Mainly interested in discussing the NZF Capital Notes (NZF010).
Any interest in this discussion?
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Mainly interested in discussing the NZF Capital Notes (NZF010).
Any interest in this discussion?
I own some but admit I didn't really do my homework on them. Can you tell me if they are repayable next year or do they convert to shares ? The yield on them seems too good to be true assuming NZF lasts until next year.
Yes, they mature on the 15/3/2011. The company may elect to either pay back the face capital ($1) or convert to shares based on a VWAP type calculation. (Details are in the Trust Deed - accessible on www.companies.govt.nz).Quote:
Originally Posted by QOH
Your point about the amazing yield is also an interesting observation (they have been trading between $0.50 to $0.75 of face value).
The recent S&P rating, at B, does not allow NZF Money to continue with the government retail deposit guarantee. The main reason for this is the weak capitalisation of NZF Group, the holding company. The company has an S&P rating, by the deadline - they have until some time in October to recapitalise NZF Group to BB, to continue with the guarantee. (At BB the guarantee is expensive - 1.5%).
NZF is largely bank funded, has avoided massive property development losses, has a major backer (Huljich), minimal related party loans, and has exposure to property through retail 1st mortgages.
My personal feeling is that this company, with decent capitalisation, will be a candidate for a banking license.
Thanks enumerate, I guess they will issue shares instead of paying it back then. That will teach me to do my homework. I had assumed they were just an ordinary debenture. Having said that NZF have always treated me well when I've been a debenture holder, I hope they do survive.
Quote:
Yes, this is true - that is why they are Capital Notes instead of debentures. The value of conversion is by a typical 95% VWAP of the 20 days prior to maturity date. Maturity date is 15/03/2011.
Remember, current market capitalisation of NZF is about $15million. There are over $20million of NZF Capital Notes.
My current view is that:
1) if the companies situation were to remain the same as the current situation - they would find roll over or repayment a better option compared with replacing current dominant shareholders with capital noteholders. They are profitable at existing levels of debt - they need to increase capitalisation well before the maturity of the capital notes.
2) if the company were to get into trouble ... this is the classic death spiral situation - in which capital noteholders become the new owners and existing holders would be wiped out.
Hi Enumerate, thanks for your response. Thought I had better continue this discussion in the right place.
Unlike you, I assumed the worst case that the notes will be converted into shares in March next year. You are right that this would leave the current bondholders owning ~58% of the company with an effective entry price of 11 cents a share. The shares last traded at 20 cents, their all time low. Though the only bid at the moment is at 4 cents!
A few points/questions:
1) Are the NZF010 notes covered by the government guarantee until October?
2) Studying its business units, the company does show promise. However they seemed to specialise in low-doc mortgages (especially Finance Direct) which I would assume can't have gone well for them over the last couple of years?
3) If we extrapolate from their interim report and their Jul-Dec 09 profit of $2.6m to get a normal full year profit of $5m this would give their 20 cents shares a P/E of 7.3 on the combined capitalisation (Shares and Converted Notes) or a P/E of 4.1 for the notes at 0.55714. Half of these $5m in earnings comes from non interest income aka fees so should be fairly stable.
4) Any idea of the size of their KiwiSaver book? Trail commissions on this in the future will be substantial if they are indeed being paid trail commissions which is the industry norm. Hulijch may well decide to buy out the company to save this cost and to secure what must be one of their key distribution channels?
5) Where I expected weakness, I found strength in that their impaired loans actually improved by $1m in the last half year. Can this number be relied upon?
6) What do S&P see that we don't to have rated them a B (Outlook Negative) in Feb this year?
Anything else I am missing?
1) Are the NZF010 notes covered by the government guarantee until October?
No, they are Capital Notes - not retail "non-bank" deposits
2) Studying its business units, the company does show promise. However they seemed to specialise in low-doc mortgages (especially Finance Direct) which I would assume can't have gone well for them over the last couple of years?
Not true ... they are 1st mortgage specialist and they fund these mortgages with bank loans, not publicly issued debentures. Where do you find reference to "low doc" loans - I thought they were careful lenders.
3) If we extrapolate from their interim report and their Jul-Dec 09 profit of $2.6m to get a normal full year profit of $5m this would give their 20 cents shares a P/E of 7.3 on the combined capitalisation (Shares and Converted Notes) or a P/E of 4.1 for the notes at 0.55714. Half of these $5m in earnings comes from non interest income aka fees so should be fairly stable.
I agree ... with banks withdrawing from the mortgage market, I would have thought there would have been growth prospects. They also indicated that they would diversify into insurance.
4) Any idea of the size of their KiwiSaver book? Trail commissions on this in the future will be substantial if they are indeed being paid trail commissions which is the industry norm. Hulijch may well decide to buy out the company to save this cost and to secure what must be one of their key distribution channels?
I believe they act as an agent for Huljich Wealth Management - hence they do not directly have a Kiwisaver book.
5) Where I expected weakness, I found strength in that their impaired loans actually improved by $1m in the last half year. Can this number be relied upon?
It is the application of IFRS accounting standards to potential mortgage "break fees" - they were very conservative in accruing the potential loss, which never eventuated and hence the write back.
6) What do S&P see that we don't to have rated them a B (Outlook Negative) in Feb this year?
The mortgage business does not need an S&P rating - it relies solely on bank money. It is only the consumer finance arm (NZF Money) that raises public money through debentures that has applied for the S&P rating. They pointed out the thin capitalisation of the parent group as being an issue. They further made the point that margins were thin. What can you say ... yes, I would like thicker margins and higher equity capitalisation, as well.
Anything else I am missing?
Main risk is if the banks withdraw the funding lines to the parent - NZF Group. I would see selling part of NZF Money as a solution to the credit rating issue with the consumer finance arm. A JV with Rabobank would go down nicely ...
Bottom line is that these guys have been ignored by the market. They are in the Huljich sphere of influence. This is good news as far as I am concerned ... it means NZF Group has a seriously wealthy backer with the insight to survive the GFC. The beat up on Peter Huljich, which we have covered in another thread, is further evidence of the resentment and envy that drives the industry. If you are weakened by bad decisions - you score points by trying to tear down those that are strong.
I have my eyes open ... but I am comfortable about the risk/reward the NZF010's present. I have even bought a few NZF ords to gain access to the NZF AGM.
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 ...
Quote:
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.
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.
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.
