HGH - Heartland Group Holdings

[K1W1G0LD]

Last week a friend went to a Heartland depositers' briefing.They are to conduct a number of these around the country.My friend was most impressed with the presentation.Thought Greenslade was on top of the game.Had a lot of senior management there.A very positive meeting.

Greenslade comes across as a confident operator but HNZ is going to be a hard slog changing public perception of Finance Companies in NZ .
On a slightly different tack I wonder if article reporting PGC may be ditching HNZ holdings in Stuff over weekend has anything to do with PGC losing 3 cents today.

[Xerof]

Heartland depositers' briefing

Interesting they put these cucumber sandwich meetings on for depositors - what about the poor suffering shareholders?

PGC may be ditching HNZ holdings

only a 'review' at this stage, but you are right - not a good look - shareholders will be feeling completely abandoned by now.....having lobbed the finance company off by way of an uncontested in-specie, and had the underwrite backfire badly on us, lets bail ........

[Snoopy]

- what about the poor suffering shareholders?

HNZ shareholders are some of our greatest heroes. With the bloodying of the balance sheet, you will be remembered.

SNOOPY

[POSSUM THE CAT]

May be worth a flutter at $0.20

[K1W1G0LD]

... which is why they want to become a bank ...

Yes, lets hope they succeed with that too Belgarion.

[winner69]

Yes, lets hope they succeed with that too Belgarion.

The alarm bells started ringing when the CFO made the comment that intending to become a bank was 'a great marketing tool' .... he left the impression that this was the main reason ... and until it happened (or not) they could still sort of use the the word bank quite a lot

As long as the depositors get the cucumber sandwiches and everybody thinks Greenslade is an OK switched on bloke all will be OK methinks.

[Lizard]

I am not terribly expert in analysing financial stocks and have made more than my share of investing mistakes. I also have a heap of respect for Xerof, Winner and Snoopy, who are all ringing the alarm bell on HNZ. So, since I recently acquired a few HNZ, am hoping someone can further outline the concerns in relation to the accounts.

My prior concerns were regarding liquidity, particularly in regard to the expiry of the govt guarantee. However, the accounts suggest that they have managed that quite well and the expiry in itself is unlikely to pose a threat at this point. Nor is there any sign of Marac raising rates to attract funds (although to some extent, they will have benefited from widening spread over bank deposits through a fall in bank rates).

The market is still looking more cautious though, with the MAR010 trading at 8.0% - considerably higher than the Heartland/Marac term deposit rate for similar maturities - but the yield on MAR010's is falling. This seems to suggest an "alert but not anxious" type approach from the market and is in line with the sort of rates being seen in GPG, IFT and NPX fixed interest securities.

So presumably, amongst the ST experts, credit risk is the main concern? How would you go about judging that versus, say, Kiwibank?

For instance, looking at equity relative to total lending, Kiwibank has $600m net equity and about $11,500m of non-bank lending (which doesn't seem to leave a lot of room for bad debts). Heartland-PWF combination looks to have about $400m of net equity for about $2,100m of lending. So I would take that to seem that HNZ could absorb a substantially greater % of bad debts, and could write off perhaps as much as $300m (about their entire property book) before they'd be down to Kiwibank-type equity as % of funding.

In impairments, Kiwibank had allowance for about $87m of individual and collective impairment at FY2011, while HNZ+PWF had about $50m. Kiwibank had a further $200m of overdue and impaired for which an impairment had not been provisioned. HNZ+PWF had about $212m, of which $74m came from PWF - and a good $53m was impaired but for which impairment had not been provisioned. i.e. overall, HNZ+PWF looks a little worse, but comes close to Kiwibank in terms of % of equity.

Not intending to defend HNZ, but am more just interested in specific comments as to where the risk in HNZ is coming from beyond the systemic risk affecting all lenders in the current environment?

(Also, I note re PGC potential sale of HNZ that the stuff article did not suggest PGC was in a hurry to quit HNZ, but more that their holding in it was not part of a long term strategy, and more to do with continuing to support HNZ transition to a stable business)

Mogridge said PGC was in no rush and HNZ's share price had some way to rise.

[Lizard]

After sleeping on it, just should point out that the equity of PWF+HNZ in my earlier post is not accurate - possibly equity is closer to $300m post-transaction. If I find the correct figure, I will post it. However, also note that $90m of impaired/restructured PWF loans were not acquired and $30m have a 3 year full-recourse agreement, so total of overdues in HNZ more like $140m (from HNZ side), with at least $50m of recourse to PGC (via RECL) and PGW (mostly against other loans).


Note: Just found pro-forma in the capital raising update at end of August and NTA was $324m for HNZ+PWF. Have also just re-read and adjusted the overdue but not impaired amounts for both. HNZ now looks to have overdue but not impaired assets equal to around 43% of equity, while Kiwibank is about 33%. This does not take account of HNZ's recourse agreements with PGW and RECL

[corlemar]

I am not terribly expert in analysing financial stocks and have made more than my share of investing mistakes. I also have a heap of respect for Xerof, Winner and Snoopy, who are all ringing the alarm bell on HNZ. So, since I recently acquired a few HNZ, am hoping someone can further outline the concerns in relation to the accounts.

