NZF Group (NZF and NZF010)

[Enumerate]

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.

[Enumerate]

I thought I had - isn't that reflected in the value the market puts on the ordinary shares. Their interim report shows total net assets of $12.7m

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).

[minimoke]

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

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.

[Enumerate]

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.

The other scenario is:

Those that don't elect to take up the new deal will simply be paid out in cash (if the company decides it does not want the dilution and acts before the 1st of March to pay those who have not elected to proceed with the new deal).

[minimoke]

"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.


Those less risk adverse souls have a chance of getting cash - especially if they are prepared to play hardball.

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.

[Enumerate]

Where do they get the cash from?

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.

[minimoke]

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.

[Jaa]

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.

Thats also the conclusion I came too.

If your not sure whether your playing cricket or rugby you shoudn't be on the field

[minimoke]

Bit of a tickle today. One more big spender coming in at $0.046 (so thats two eager buyers) and the NZF010 at 125

[getontoit99]

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

..............