NZF announces their full year results:
http://file.nzx.com/000/957/3758957.pdf
An overall loss, for the year, was declared after writedowns of goodwill:Quote:
Originally Posted by Highlights
Since the goodwill write down is not a cash loss, this is probably a good time to take the write down. I assume that from a tax viewpoint this allows 30% of the operating profit to be maintained. While overall assets go down - maximum cash is maintained in the company.Quote:
Originally Posted by Goodwill impairment
All in all ... a solid result.
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!
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 ...
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.
This was posted by Bob Day on his web site today .............."NZF (like a number of others involved with property, they don't believe those nasty bottom lines should get quite as much attention paid to them as some, like me, pay, but they're also hoping those bottom lines will become worthy of reporting very soon) "
Enumerate: Thank you for your various detailed posts and your erudite analysis of the current position with NZF - a much superior assessment to what I have seen produced by our rather abysmal financial press, if I might say so. The recently-announced results are worthy of detailed study, and distinguish NZF from a large swathe of their lesser-endowed peers. I even bought a few more of the NZF010's, back in April.
One query I would have, in regard to what might happen on maturity of the notes, relates to the manner of arriving at the "market price of the NZF's" if they choose to convert to shares, given that these shares are only traded very spasmodically? I suppose I could find out the answer, if I rooted around long enough, but I thought you might have it at your finger tips. (I tend to agree, though, that they might seek to roll over, and/or refinance elsewhere, rather than dilute the current ownership).
LATER: I have now done the legwork, relative to my query, and consulted the Trust Deed. It states that the conversion price is to be 95% of the weighted average share price over the previous 20 business days. If there have been no transactions on the NZX over this period then the "last sale price prior to that period" is the operative price. It seems to me that this formula leaves the conversion price wide open to manipulation, where we have such an extremely thinly-traded share.
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.Quote:
Originally Posted by invessi
It is a classic discounted VWAP calculation: 95% of the weighted average of the shares traded 20 business days before the test date.Quote:
Originally Posted by COLIN
Oops, you have done the research ...
Another reason to have a little stockpile of shares bought cheaply ...Quote:
Originally Posted by COLIN
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).Quote:
Originally Posted by winner69
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.
The shares in NZF are tightly held which creates its own problems, an increase in shareholders could be a good thing! A merger or takeover of a like company could also be a good thing!
NZF are going to roll out a comprehensive range of insurance products shortly of which they are the underwriter of premiums, this could go well for them given that they have built in distribution through Mike Pero brokers/insurance writers and the brokers/insurance writers who agregate through NZF. The other advantage they have is that a lot of general insurance writers are either retiring or not wishing to go through the new education process, this should widen the market for NZF.
BTW - I looked at last years accounts filed at the Companies Office (still waiting for this years). The Goodwill changes were recorded on the income statement - which is good news for the use of the write down to offset tax, in my view.
Invessi, you point out the insurance product diversification ...
This is important news ... to me it speaks of a a company willing to invest in the NZ financial services sector and to innovate (cf the recent Residental Mortgage Backed Securities issue). I think your point about other companies retreating from the market also applies to a wider set of financial services. If they can sort the capitalisation issues - the future should be very bright.Quote:
Originally Posted by Invessi
This is the person who heads up the new insurance program -
Dave Shatford Dip P Fin Plan(Waikato) – General Manager Investments and Insurance
Dave moved to his current role in July 2007 from GM Distribution for NZF mortgage and insurance broking division New Zealand Mortgage Finance Limited (NZMF). Dave has a wealth of experience in investments and insurance from the 32 plus years he spent in the financial services industry. His specialist insurance knowledge came from his senior management roles at Aon (where he ran Aon’s life insurance distribution area) and before this AMP, where he was in the life insurance business development area, his last role being National Manager Broker Distribution. Prior to this he spent over ten years in ANZ Bank’s funds management division, initially in administration and marketing management roles, prior to going abroad for an extended period. On his return to New Zealand in 1993 he was appointed as a Financial Planner with ANZ Funds Management and later as ANZ’s Financial Planning Manager; in charge of systems, audit, training and development of ANZ’s Investment Advisory Service and personnel. Dave joined NZF when Approved Mortgage Brokers Limited (where Dave was CEO and part owner) merged with NZF subsidiary NZMF. Dave started his career with the ANZ in 1977, where he held a number of senior and managerial roles over the 23 years he worked there, including residential and commercial lending, credit control, marketing, administration, investment and insurance.
I would be very surprised if amortisation of goodwill was deductible for tax. What i think you have been looking at are the company accounts not the tax accounts. In company accounts goodwill etc is normally expensed over say 10 years in the operating accounts but wil not be in the tax accounts. This would suggest that the company accounts understate tax due. There may be a tax reconciliation somewhere which take the company Profits, adjusts for all these sort of items, and comes up with actual tax payable.
NZF
15/06/2010
GENERAL
REL: 1417 HRS NZF Group Limited
GENERAL: NZF: NZF closes its inaugural NZ$100m issue
15 June 2010
NZF Group (NZF) closes its inaugural NZ$100m issue of New Zealand residential
mortgage backed securities (RMBS).
NZF Mortgages Series 2010-1 Trust, arranged and lead managed by Westpac, is
NZF's first RMBS transaction and the first RMBS transaction in New Zealand
since 2007.
Details of the notes are:
Note Class Issue Amount (NZ$m) Rating (S&P) Estimated WAL (Yrs) Pricing (3m
BKBM Bid +)
A1 87.8 AAA 2.7 175
A2 9.1 AAA 2.7 260
B 2.5 AA- 5.0 Undisclosed
C 0.6 NR 5.0 Undisclosed
The transaction was built around strong reverse enquiry from a small group of
institutional investors. NZF have retained a portion of the notes to support
the transaction.
The notes are pass-through securities that will be repaid as (borrowers make
principal payments on their mortgages/the trust receives principal from the
underlying borrowers). The transaction is therefore a key fundi
ng tool for
NZF, allowing the duration of funding to be aligned to that of the underlying
mortgage loans.
The transaction further diversifies NZF's funding base and frees up NZ$100m
for future loan origination.
The notes are backed by mortgage loans to 348 borrowers, secured by 403
properties that are located in New Zealand. All loans benefit from mortgage
insurance provided by Genworth Financial Mortgage Insurance Pty Limited.
Key characteristics of the loan pool include:
- weighted average loan size of $286k
- weighted average seasoning of 28.9 months
- weighted average loan to value ratio (LVR) of 73.4%
- 73.4% principal and interest
- 64.5% fixed rate
- 41.8% low documentation loans to self employed borrowers.
ENDS
For more information please contact:
John Callaghan Tel (09) 520 9350 or 021 346 262.
