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  1. #1
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    Default NZF Group (NZF and NZF010)

    Mainly interested in discussing the NZF Capital Notes (NZF010).

    Any interest in this discussion?
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

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    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.

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    Quote Originally Posted by QOH
    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).

    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.
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

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    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.

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    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?

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    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.
    Last edited by Enumerate; 09-04-2010 at 05:26 PM. Reason: Spelling
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

  7. #7
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    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.
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

  8. #8
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    Quote Originally Posted by Enumerate View Post
    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.

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    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.
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

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    NZF announces their full year results:

    http://file.nzx.com/000/957/3758957.pdf

    Quote Originally Posted by Highlights
    NZF’s four key operating segments all showed strong returns to profitability; the most notable of
    which were the Home Loans and Property Finance Divisions, which contributed $4.345 million and
    $1.021 million respectively to the audited profit from trading operations for the year.
    An overall loss, for the year, was declared after writedowns of goodwill:

    Quote Originally Posted by Goodwill impairment
    Goodwill impairment testing indicated that the carrying
    amount of goodwill allocated to NZF’s 50% Joint Venture Investment in MPMH Limited exceeded its
    estimated recoverable amount by $6.975 million. The Directors have accordingly accounted for this
    impairment loss in the financial statements, which has resulted in NZF reporting a retained loss of
    $4.596 million for the year attributable to equity shareholders.
    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.

    All in all ... a solid result.
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

  11. #11
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    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!

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    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 ...
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

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    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.

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    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) "

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    Quote Originally Posted by Enumerate View Post

    ... 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

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