HGH - Heartland Group Holdings

[nztx]

Help me out then my Beagle friend because I'm just an overworked time poor Beagle trying to follow too many companies and cats are never a dog's friend and all the resident one ever wants to do is claw me. (Cruel animal he is).

So their stake is now worth $A3.50 per share x $8,518,864 shares = ~A30m. Seems like a pretty tidy unrealized profit but didn't they invest a bit more later on ?

Heartland's purchase of 10% in 2014 is announced in pdf (on link) under:

https://shareholders.heartland.co.nz...t-14-final.pdf

"HEARTLAND TO TAKE SHAREHOLDING IN HARMONEY

8 September 2014

Heartland New Zealand Limited (Heartland) (NZX: HNZ) advises that it has taken an approximately 10%
shareholding in HarMoney Corp Limited (HarMoney), New Zealand’s only licensed peer-to-peer lending
platform.

In conjunction with this, Heartland Bank Limited is providing a funding line to enable lending to a range
of individual borrowers using the platform. "



Digging further - Heartlands Filed Reports tend to not separately disclose Harmoney in Reports & Releases,
however -

On 12 Sep 2014 Heartland NZ Ltd is recorded at 12,355.363 shares

This increased around 2 Feb 2015 to 17,011,420 shares

the new shares in Feb 2015 from filed Co's Office Docs appear to have been issued at 32.514 cps

From Co's Office, it appears that Trade Me became HarMoney Stakeholders on 20 Feb 2015
with a holding of 23,815,974 shares

[Beagle]

Thanks, appreciated.

[winner69]

They say Harmoney market cap could A$353m.

heartland market cap A$743m .....hmmmm

[King1212]

That shows how undervalued hgh at current sp

[KJMLimited]

Heartland are not a Fintech stock though. Maybe that's why they want to be one.

[winner69]

Heartland are not a Fintech stock though. Maybe that's why they want to be one.

Heartland maybe see themselves as a Fintech and that’s why they want to be rated as one

On same income multiple Hgh be about $1.70

[KJMLimited]

Heartland maybe see themselves as a Fintech and that’s why they want to be rated as one

On same income multiple Hgh be about $1.70

I'm not sure. If they want to be valued as a Fintech it's all about presenting the market with future tech revenue growth even if from year 2 it is more of a guess than anything else.

[blockhead]

Had got down to just a few HGH left and a TD came due, no sense putting in the bank so today I bought the bank (@1.30).

Mention of sp of $1.70 has a nice touch about it !

[Snoopy]

Harmoney & Other Consumer Lending" had an OK year over FY2020 (p19 FY2020 presentation, PR2020) with the loan portfolio up 2% to $211m compared to FY2019. I am unclear as to exactly what has happened here. From the information in the link below:

https://www.interest.co.nz/news/1067...gging-consumer

Harmoney are now a much smaller business. (Loan Book down from $367m to just $129m). Heartland own just 11.85% of Harmoney. (source NZ Companies Register below)

https://app.companiesoffice.govt.nz/...2BBiKNrJq6AAAA

But 'ownership' and 'providing capital with which to make loans' are two different things, And I think Heartland do both of those things for Harmoney.

In direct contradiction to the 'interest.co.nz' Harmoney results reference above, p19 of PR2020 shows "Harmoney receivables increasing to $199m." Who can explain that discrepancy? Whatever the explanation, it certainly sounds like the Harmoney loan book is being incorporated into the Heartland loan book. But the reason for doing that is another mystery in itself (question posed below). Despite the slightly bullish tone on p19 of the AR2020 presentation, I don't see sufficient information to override my (previously stated in the quoted bubble) bearish outlook for this sector.

It does definitely appear as if Harmoney loans are listed in the 'Finance Receivables' in the Heartland balance sheet. However, a word search for Harmoney in the FY2020 accounts comes up blank. So I am not clear where Harmoney fits into the Heartland 'Finance Receivables'. One possibility: If I look in the Segmented Analysis of the AR2020 p98, we see the 'Other Personal' category having $214.759m in assets. This is similar to the $211m in assets figure listed on p19 of PR2020 for 'Harmoney and Other Consumer Lending' (again I can't explain the small difference).

I thought I might find Harmoney under note 11 'Investments' (AR2020 p106) under the equity sub header. But if Harmoney was an 'investment' based on the just 10.85% shareholding that Heartland held, then why have the Harmoney receivables -apparently - been consolidated inside the Heartland receivables? I don't follow how Harmoney has been treated in the Heartland accounts. So if anyone can unscramble it for me I will be all ears.

A bit more on how Harmoney gets the finance dollars to operate their business is disclosed in the Harmoney Prosoectus of 30th October 2020. This has ramifications for Heartland shareholders who were some of the earliest funders of Harmoney.

From Section 3.2.7.1 of the Harmoney Prospectus on New Zealand funding:



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"Prior to its New Zealand launch, Harmoney was granted the first New Zealand peer‐to‐peer licence by the FMA in 2014, creating a peer‐to‐peer marketplace that enabled retail lenders to lend to creditworthy customers. Alongside the launch of the peer‐to‐peer marketplace, Harmoney attracted $85 million of peer‐to‐peer funding from multiple institutional partners. The institutional peer‐to‐peer funding included a $50 million facility from a New Zealand bank." (Snoopy Note: I believe this NZ bank to be Heartland, consistent with Heartland's 8th September 2014 press release).