Malcolm Lindeque
For and on behalf of the board of directors
Company Secretary
NZF Group Limited
End CA:00196126 For:NZF Type:GENERAL Time:2010-06-15:14:17:11
This is very good news. It means that NZF can write mortgage business in $100million dollar blocks and fund this through ready demand in the wholesale market.
I note the BNZ has issued $425million of covered bonds - also with an AAA rating:
http://www.nbr.co.nz/article/bank-ne...d-bonds-124620
I think this development is really very good. Rather than fund the NZ mortgage market at junk levels through the carry trade more power to NZF to package the high quality debt in a manner that allows Banks and Financial institutions to treat it as Tier-1 capital.
NZF is innovating. Further, I think we can look for stellar performance from this company as the recovery strengthens.
It seems absurd that the NZF010s trade at the same level as the SCF010s. I suppose people are worried about conversion into NZF shares. However, I think the RMBS deal means that it would be highly unlikely NZF would choose to issue heavily discounted shares in satisfaction of the maturing NZF010s.
NZF Group's $100 million residential mortgage backed securities offer has closed, with institutional investors' strong interest encouraging the financial services firm to aim for another issue later this year.
NZF Group's offer of the securities was the first of its kind in New Zealand since 2007. The $100m offer includes $87.8m of AAA-rated notes, backed by a package of 403 properties and mortgage loans to 348 borrowers.
Managing director John Callaghan would not name the investors who bought the notes, but said residential mortgage backed securities (RMBS) were in demand from institutional investors. "There are investors looking for AAA products and quality RMBS. This offer is really about re-establishing the RMBS market in New Zealand."
NZF Group's offer was a "plain vanilla mortgage book offer" that was easy for investors to understand. RMBS had fared well in both New Zealand and Australia during difficult economic conditions, he said.
The offer's non-rated and AA- rated notes were held by NZF Group as the firm still had an interest in this type of product, he said.
NZF Group provides a range of financial services including home loans, consumer loans and debentures. It is also half-owner of Mike Pero Mortgages with Australian specialty finance group Liberty Financial.
NZF Group, formerly New Zealand Financial Holdings, posted a $4.6m March year loss, writing off close to $7m on its Mike Pero investment. This came after ratings agency Standard & Poor's assigned NZF Group subsidiary NZF Money a B rating for both its short and long-term debt in February, citing its "weakly capitalised parent".
Too slow ... I rely on the ASX to be open for liquidity.Quote:
Originally Posted by COLIN
This was posted today on the Bob Day website "He said the notes were backed by mortgage loans to 348 borrowers, secured by 403 New Zealand properties. All loans had mortgage insurance from Genworth Financial Mortgage Insurance Pty Ltd."
I noted in an earlier post on this blog that Tower insure the NZF Group Mortgages, please note that Genworth were the primary insurer but Tower are the insurer going forward, I would expect primarily because Tower are behind the new NZF insurance products for brokers to distribute initiative!
Good to see NZF innovating Emunerate but don't you get the heebie greebies when the same things that essentially caused the GFC seem to be coming back into favour big time .... even reports today that Wachovia are back in the market with RMBSs
The rating agencies got heaps of flack about how they rated these things and things don't seem to have changed much.
The top tiers of the NZF issue are rated AAA. The profile of the underlying mortgages looks impressive with numbers like weighted average LVR of 73% suggesting pretty safe etc .... but then again 42% of them are low documentation loans .... hardly highly rated securities .... but when you bundle them up hey presto the ratings agency give them a AAA rating
Yep and just the circus of a few years ago all these things are insured as well ..... and just maybe there are heaps of other derivates driven from the same pool of mortgages and bonds. No doubt many prepared to take the extra few points of returns
At least NZF as the originator get the money up front so prob OK for them
There are major differences between the US RMBS market and the Australia/New Zealand markets.
- there is a limitation in liability to the security asset, in the US - in NZ, you can be bankrupted
- "low doc loans" in NZ/Australian parlance means loans to the self employed who "auto certify" their income stream; in the US "low doc loans" means the person has pulse ... maybe
- this is loan syndication up - to banks and financial institutions; the US case was syndication down to the wider finance sector.
As you point out, the risk is now with the purchasers, not NZF. However, this is not a "stitching up" exercise. I think this may be the way NZF as a "packager" and "enabler" of prime, first mortgage loans raises the capital to fund those loans. It seems like a sustainable and profitable business, to me.
All this simply justifies, in my mind, that the NZF010s, at 60%, are too cheap.
You pop away for a while and some things change - while others don't. Hopefully Enumerate is still around as I'm a bit lost on where to post yesterdays events. NZF Sp takes a 50% hit down to an all time low of $0.10. Enumerate and I couldn't see eye-to-eye on Peter Huljich in the Huljich Wealth Management Thread but yesterdays news once again touches the Kiwisaver thread as wells as the SCF and the ALF/ANF threads. It also touches the Local Body election thread - whose voting for John Banks, Director of Huljich and significant holder of NZF (or at least they were when I last looked)?
Nothing like a bit of market manipulation. Just a single $400 trade today to drive the SP back up 100% to $0.20!
I'm inclined to agree - I'm not too sure there are too many people interested in this stock - as evidenced by its depth. However where the SP does become important is where a Kiwisaver fund has a substantial holding of a particular stock. The value of that stock will make a real difference to how that KiwiSaver fund reports its portfolio management. And we know that fund performance is then used in the marketing collateral. A $400 investment to double the value of a fund holding is money well spent - unless you are an investor in a Kiwsaver fund which is based on such manipulations.
To the contrary, there is quite a bit of interest in this stock, a lot of watchers waiting on some of the moves in progress to materialise, such as: AGM 22/09/2010 - "The Mike Pero brand continues to be strong in the market place which has
insured that they have been able to maintain its market leader position. A
number of new opportunities are being looked at to increase its presence in
the property sector in New Zealand." Also, expecting another RMBS issue soon and launch of their insurance products!
NZF’s liquidity risk on mend with RMBS issues
The collapse of some big finance companies recently has been an eye-opener for NZF Group which is now seeking to further reduce its reliance on debenture funding in favour of funding sources like Residential Mortgage Backed Securities.
Tuesday, 5 October 2010
by Sophia Rodrigues
Such a source will not only provide the group with a cheaper source of funding, but moderate the asset-liability mismatches on its books by aligning the maturity profile of the funding with the company's loans.
NZF recently raised $100 million via RMBS issue, earning the distinction of being the first financial institution making the issue since the global financial crisis. The company is now in the process of making another such issue but wouldn't indicate how soon that would be.
NZF used proceeds from the RMBS issue to repay the amount drawn against the term loan facility with Westpac and the balance now stands at around $106 million from $194 million back in March. Westpac has retained the total facility at $225 million and extended the term to October next year.
