NZF Group (NZF and NZF010)

[Enumerate]

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

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

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

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

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

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

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

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

Summary Conclusions:

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

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

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

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

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

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

[Enumerate]

As an adjunct to the "analysis" - this is my thinking around the note election issue:

1) If I had shares - I would be selling them ... even at 5 cents. The main reason is the ALF effect - at current election levels of the notes, there will still be lots of converted shares for sale after the 15th of March. These shares will be "hot" - some people will take a 50% hit just to get some cash back, in my view.

2) There is a Hobson's choice for existing noteholders:

i) If you elect to convert, I think your capital will be generally safe if NZF fails. However, you must think of your new notes as some kind of "perpetual" preference share. I reckon they will not trade anywhere near par - I would suggest maybe 60cents on the dollar will be a realisable portfolio liquidation value. Your choice is to take 6% (bank interest - without anywhere near the security) and face precisely the same Hobson's choice in 5 years time (if you do get paid out in cash in 5 years - you would have been better off to take equity - because this means the business has recovered well)

ii) If you take equity - your capital preservation will take an immediate paper "hit" - as new shares flood onto the market. However, you do not have to sell - you can bank on the deal happening in the background to sort NZF Money's and by implication Finance Direct's retail funding dilemma. If this happens, I think you will see your money back in the medium term (though selling pressure will doubtless be a significant factor - the newly issued shares must be regarded as "overhang" for a number of years. You basically sacrifice an interest payment and some assurance on liquidation capital preservation for a possible medium term ability to sell the shares and get your money out.

Again, I call 'em as I see 'em - happy to entertain alternative viewpoints or to be corrected ...

[invessi]

Enumerate, nice to see that you have distilled the groups current financial makeup and made some informed and common sense comments. I would like to make a few predictions, mainly for the benefit of TTG and Zerof:

By far the majority of bond holders will renew, over 90% me thinks, why wouldn't they when they rank ahead of shareholders!

A new financial partner(s) will be announced soon

Most of the unconditional property settlements will occur over the next few months leaving NZF with some healthy cash reserves

MPM will launch with a bang!

Before the year is out, they will be lending on a renewed scale and may even consider paying dividends in 2012.

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

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

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

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

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

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

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

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

Summary Conclusions:

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

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

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

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

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

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

[minimoke]

Again, I call 'em as I see 'em - happy to entertain alternative viewpoints or to be corrected ...

The sale of notes or shares is fine in theory - but this is an illiquid company. No-one has expressed an interest in the recent past to buy. Even if 90% roll over leaving $2m converting to shares there hasn't been much more than $50,000 worth of trades in the past few years. There hasn't been much activity in the notes either.

[Enumerate]

The sale of notes or shares is fine in theory - but this is an illiquid company. No-one has expressed an interest in the recent past to buy. Even if 90% roll over leaving $2m converting to shares there hasn't been much more than $50,000 worth of trades in the past few years. There hasn't been much activity in the notes either.

Another way of viewing things is that at 5cents per share it is better holding for a medium term 0.5cent per share annual dividend (fully imputed) rather and holding 1 dollar of notes for a 6 cent annual interest payment. (They should be able to do a 0.5cent dividend with a surplus of about $500k)

[Enumerate]

... and remember, we have to choose either new notes or extra shares ... the fact that both are illiquid does not help us in our choice.

[Tony Two Gloves]

Interesting comments guys, not to be negative but.......Enumerate you requested comments be kept grounded which is fair. Invessi whilst applauding this you then make four predictions mostly based on pure speculation. The facts are they have been downgraded for a reason, the detriorating loan book is a huge concern for everyone whether you hold debentures, bonds or shares. As we have witnessed over the last few years when S&P downgrades a company the writing is on the wall and very few recover. NZF has a one in two chance of being downgraded further to a "D", how would there bankers feel if this occurs? We are already seeing how the debenture holders feel and this can only get worse since the down grade.

I'm sorry but I feel the optomism regarding NZF is totally unfounded, don't get me wrong they are still around when others (not all) have failed but I feel they are clinging on by their finger tips. Again not entirely there fault, the markets they operate in are dreadful and I don't see an improvement in the short term, this company needs to start making money and I don't believe a new real estate venture is the answer. If they do fail debenture holders will be first in line not bond holders and if the loan book is a mess its not to often that I have seen debenture holders get all their money back lately espicially after secured lenders are repaid. I think we all know what would be left for note holders in this scenario.......

[blackcap]

This came out today.... does anyone know when the new notes start trading?

NZF
14/03/2011 15:20
GENERAL

REL: 1520 HRS NZF Group Limited

GENERAL: NZF: NZF Group Limited (NZF) Capital Notes

NZF
14/03/2011
CAPITAL NOTES (NZF010)

NZF Group Limited (NZF) Capital Notes - Expiration of Notification Date for
receipt of Election Notices of NZF Capital Notes (NZF010)

The Notification Date for receipt of Election Notices for NZF Capital Notes
expired at 5pm on Thursday 10 March 2011. Acceptances for the "Renewal
Option" on NZF Capital Notes were 89.9% by amount. Capital Noteholders that
have not elected the "Renewal Option" will be issued ordinary shares in NZF
in accordance with the Trust Deed. The conversion price will be based on 95%
of weighted average sale prices of an ordinary share in NZF sold during last
20 business days immediately prior to the Maturity Date.

A resolution to issue up to 56,135,496 ordinary shares in NZF to provide for
Capital Noteholders that have not elected the Renewal Option" was presented
at today's Special General Meeting and was passed by a majority of NZF
shareholders. The number of actual shares to be issued will be determined at
close of business today. However, based on the recent prices of shares sold
and the level of Noteholders electing to renew, we expect the actual figure
of NZF shares to be issued, will be significantly less than the maximum
mentioned above.

Malcolm Lindeque
For and on behalf of the board of directors
Company Secretary
ENDS
End CA:00206773 For:NZF Type:GENERAL Time:2011-03-14 15:20:33

[minimoke]

I end up with around 33.4m shares bing issued or what will end up being around 30% of the company. This gives me an SP of $0.038 or if we add the $2m back in then an SP of around $0.057.

[Alan3285]

I end up with around 33.4m shares bing issued or what will end up being around 30% of the company. This gives me an SP of $0.038 or if we add the $2m back in then an SP of around $0.057.

Looks like the last trade before the numbers are struck was at 5.5c.

Alan.