liquidity Buffer ratio" for FY2016.
When dear old Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as christened by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic date I need to check this out has already been calculated (see above). So let's get going.
To check out the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:
(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%
On the numerator of the equation, we have borrowings.
HNZ BORROWINGS
1/ Term deposits lodged with Heartland. |
$2,282.876m |
2/ Bank Borrowings |
$429.304m |
3/ Securitized Borrowings total |
$284.429m |
4/ Subordinated Bonds |
$3.378m |
Total Borrowings of (see note 13) |
$2,999.987m |
Note 13 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.
Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes. Heartland can’t rely on CBA Australia as a source of short-term funds.
The information given in note 13 on the securitized borrowing facilities is as follows:
|
Total FY2016 |
Total FY2015 |
Facility Maturity Date FY2016 |
Securitized bank facilities total all in relation to the Heartland ABCP Trust 1 |
$350.000m |
$350.000m |
1st February 2017 (*) |
less Current level of drawings against this facility |
$284.429m |
$258.630m |
equals Borrowing Headroom |
$65.571m {A} |
$91.370m |
(*) I do not expect any problem in rolling this facility over for another year.
HNZ LENDINGS vs HNZ DEBENTURES
Customers owe HNZ 'Finance Receivables' of $3,113,957,000. There is no breakdown in AR2016 (note 11) as to what loans are current or longer terms. However, if we look at note 20, we can derive the expected maturity profile of total finance receivables due over the next twelve months.
|
On Demand |
0-6 Months |
6-12 Months |
Total |
Expected Receivables Due |
$84.154m |
+ $961.274m |
+ $639.962m |
= $1,685.390m |
less Expected Deposits for Repayment |
$21.630m |
+ $289.314m |
+ $304.975m |
= $615.919m |
equals Net Expected Cash Into Business |
$62.524m |
$671.960m |
$334.987m |
$1,069.471m {B} |
If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for debenture holder liquidity. That is the case here.
Summing up:
(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding)
= $65.571m / $1,069.471m
= 6.1% < 10%
=> Fail Short term liquidity test
On the surface this is an odd result. The expected cashflow outstanding is hugely positive, much greater than the pcp. So how can I fail Heartland on this liquidity test? One answer is that getting more net money in than in previous years
could mean that Heartland might have difficulty applying that money into new loans.
|
FY2016 |
FY2015 |
Amount lent to Customers (Receivables) |
$3,113.957m (+8.8%) |
$2,862.070m |
Total Borrowings |
$2,999.987m (+6.2%) |
$2,825.245m |
Amount borrowed from Customers (Debentures and Deposits) |
$2,282.876m (+8.8%) |
$2,097.458m |
Securitized borrowing facilities have gone up by $25.799m over the same annual comparative period, while the $350m borrowing ceiling remains the same. So Heartland have upped their current period risk profile yet again by having a smaller declared available loan buffer to cover any mismatch between maturing borrowings and maturing receivables.