Meanwhile, NZF has also reduced its reliance on debentures with such funding making up only 15.3% of the group's borrowing from around 22% in March.
As of March, the mismatch in NZF's asset-liability profile was stark with loans over five year-term as per contractual maturity comprising of 62% of total loans taken on an undiscounted cash flow basis. On the other hand, only about 18% are due within one year.
On the funding side, nearly 95% of the funding was due within a year, including the entire term loan facility from Westpac, $20 million of secured notes that are due in February and a majority of debentures.
The RMBS issue would have alleviated this mismatch to some extent and with more such issues planned a further easing in the liquidity risk on the books may be on the cards.
NZF
12/10/2010 15:47
GENERAL
REL: 1547 HRS NZF Group Limited
GENERAL: NZF: Successfully exit the Crown Retail Deposit Guarantee Scheme
(NZF) NZF Group Limited - Subsidiary companies NZF Money Limited and Finance
Direct Limited successfully exit the Crown Retail Deposit Guarantee Scheme.
NZF Group Limited (NZF) is pleased to advise that its wholly owned subsidiary
(NZF Money Limited) and 70% owned subsidiary (Finance Direct Limited) have
successfully exited the Crown Retail Deposit Guarantee Scheme (RDGS).
The RDGS was established on 12 October 2008 by the Government for a term of
two years, to provide confidence and stability within the NZ banking system
(as well as the non bank sector) at a time of worldwide financial crisis. NZF
Money Limited (NZFM) was one of the first non banks to be accepted into the
RDGS, with Finance Direct Limited (FDL) following shortly thereafter.
While the RDGS achieved its objective of stabilising the market, it also had
the adverse effect of attracting large numbers of investors only seeking a
higher return with a Government guarantee, with absolutely no intention of
remaining long term investors. This put unnatural pressure on cash flows
nearing the expiry of the guarantee.
NZFM and FDL planned out their cash flows and carefully managed their deposit
and lending books to ensure that they could successfully manage the expected
net outflow of investors
that were taking advantage of the RDGS.
NZFM and FDL would like to thank all long term loyal investors that have
remained with them before, during and beyond the expiry of the RDGS.
ENDS
Malcolm Lindeque
For and on behalf of the board of directors
Company Secretary
NZF Group Limited
End CA:00200936 For:NZF Type:GENERAL Time:2010-10-12 15:47:48
In case you missed it, NZF ran a 3 column x 180cm colour advertisement in the business section of the Herald on Saturday offering depositors 9.25% for 12 months, secured by first ranking debenture stock over the assets of the company, looks like the finance company division is going to fire up again!
In case you missed it Invessi, one of NZF's Directors , Peter Huljich is now up on criminal charges. The Securities Commission allege he failed to disclose third party loans in offer documents and that he “misled prospective investors by misrepresenting the investment performance of the scheme's funds in offer documents.”. Innocent til proven guilty Invessi but does the news that one of NZF's directors has been accused of such practice fill you with confidence. If it does you are pretty much on your own - theres only one buy bid at the moment and thats at 10 cents which as low as this stock has ever gone.
Minimoke, I have to say it is regretable that PH has been targeted, there are others far more worthy of prosecution in my view. I am inclined to agree with Phil Macalisters blog this morning on Good returns (below). As to the share price, I don't see that changing much until we get a good news story and they start paying dividends again!
I thought it was worth having a go at trying to defend Peter Huljich. As readers will know the Securities Commission laid criminal charges against Peter Huljich and Huljich Wealth Management (HWM) for allegedly misrepresenting its KiwiSaver funds to the public.
Since this story broke there has been plenty about it including a comprehensive statement from Huljich about what happened. This is detailed elsewhere on Good Returns.
As part of the background Huljich has acknowledged there was a mistake, stepped aside from his role and offered make ups to its KiwiSaver members.
Now the Securities Commission lays criminal charges against him which, if proven, could result in time behind bars.
The so-called victims of this alleged crime haven’t lost money and have been told that if they are unhappy about HWM they can switch to another of the many KiwiSaver providers in the market place – for free.
Here’s the bit I don’t understand – why is the Securities Commission taking this action when there are plenty of other potential cases where investors were deliberately misled; are real victims as they lost money and are now suffering. Secondly, did Huljich really top up the funds without anyone else associated with the business knowing?
I don’t know if Huljich set out to deliberately mislead investors, and unless there is some smoking gun then it would be hard to secure a conviction.
Likewise it is incredibly difficult to believe the Huljich took the actions he did and no one else knew anything about it or raised any objections.
The directors who signed off the accounts should be included in any criminal proceedings the Securities Commission pursues.
So too should Trustees Executors which is both the trustee for the fund, and the fund administrator.
With this latter role the company must have known what happened and approved it. If it had doubts it should have walked across the room and raised it with trustee.
Looking at the 3rd Annual ASSET Magazine KiwiSaver survey it is clear that HWM has done well signing up members.
Indeed our analysis of data shows that HWM was one of the most successful managers in the year to March 31 at signing up new members and had the highest growth in FUM at a whopping 625%.
Yes, justice has to be seen to be done, but again why this case when there are plenty of others where there are actual victims? Is the commission just after a high profile scalp to look good?
You can see why I didn’t follow my father, grandfather and uncle into the legal profession!
This entry was posted on Sunday, November 21st, 2010 at 11:42 am and is filed under KiwiSaver. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
I don't know that he has been targeted - where he is today is where he ought to be. In the Kiwisaver arena there is no one more deserving of charges being laid against them than PH. He's the first to be found out for doing dodgy things so it is only right that his actions be judged by the judiciary to determine if those actions are legally acceptable. Other KiwiSaver providers will be watching closely.
Macalister also has the advantage of hindsight - sure there were no victims. But that was only because he was caught out in time. Sure there are others more deserving - and Sec Comm seems to have its work cut out at them moment - there is no shortage of potential crims who are no doubt in their sights. One of the biggest fish would of course be Alan Hubbard who did the same thing as Huljich - and look where his investors have ended up now. If it wasn't for the Govt Guarantee they would be right up **** creek.
Oh, there are still buyers and sellers then!
Last VWAP Buy Sell High Low First Volume Value
15 ¢
(NZD)
23/11 13:42 NZT
15 12 15 15 15 8,207 $1,231
Minimoke
A word to the wise, Feely has his place in our society and it is good to know there are people like him looking out for us but in my observation, people like him are salaried and have their targets to meet and need public support to keep office, nothing new or particularly wrong about that except when their targets are met and their persona are achieved by going after the easy fish, who on a scale of 1 to 10, are maybe about a 2.