My prior concerns were regarding liquidity, particularly in regard to the expiry of the govt guarantee. However, the accounts suggest that they have managed that quite well and the expiry in itself is unlikely to pose a threat at this point. Nor is there any sign of Marac raising rates to attract funds (although to some extent, they will have benefited from widening spread over bank deposits through a fall in bank rates).

The market is still looking more cautious though, with the MAR010 trading at 8.0% - considerably higher than the Heartland/Marac term deposit rate for similar maturities - but the yield on MAR010's is falling. This seems to suggest an "alert but not anxious" type approach from the market and is in line with the sort of rates being seen in GPG, IFT and NPX fixed interest securities.

So presumably, amongst the ST experts, credit risk is the main concern? How would you go about judging that versus, say, Kiwibank?

For instance, looking at equity relative to total lending, Kiwibank has $600m net equity and about $11,500m of non-bank lending (which doesn't seem to leave a lot of room for bad debts). Heartland-PWF combination looks to have about $400m of net equity for about $2,100m of lending. So I would take that to seem that HNZ could absorb a substantially greater % of bad debts, and could write off perhaps as much as $300m (about their entire property book) before they'd be down to Kiwibank-type equity as % of funding.

In impairments, Kiwibank had allowance for about $87m of individual and collective impairment at FY2011, while HNZ+PWF had about $50m. Kiwibank had a further $290m of overdue and impaired for which an impairment had not been provisioned. HNZ+PWF had about $212m, of which $74m came from PWF - and a good $53m was impaired but for which impairment had not been provisioned. i.e. overall, HNZ+PWF looks a little worse, but comes close to Kiwibank in terms of % of equity.

Not intending to defend HNZ, but am more just interested in specific comments as to where the risk in HNZ is coming from beyond the systemic risk affecting all lenders in the current environment?

(Also, I note re PGC potential sale of HNZ that the stuff article did not suggest PGC was in a hurry to quit HNZ, but more that their holding in it was not part of a long term strategy, and more to do with continuing to support HNZ transition to a stable business)

I agree with a lot of what you comment on Lizard.....admittedly I don't proclaim to know the exact ins and outs, in terms of equity/lending etc....and I am a shareholder of HNZ,but when you take a snapshot of HNZ it seems to me, that the entity is far better placed than the previous PGC which held MARAC. It seems that although there maybe still some bad loans like is possible with any bank or finance company these are minimal in the big scheme. Furthermore, Jeff Greenslade has delivered on everything to date, which imo represents good leadership. The management of HNZ have shown their confidence by accepting the $15k SPP and HNZ seems to have positioned itself where the big banks don't want to go and further you could could argue that farmers and the rural sector are more confident now than they have been for sometime. Also, whether pple perceive it as a finance company or a bank - the bad finance companies have been whittled down to a small few, which should benefit HNZ.

With regards to PGC i also agree that I fail to see why PGC would want rid of HNZ when they've only just acquired them, PGW which they hold on the otherhand yes I could see why they may wish to address this ownership !!

[Snoopy]

So presumably, amongst the ST experts, credit risk is the main concern? How would you go about judging that?

Liz, I have an indirect shareholding in HNZ as a PGW shareholder through the $10m that PGG Wrightson (PGW) supplied towards the just completed Heartland New Zealand (HNZ) recapitalization. I do not consider myself an expert in analyzing banks either. Albeit that is a hole in my analysis armour I hope to fill at some stage. I had hoped that my holding PGW through PGG Wrightson Finance (PGF) would be my window into future analysis of the banking world. But as you know, PGF has just been sold to HNZ.

Having just said I don’t really know what I am doing regards banking, I would nevertheless be a little worried about HNZ regarding their current capitalization relative to their lending book as you paint it.

If I look at the PGF financial accounts at the death (30th June 2011) I see total equity of $100.919m against loans and receivables of $381.778m, after the annual provision for doubtful debts.

$90.9m of those “still OK” loans (according to PGW management) have now been transferred to a special purpose vehicle that still sits with the seller PGW. The final sale price for PGF was confirmed at $99.5m. So my best guess of what Heartland acquired when they bought PGF is $99.5m of net tangible capital to support $381.7-$90.9= $290.8m of loan debt. That is a loan to equity ratio of 3:1

Using your figures for the combined HNZ Lizard, $324m of net equity for about $2,100m of loans equates to a loan to equity ratio of 6.5:1. What would the combined loan book have looked like at HNZ without the acquisition of PGF! Actually I can answer that:

($2,100m-$290.8m)/($324m-$99.5m)= 8:1. A crisis averted by HNZ in buying PGF?

Well according to you Liz (on the other side of the transaction fence) it was actually PGF that was the ‘bad boy’ in this cauldron of doubtful loans.

Lizard wrote
“HNZ+PWF had about $212m (of overdue and impaired loans), of which $74m came from PWF - and a good $53m was impaired but for which impairment had not been provisioned. i.e. overall, HNZ+PWF looks a little worse,”

This I don’t understand. We PGW shareholders were told that all the overdue loans where interest is being capitalized, were rolled up into the ‘special investment vehicle’ that PGW retained. How does Heartland justify classifying $53m of their just acquired PGF loans as impaired, when we PGW shareholders were lead to believe that all the loans on sold to Heartland were good?

SNOOPY