"This institutional peer‐to‐peer funding, in conjunction with the peer‐to‐peer marketplace, allowed Harmoney to successfully demonstrate the viability of its peer‐to‐peer lending model. Harmoney subsequently added three additional institutional peer‐to‐peer funders: a second New Zealand bank, a London Stock Exchange listed investment trust, and a New York-based asset manager. The terms of these commercial agreements vary but all compensate Harmoney with upfront fees paid by the peer‐to‐peer lender to Harmoney at the time the loan is funded. In addition, some peer‐to‐peer lenders also pay Harmoney a service fee and performance fee, with the potential for some of the upfront fees to be rebated by Harmoney to the peer‐to‐peer lender depending on the performance of the underlying receivables."

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I read that as though the funding banks (including Heartland) pay an up front fee when a loan is initiated and an extra fee on top of that if the interest charged ends up being 'above market expectations' (I am not sure what other interpretation you could put on a 'performance fee' for a loan). But also that Harmoney's 'finder fee' to Heartland will be rebated if a loan subsequently goes bad.



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"For the period the peer‐to‐peer marketplace was operating, approximately 20% of monthly New Zealand loan volumes were allocated to retail lenders, with the remainder, prior to the introduction of the warehouse funding model, being funded by institutional peer‐to‐peer funders."

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If we take the balance sheet at the end of FY2019 (30th June 2019), a 'time snapshot' where the retail peer to peer lending operation was still in full flight, we have total Harmoney lending of $NZ149.7m (NZ) + $NZ39.8m (Oz) = $NZ189.5m on the Heartland books (PR2019 p18).

So we can work out that 'institutional peer funders' funded approximately: 0.8 x $147.7 = $118m of that total. Of that sub total, Heartland will have funded up to: $50m/$118m = 42% of the institutionally backed portion of the NZ Harmoney loan book (more if you remove Warehoused loans)? This is substantially more than Heartland's 10.85% equity stake in Harmoney might otherwise suggest, if their loan book commitment and their equity stake in Harmoney were in balance.




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"During this period, the retail peer‐to‐peer loan book grew to approximately $80 million, which was funded by approximately 10,000 retail lenders."

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$189.5m - $118m = $71.5m. $71.5m is 'approximately $80m'. The actual peak figure (which would be higher) would most likely have been reached after 30th June 2019 but before the wind down in the Harmoney retail peer to peer loan book was initiated later in calendar year 2019. The $80m figure would suggest that the initial expansion by Harmoney into Australia was entirely funded by retail peer to peer investors.



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"In December 2018, Harmoney established its second funding channel – the New Zealand Warehouse Trust. This limited recourse, revolving warehouse securitisation trust funds loan originations in the New Zealand market. Total warehouse funding on commencement of the New Zealand Warehouse Trust was $50 million, which was a combination of senior note and mezzanine note funding. The senior note funding is provided by a major bank, which initially subscribed to $35 million of senior notes. A large Australian asset manager subscribed to $9.75 million of the mezzanine notes."

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'Securitization' means collecting a set of like loans together and selling these packaged loans off to a third party. However, such securitzed loans would generally still appear on the Harmoney books, because any organization that buys these loans requires a guarantee that could see the loans returned to Harmoney under conditions of extreme loan stress. With loans securitzed to a third party, that means the original $50m of bank funding that Heartland provided to Harmoney can be recycled into newly written additional loans,



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"The New Zealand Warehouse Facility limit was increased to $100 million in May 2019, $140 million in December 2019, and $153 million in September 2020 in order to support the continued growth in Harmoney’s loan book. Harmoney has recently commenced a process to obtain a formal credit rating for the New Zealand Warehouse Trust with a global external credit rating agency. The senior financier has approved a further limit increase of the New Zealand Warehouse Facility to $200 million once the rating is obtained."

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I find it astonishing that the 'warehouse funding' (securitisation) of Harmoney loans has exploded from an initial $50m to $200m in little more than a year.....



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"Furthermore, in anticipation of establishing an Asset Backed Securitisation program, the rating will facilitate the ability to term out loan receivables to recycle warehouse capital. In September 2020, Harmoney also received credit committee approval from a global asset manager for up to $200 million to establish a second Warehouse Facility in New Zealand."

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....and that the establishment of a 'Warehouse Facility Credit Rating' (with no indication as to what that hoped for rating might be) will immediately allow the securitization program to for Harmoney to double in size yet again, with a combined $400m facility!

So what does this mean for Heartland? It appears that going forwards Harmoney will not require Heartland's 2014 $50m cash funding commitment to grow, as Harmoney's loan book grows. That will be positive for Heartland going forwards as they manage their own limited capital base. Yet despite Heartland not having to put up more cash, Heartland will still have to raise more capital of its own to stand behind Harmoney's ever expanding and 'consolidated within Heartland' loan book, and satisfy our Reserve Bank's capital requirements for NZ banks. I think it is not so good for Heartland shareholders having to raise capital for a 'rapidly expanding part of a loan book' that you do not control!

Does Heartland's $50m funding commitment to Harmoney also explain my unanswered question (see quoted post) as to why Harmoney's full loan book appears on the Heartland balance sheet, even though Heartland is only a 10.85% shareholder in Harmoney? Up to $50m of that Harmoney loan receivables balance is directly funded by Heartland. Taking out the securitised loans (loans that have been sold off that nevertheless still appear on the loan book), that might mean that over 50% of Harmoney's loan book is funded by Heartland. Perhaps owning over 50-% of the loan book is a sufficient interest to justify incorporating that Harmoney loan book into the Heartland loan book, despite Heartland's equity ownership in Harmoney being well below the 50% threshold consolidation level for result consolidation. Anyone know?

SNOOPY

[King1212]

Had got down to just a few HGH left and a TD came due, no sense putting in the bank so today I bought the bank (@1.30).

Mention of sp of $1.70 has a nice touch about it !

patience is the key!