This was very evident when they prosecuted Brian Clegg of Clegg and Co, in terms of wrong doing, he was on a scale of about 2, maybe 3, his company was very small, he was trying to balance his covenents between the finance company and capital notes ratios, when a capital notes investor needed an urgent early withdrawal to assist his situation, the covenent was breached (although not greatly) and the trustee pulled the plug, Brian Clegg was then prosecuted albiet they did deals behind the scenes of course to get him to plead guilty! Is this really equitable justice or is it just moving the cards around!
I am sure you and I will know quite a number of disgraced finance company directors and others who are still at large, many of them are still lenders under some newly invented vehicle, some of the most nortorious are part of property lending syndicates, some are asking for a 10% fee up front and charging 17% interest rate.
I am currently reading the "Southern Octypus", this a a book about the inception and growth of our Australasian merchant shipping industry, it was a ruthless and calculating industry, nothing has changed in this country, its all about who has the most influential friends, the most money and the best lawyers, another good book on this subject is lawyers, guns and money by Ian Wishhart.
In my mind, Peter Huljich is the next easy target!
I agree. I think the evolution of the SFO along US District Attorney lines is a very unfortunate development. In certain cases this office is an elected position and becomes mired in the political process. I think Feeley has abandoned the NZ character (measured, fair) in favour of some Hollywood "image".Quote:
Originally Posted by invessi
Look at the web site, the key performance indicators emblazoned front and centre:
http://www.sfo.govt.nz/
I wonder if Adam gets confused from his role at Eden Park Redevelopment and believes the SFO is managing some kind of sporting event.
Given the catastrophic collapse of the mezzanine finance sector (how many company failures is it now? how many billion$?) you would have to say the Commerce Commission and the Securities Commission need to be investigated for gross negligence.
If this was expressed in civil engineering terms - we lose all major structures built by Fletcher, Mainzeal and a host of others due to civil works failure; do you think there would be an investigation into the enforcement of the building code (or even a bit of a look at the code itself)? Not in New Zealand - we would put anyone else with buildings that did not fail under the microscope and pursue them with US DA style "prosecution".
I just hope the civil works at Eden Park are up to the mark.
News!
HOME
SHAREHOLDERS
KIWISAVER
CONTACT
We are pleased to announce that NZF is in the final stages of negotiation with a new business partner which was a strategy announced late last year. Since then we have looked at a number of options and narrowed these to one party which we believe offers the most effective solution for NZF.
We are currently involved in the final stages of the due diligence process and as a consequence we must suspend all new originations from NZF HomeLoans until these negotiations and the necessary due diligence is complete.
This means that we will not be writing any new business for the next few weeks, while this process is being undertaken. All existing loans will continue to be serviced in the usual manner, and for those loans where full solicitor documentation has been completed but have yet to settle, these commitments will be honored.
We will keep you informed once origination can recommence.
This is a very exciting step for NZF, and one that will enable us to grow the business to a scale that under existing structures would not have been possible.
As always, if you have any questions, please give us a ring – otherwise, stand by for further news as it comes to hand.
To contact Scot Bailey -
0800 80 40 70 or e-mail at bdm@nzf.co.nz
As a result of the Unsolicited Electronics Message Act 2007 which came into effect on September 5, 2007, we are required to have your consent to send promotional electronic messages. As you have been receiving information from us in the past, on a regular basis, and have not requested to be removed from our membership database, we infer that you consent to receive similar emails from us in the future. However, if you do not wish to receive future emails from us, please let us know by replying to this message including ‘Unsubscribe’ in the subject line and you will be removed from our database immediately.
This email was sent by: NZF BDM Team, NZF Money Limited, Level 2, 88 Broadway P O Box 1195, Shortland Street, Auckland. Toll Free: 0800 80 40 70 Fax Free: 0800 379 9080 E-mail: homeloans@nzf.co.nz or bdm@nzf.co.nz
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Awww, come on, don't be harsh.
We're all mates inside-ere.
:-)
Clearly NZF is being "invested in" or "taken over". (Why else would you suspend writing new loans during a due diligence).
Any ideas who the new partner is?
As an exercise - I compared the latest numbers from Dorchester (DPC) to NZF. NZF is in infinitely better shape and yet in normalised share price terms - NZF is a bargain. NZF is also multiple brands - Mike Pero mortgages is such a dominant brand and NZF owns 50% - yet there is not much market consciousness about the significance of MPM.
A new equity partner and a restructure would be a great development.
Yes, they are a bargain, I think "invested in" is the likely scenario, looks like it might be a new line of bank funding for home loans and the finance company arm, once they get the liquidity ratios right for the finance company, expect to see a investment grade S&P rating! And yes, MPM has been underrated by the market, they are profitable and a great distribution chain, distribution is key!!
Hi Guys,
I have been the NZF010s for some time.
Your comments above are not specific about NZF v NZF010.
Do you see this as positive for both the shares and bonds, or are there negatives for the bonds? I can't see how, but you seem more up with the play on these than I am.
Thanks,
Alan.
It will be positive for both.Quote:
Originally Posted by Alan3285
NZF shares are under pressure because of the percieved lack of capital adequacy. The basic businesses are under pressure - but are intact and recovering. (This is a near miraculous track record given what has happened to other businesses in the sector).
NZF010 are under pressure because people are fearful they will convert to shares because of the point above. These were selling in volume at 75cents per dollar face - insane (low of 50cents or so). The margin has narrowed, recently. I would love mine to convert to shares at 14.5cents per share - the noteholders would end up controlling the company. However, for this reason, I do not believe that they will convert to shares.
I'm wondering if its actually a takeover. I can't figure out why you would suspend new loans if you are the one doing due diligence. It makes sense if your the one subject to due diligence. I'd have thought that a new investor would be encouraged by a growing loan book. And why would you make this statement to people on your email list and not to the market at large - unless you just want to spin a positive yarn to depositors.
Perhaps the share price is depressed because they aren't making a profit. Perhaps its because one of their Directors is up on charges. Perhaps its because their Kiwi saver fund is showing negative returns when pretty much every on else is positive: (their diversified plan is down 5.28% when the average is up 6.36%) Perhaps punters see highs of $1.60 and the are now trending consistently down to $0.14 and wondering if the bottom has indeed been reached - especially now there is no Govt Guarantee golden parachute. Perhaps its because the property market is looking pretty rocky at the moment - reduced lending on falling values)
Minimoke Prospectous would be Invalid in my opinion If it did not detail possible changes in ownership.
Trust Mini to make sure every silver lining has its cloud ...
BTW the final year loss is due to a write down in intangibles - MPM is not making as much money as it used to. Operations is profitable.
Huljich and HWM are probably part of the solution rather than part of the problem.
The punters don't seem keen to sell any - the liquidity over the past year has been minimal. There does not seem to be any evidence for a rush to the door.
The government guarantee never applied to the ordinary shares.
Apologies for that - I guess I tend to see the cloud when thats self obvious. Distinguishing diminishing storm clouds from a smoke screen is often the challenge.
?? Finance Div -= $1.7m loss, Home Loans 1.7m profit, Finance $0.18 profit, Consumer finance $0.16m loss, management 1.1m loss. Operations actually made a $818,000 interim loss compared with a $2m profit for the previous period.Quote:
BTW the final year loss is due to a write down in intangibles - MPM is not making as much money as it used to. Operations is profitable.
There have never been too many punters wanting to buy either. Its a good day if there are more than a couple of buy bids.Quote:
The punters don't seem keen to sell any - the liquidity over the past year has been minimal. There does not seem to be any evidence for a rush to the door.
Thats a given. But during the guarantee depositors could support the share price knowing they would get their cash back. We only need to look at SCF to see how a company was artificially propped up. All credit to NZF - at least they are standing on their own two feet.Quote:
The government guarantee never applied to the ordinary shares.
NZF
26/01/2011 16:45
GENERAL
REL: 1645 HRS NZF Group Limited
GENERAL: NZF: NZF Group Ltd Announces Maturity options on Capital Notes
NZF
26/01/11
CAPITAL NOTES (NZF010)
NZF Group Limited (NZF) Announces Maturity options on Capital Notes (NZF010).
Letters have been sent to all NZF Capital Noteholders on the register today
for NZF010 Capital Notes that mature on 15/03/2011.
The letter includes an Election Notice, in terms of the Trust Deed
establishing the Capital Notes ("Trust Deed"), and confirms that:
- NZF has elected to provide Noteholders, with the option to renew all of
their Capital Notes on the terms specified in the Election Notice ("Renewal
Option");
- If they do not elect to accept the Renewal Option, then NZF has elected
that it will, on the Maturity Date, compulsorily redeem all of their Capital
Notes by issuing new ordinary shares in NZF in accordance with the terms of
the Trust Deed;
- NZF has elected to not redeem the Capital Notes for cash on the Maturity
Dat
e..
The covering letter, Frequently Asked Questions and Election Notice are
attached.
Capital Noteholders that wish to exercise the "Renewal Option" must complete
and return Election Notices to reach the Registrar (Link Market Services) by
24 February 2011.
Malcolm Lindeque
For and on behalf of the board of directors
Company Secretary
ENDS
End CA:00204900 For:NZF Type:GENERAL Time:2011-01-26 16:45:21
So, do we read into that there is no cash and they are looking at a dilution of head shares?
Well yes, cash is King!
I understand that NZF is a high risk, and I am keen to chuck $1,000 into them. My question is what would be a good price to buy them at?
If you don't think I should even be thinking about this, what other NZX/ASX shares could I look at? Am interseted in shares that are currently low but have a chance of increasing (perhaps doubling) sometime over the next few years. I'm guessing this is high risk behaviour. I have been recommended looking into mining exploration companies in the ASX.
Cheers team
Not a good deal ... 6% with maturity in 5 years for a subordinated debt position behind secured debt yielding up to 9.5%.
These guys must think that the NZF010 holders have no where to go but to roll over.
At current prices, they have a market capitalisation of about $12m. There are $20m of the NZF010 - 60% conversion to shares means that the NZF010 holders will own 50% of the company!
The other intriguing possibility is the fabled "death spiral". They need to be notified of renewal election by the 24th of February. I need to consult my trust deed, but I presume the VWAP of share sales between this time and the date of conversion would be used to establish the price of conversion (possibly less a discount). A predator could drive down the shareprice (market liquidity is almost nil) and convert to squillions of shares for a minimal holding in the notes.
Hmmm ... sounds like fun. Anyone game?
Thinking things through - I wonder if these guys are planning on making a large share transaction at a price significantly higher than the existing price somewhere in the days after the 24th of February? This would weight the VWAP to a market price and eliminate the possibility of the "death spiral".
[QUOTE=COLIN;306745]Enumerate: Thank you for your various detailed posts and your erudite analysis of the current position with NZF - a much superior assessment to what I have seen produced by our rather abysmal financial press, if I might say so. The recently-announced results are worthy of detailed study, and distinguish NZF from a large swathe of their lesser-endowed peers. I even bought a few more of the NZF010's, back in April.
One query I would have, in regard to what might happen on maturity of the notes, relates to the manner of arriving at the "market price of the NZF's" if they choose to convert to shares, given that these shares are only traded very spasmodically? I suppose I could find out the answer, if I rooted around long enough, but I thought you might have it at your finger tips. (I tend to agree, though, that they might seek to roll over, and/or refinance elsewhere, rather than dilute the current ownership).
LATER: I have now done the legwork, relative to my query, and consulted the Trust Deed. It states that the conversion price is to be 95% of the weighted average share price over the previous 20 business days. If there have been no transactions on the NZX over this period then the "last sale price prior to that period" is the operative price. It seems to me that this formula leaves the conversion price wide open to manipulation, where we have such an extremely thinly-traded share.[/QUOTE]
Enumerate: Reference your point about the scope for share price manipulation - this is a scenario I foresaw, in my post of 1-6-10 (above), and I can only surmise that they will ensure that "friends" bid up the share price during this period. However, the picture is heavily clouded by the recent "news" (that apparently was passed to depositors, etc., and not to the NZX - without any challenge by the latter!). It really leaves noteholders in the dark and, unless I am missing something, I find the situation totally unsatisfactory.
I agree. I was hoping for better treatment - I would have rolled my notes if the interest rate was appropriate to the risk. Why didn't they offer to convert to secured debt on standard debenture terms (ans: probably for capital adequacy reasons).Quote:
Originally Posted by COLIN
Or an alternative where holders bid up the price, in an attempt to head off the dilution, which leaves bond holders little choice but to roll over. Either way the trades over the next month will be very telling - theres surely got to be at least one trade in the 20 days
I reckon most holders won't elect to do anything - the paper will sit in the bottom drawer and teh election date will pass them by.
The action is going to start for real after 24 Feb. Either way it doesn't look like bond holders are going to get their money back. On one hand you hang in there for another 5 years at 6% and pray every night that NZF is still around on 15/3/06 or you get converted into ordinary shares at a value yet to be determined. But given the liquidity of this stock it doesn't look like there would be much chance of selling shares as there are so few buyers.
This is date is the 24th of FebruaryQuote:
Originally Posted by NZF Trust Deed
So, this is the mechanism for busting the "death spiral" - after the election date but before 10 days before maturity - if you have elected to convert to shares, they can redeem your holding in cash.Quote:
Originally Posted by NZF Trust Deed
So, the proper "death spiral" predator will:
1) Elect to convert to shares
2) Wait until 10 days before maturity (hoping for light volume on the VWAP)
3) Within the 10 day window to maturity (also within the 20 day VWAP calculation interval) and then dump high volumes of shares on market to drive down VWAP.
Bottom line: if you want cash - convert to shares and be prepared to play hardball in the establishment of the conversion VWAP.
:eek2:
I find it surprising that no one has commented on the likely effect of converting the bonds to shares, I don't know how many individual bondholders there are but I imagine the conversion will turn around the situation of 75% of the current shareholding being held by company directors, after conversion, we should see a lot more trading activity, particulary as they are in train to bring in a new Australian (I would think) partner/funder!
Colin, you should be thankfull for what you have, it could have been a lot worse!
We did ... right at the start of the commentary:
Also, discussion of the "death spiral" is also a de facto discussion on conversion.Quote:
At current prices, they have a market capitalisation of about $12m. There are $20m of the NZF010 - 60% conversion to shares means that the NZF010 holders will own 50% of the company!
In fact, my view now is that conversion to shares is the best path forward.
I agree, exciting times ahead!
Isn't that really the only option.
One one hand you can lock your money in at 6% for five years with no guarantee you'll get your money back in 2016 and an environmental where interest rates are sure to rise.
Or by default you end up with a pile of ordinary shares. If thats you're option then you are at the Mercy of those who are going to manipulate the price in that Feb / March period. At the moment you have an $11m company spread amongst 76.6m ordinary shares. At the end of this aren't you still going to have an $11m company but spread amongst a squllion shares?
And the silver lining is?
I need some help here!.
(1) Bond holder have only been offered one thing - that is to take up 6% to 2016. There is no offer to elect to convert to shares - though this happens by default through inaction on the offer.
(2) A bond holder can only wait -there is nothing else for them to do.
(3) How does a bond holder dump shares they haven't been issued yet. How do you dump high volumes in an illiquid market where there are no buyers (except one current one who is only after 10,000 at $0.045.
If you want cash you surely have to be praying that someone will buy your converted shares but if the price has been driven down low you can't expect much cash can you?
You have not accounted for the $20m sitting in their finance company book!
I created a Google Docs spreadsheet last year when I looked at NZF010 in the expectation that they would be converted to shares.
By my calculations noteholders should end up with ~65% of the company if none decide to renew.
I have set it so that anyone can view and edit it. So feel free to play around with different share prices or estimate figures or even improve the model. It factors in the 5% discount.
https://spreadsheets.google.com/ccc?...thkey=CN2h8PkC
Disc: I didn't end up buying any
Couple of points guys ....
The market cap is about $12m - if $12m of noteholders convert to shares (by not elected to convert to the new deal) - the company becomes a $24m company with 50% owned by the noteholders. ($12m is 60% of the $20m of notes).
Pay attention, guys ... this is important.
If $8m of holders elect to take up the new deal on the 24th of February ... this means that $12m of holders will convert to shares.
The company has until about the 1st of March, or so, to decide:
"Do we let these non-election holders convert to shares (at potentially "Death Spiral" prices) or Do we pay them out in cash?". This decision has to be made by the company before the 1st, or so, of March.
A holder, electing to convert to the new deal, is making a mistake (6% does not compensate for the subordinated risk). However, the company is "trying it on" - any one with a risk adverse attitude will elect to convert and will be contributing subordinated money at a ludicrous rate.
Those less risk adverse souls have a chance of getting cash - especially if they are prepared to play hardball.
From memory ... and away from my notes ...
In the interim they do not equity account for Mike Pero ... they "value" MPM as an intangible asset. I get a clearer view of things from the full year accounts where they present a combined group view. They had $14m in equity (Group+MPM).
So, if existing shareholders want to retain control of their company (assuming they aren't already bond holders) we are going to have to see the SP move to $0.30. So buying now at $0.18 could be worth a punt. Even buying discounted bonds and ordinary shares now might be worth a punt. Trouble is owning x % of not very much may not be a good move.
Where do they get the cash from - they only had $4m in the interim accounts.
As a shareholder what do you do - spend your $4m on bond holders or do you buy up existing stock as treasury stock and return the cash to your self. Or do you spend it on driving up the SP so that more bondholders are needed to get past the 50% ownership threshold.
Does it really surprise you that some kind of restructure is currently on the cards - timed for completion some time in February?
Do you really think the current owners will be happy with dilution even if the VWAP ends up a 30cents, as pointed out by Mini ?
They have an opportunity to "try it on" - the more noteholders electing the new deal - the happier they (and their bankers) will be!
Think about how nervous they will be wondering if, between the 1st of March and the 15th, whether a predator has written a contract with major shareholders to sell their entire holding to a standing order in the market at 1cent to be compensated with their shares back plus a fee after the 15th of March.
Clearly it is now "game on". What is going to be fascinating as this plays out is who the players are and what they are playing for. Without knowing the game or the players its a bit hard to work out the rules - I'll be on the sidelines with this one.
Bit of a tickle today. One more big spender coming in at $0.046 (so thats two eager buyers) and the NZF010 at 125
Hi all.
Been following your discussions on and off for months but now with the company deciding to not redeeem the capital notes for cash, I thought it time to add my penny's worth.
I contacted the company and had a robust conversation with a member of their management team. (Hey, if you can't change anything, at least let them know what you think of it!) What the man said to me was followed up by the e-mail below.
Dear ....
Thanks for your call.
It is important to remember that when we issued the Capital Notes in the world was a different place. As you well know, things began to unravel with three firms National Finance, Provincial Finance and Western Bay forced into receivership. As New Zealand entered recession in 2007, four more were placed in receivership. By the end of that year, the situation had deteriorated with 20 percent of total finance company deposits at risk. With the onset of the global financial crisis in 2008, the number of failed finance companies sharply rose to 48, involving depositors funds of over $6 billion. Throughout this period we have paid the interest due on the Notes on the due dates at all times.
Also at the time the Notes were issued, other factors included:
o The Global Financial Crisis did not occur until 2008
o There was no credit squeeze
o We had a high interest rate environment – at the time the OCR was 7.25%
o We had a highly active and rising property market
There has to be a balance between paying a competitive rate of interest and not causing undue pressure on the issuer. While we would have liked to have offered a higher rate to investors, we believe the Interest has been set at a competitive (3% over the OCR whereas the previous margin was 2.5%), yet manageable level, given our sector challenges and the economy in NZ and Globally, all of which are still in recovery mode. Paying a high interest rate which could possibly put stress on the company is not a responsible action as any failure would obviously lead to a loss on Capital Notes being sustained by investors
In this regard, over the last 3 years there have been many financial service company failures, resulting in Capital Note holders loosing most if not all their money. Over that same period we have paid interest on Capital Notes on time.
As a result of the GFC, Finance sector failures and dramatic slow down in consumer lending, housing market activity and losses, all sectors of our business have been effected, thus preventing us accumulating funds within the group and denying us the opportunity to offer a cash redemption option on the Capital Notes. For the same reasons, finding a funder to provide up to $20m to replace the Capital Notes in this market is simply not possible at the moment. However, we remain committed to finding a replacement facility and are continuing the process.
In summary we believe the rate offered is set at a rate that is competitive, but also manageable for the group in the current environment we are operating and is:
o Double that of the OCR
o Significantly above the rate of inflation (providing a real return to investors)
o Above the rate offered by Dorchester (5%) which is arguably in a similar position in most respects
Capital Note Holders do have the option of not taking the offer of renewal and instead taking the shares, although I am sure they will look at the Hanover/Allied debacle of swapping an investment for equity and the resultant share price. If note holders choose this option then that is their choice, we are simply not prepared to pay a rate which could have a detrimental affect on the Group as a whole.
In regard to our offer to Debenture Holders, this rate is offered by our 100% subsidiary NZF Money Limited and not NZF Group Limited. You have already raised your issues about rates in the market and I have outlined the reasons why the rate was set at that level and while we would like to have set a higher rate, this would not have been prudent in the current environment.
If it is any consolation, (a) your capital remains intact (b) you have been paid interest on time, every time and (c) our intention is to continue to pay interest on time every time for the term of the new Capital Notes.
Kind regards
..............
I'm new at this so any comments or corrections will be appreciated.
If 1/3rd of Capital Notes become shares, and the share price through the 20 business days to 15 March stays at 14.5c:
- 10,000 notes plus accrued interest = $10,244 (approx.)
- This buys 74,230 shares at 13.8c which is 95% of 14.5c.
- 6.6m Notes converting will create about 47.8 million new shares bringing the total on issue to about 125m.
- Dividing the current market capitalisation by 125m gives a new nominal price of 8.9c.
Does this make sense?
Thanks
Scott
The "management" email is more than somewhat misleading regarding the quality of the 6% rate offer for the 5 year investment, as the levels of the resprective OCRs at the time are irrelevant. These are 5 year investments, not 90 day ones. Back in 2006 the 5 years swap was around 7% and the bond yeild at that time was around 3% over that. Today the 5 year swap is above 5%, and the 6% offered rate is less than 1%....frankly it should be above the previous 3% based upon the change in associated credit risk.
Truth is,. he's right, they can't pay that much, but to justify it with references to the irrelevant OCR is near criminal.....I'd much prefer the company was just plain honest and admit we're stuck and they'll pay whatever they think they can get away with.
I own some of these capital notes, my position is slighlty different in that I bought them at a discount, so if I went with the extension, my yield would be closer to 8%. I was going to accept that however after reading this thread I'm having second thoughts. Would you still go for the shares in my situation?
Couple of points:
1) I don't believe that the interest payment is included in the conversion. (Need to read the Trust Deed to confirm this ... but would be surprised if it was "capitalised"
2) If $6.6m of Notes are converted to shares - this amount is deleted as a liability and turned into that other type of liability - equity. Hence the new nominal price would be somewhere between 13.8cents and 14.5cents (as the new shares introduce new equity at 13.8cents).
Paying a margin over OCR is a reasonable way of assessing risk. At the moment with OCR at 3%, it is at an historical low. However, the margin I would want in order to own NZF010's would be north of 6% (and not the 3% offered). The reasons for this are the degree of subordination of the debt and the perception of the market (that demands 9.5% for secured NZF debt over a shorter term).
Make no mistake, converting the NZF010 to the new instrument (NZF020?) will see an immediate discount applied on the secondary market (75cents on the dollar, as a guess).
If you convert to equity (by failing to elect conversion to the new deal) your situation will be:
- No prospect of a short or medium term dividend; and
- A likely "squeeze" on the price of the equity instrument (NZF) and very thin liquidity
Long term, I would suggest that it is likely you will get an exit opportunity at a price closer to $1 face. There is also the possibility that if faced with dilution of "death spiral" proportions, the company will act and exercise its right to pay cash to those holders queued for conversion. This, however, is not a certainty.
I think it was Dirac who said: "You cannot tell the future except as a superposition of relative probabilities".
Those electing not to take the new instrument will end up with a probability of a cash payout but with the more probable ownership of equity at a range of probable prices .... Not a good choice if you are depending on income. Not a good choice if you put capital preservation at the highest imperative. A very good choice, however, if you can deal with the variability and uncertainty of the situation and want to choose the option with the best outcome, on average, over all the likely states.
Final point ...
This new deal, in which it is clear a third party is doing due diligence on all or part of NZF, will clearly be material to the decision Noteholders need to make.
The full scope of the election process has not been put to Noteholders - there has been no mention of the full process including the potential for the company to payout cash to those expecting to get equity.
The point is:
Why is the Trustee not making some inquiries of the company to make a statement to Noteholders?
Would it be unkind to observe that the Trustee is apparently incompetent? Is it more a case of laziness than incompetence?
Thanks for your analysis and comments which are very helpful
However I don't follow your thinking above; I must be missing something.
The investment statement is quite clear. The company has elected to not redeem Notes for cash. Are you suggesting they might change their mind if Noteholders who convert to shares dump them and push the share price way down? Surely this was always a prospect in a situation such as this. Also, there would be howls of "unfair" from Noteholders who chose to hang on to their Notes.
In the Trust Deed under a section entitled "Election Process" the company can overturn the de facto choice made by those who will convert to redeem their Notes in cash.
The Trust Deed is here:
http://www.business.govt.nz/companie...0621FD46EF9B85
The Prospectus is here:
http://www.business.govt.nz/companie...9BB29CF38FF780
If the market currently values NZF at $11m (or 14.5c) then what is there about this transaction that changes that value - the equity and liability are on the same side of the ledger. Aren't we then going to see the $11m split amongst 125m shares giving a price of 8.8c?