HGH - Heartland Group Holdings

[nztx]

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:



---------

"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."

-------



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.



--------

"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."

---------



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.




------

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

-------



$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.



--------

"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."

---------



'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,



----------

"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."

-----------



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.....



-----------

"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."

-----------




....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

but wouldn't lending to an "Associate" have to be separately disclosed ?

The Whole Harmoney Loanbook on HGH Books ? would think they must have some form of
rights to 100% of the Loans if that were the case. As you know the HGH interest in HarMoney
is 11% roughly so HGH would not be able to consolidate Harmoney into their accounts & would
be obligated to treated it as an Associate - wouldn't they ?

With Retail Investors given the push by Harmoney - has the slack been taken up by the
Shareholders such as HGH on HarMoney funding to greater extent than we realised ?

All said & done, nevertheless - it appears if HarMoney goes IPO - HGH & Trade Me look to have
shortly be seen to have done very well indeed on their stakes in it - assuming less than 35.0 cps
share cost in 2014 presumably on their parcels ..

[King1212]

Quiet unusual trading today

[winner69]

Quiet unusual trading today

What happened kingie

[sb9]

Some 4.2mln shares changed hands today at VWAP of $1.29 a piece.

[Snoopy]

but wouldn't lending to an "Associate" have to be separately disclosed ?

Funding for Harmoney is disclosed. On p9 of the Annual Presentation for FY2020.

"Harmoney Receivables up 4.6% to $199m"

Table 9 in the Harmoney prospectus (from p104 in the Prospectus) shows statutory financial receivables of $129.222m as at 30th June 2020. That means the total Harmoney receivables on the Heartland books are greater than the total Harmoney receivables on Harmoney's own books :-O! I do not understand how this can be!

The $129.222m figure that I have mentioned ties in with the $129m of financial receivables, mentioned in the interest.co.nz article that I have referred to before.

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

So there is one mystery solved at least I now know where interest.co.nz got their figure of $129m of Harmoney receivables from.

But something is not right here. That June 2020 Harmoney balance sheet also contains $344.129m of 'Peer to Peer funded loans'. That $344m represents loans funded by the 'Mum and Dad' and Wholesale 'peer to peer' funders to other 'Mums & Dads. But all the peer to peer funders also need to be repaid at some point. Harmoney is paid by those 'peer to peer ' lenders who put up money to make loans Harmoney also collects money from those borrowers who end up with the loan money. Harmoney is 'clipping the ticket' on both the borrowing and lending side of each transaction. But is the on lent loan money a financial receivable asset from a Harmoney perspective?

According to the aforementioned 'Table 9', after the Harmoney share offer is complete, all of those previously peer to peer funded loans will become ordinary financial receivables. In the course of this transition, the Harmoney loan book suddenly swells from $129.222m of loans to:

$129.222m + $344.129m = $473,351m

of financial receivables loans. This seems a very odd thing to happen. There has been no underlying change in the loans made to end line customers. Yet 'suddenly' the loan book increases in size by 366%. Does the transition from being a 'peer to peer' lender to just being a 'regular finance company' lender require the loan book to be revalued upwards in such a dramatic fashion?

The Whole Harmoney Loanbook on HGH Books ? would think they must have some form of rights to 100% of the Loans if that were the case. As you know the HGH interest in HarMoney
is 11% roughly so HGH would not be able to consolidate Harmoney into their accounts & would be obligated to treated it as an Associate - wouldn't they?

I cannot fault your logic nztx. By my understanding of company accounting rules, you must have a 50% controlling stake in a subsidiary before you can consolidate such accounts within the parent company results. The shareholding of Harmoney owned by Heartland clearly does not qualify for this treatment. So how do you explain $199m of Harmoney receivables recorded on the Heartland books? Mystery not solved!

With Retail Investors given the push by Harmoney - has the slack been taken up by the Shareholders such as HGH on HarMoney funding to greater extent than we realised ?

A wholesale peer to peer funder will replace a retail peer to peer funder by taking up 100% of that loan. Once a retail peer to peer holder relinquishes their loan to a wholesale provider then 100% of that loan is relinquished. There is no variable percentage number here. So I am not quite sure what you mean when you say:

"(Perhaps) the slack been taken up by the Shareholders such as HGH on HarMoney funding to a greater extent."

All said & done, nevertheless - it appears if HarMoney goes IPO - HGH & Trade Me look to have shortly be seen to have done very well indeed on their stakes in it - assuming less than 35.0 cps share cost in 2014 presumably on their parcels ..

Agreed, although this will be a one off gain for Heartland. I wouldn't be building in any such gain into the profit i recognize as ongoing for the company.

SNOOPY

[Snoopy]

While the other Beagle is extremely busy barking loud and very long I have been extremely busy biting over and over again...chunks of shares off the sellers. I wonder which will be the more profitable approach lol

My rating for HGH is BBB+ (Beagle Busy buying)

Some 4.2mln shares changed hands today at VWAP of $1.29 a piece.

We now know the answer. The other Beagle was buying at up to $1,37 just a month ago. The Snoopy beagle has been topping up at $1.28 today. I feel as though it is a good day if I can get one up on that other Beagle! But in the long term I predict that both Beagles will do well with HGH!

SNOOPY

[nztx]

Interesting postings - Snoopy

Especially the sudden & very rapid growth in Harmoney Loan Book

Revaluation of Loan book would have to be based on economic conditions vastly improving
then may relate only to degrees of impaired loans becoming recoverable (reversing earlier
provisions or write-off's)

I dont see blue air territory on a Loan Book & not in current times either

Could this possibly be due to Harmoney taking onboard another country - such as Aussie ?

[King1212]

Seem like fundies are accumulating..

[Snoopy]

Interesting postings - Snoopy

Especially the sudden & very rapid growth in Harmoney Loan Book

Check out the 'revaluation' of the loan book in Table 9 on page 104 of the Harmoney Prospectus that you can get from the link below :

https://events.miraqle.com/FormBuild...Prospectus.pdf

Revaluation of Loan book would have to be based on economic conditions vastly improving then may relate only to degrees of impaired loans becoming recoverable (reversing earlier
provisions or write-off's)

I don't see blue air territory on a Loan Book & not in current times either

Could this possibly be due to Harmoney taking onboard another country - such as Aussie ?

I have obviously not made my point clearly. The sudden revaluation of the Harmoney loan book has nothing to do with economic conditions, impaired loans or the quality of the loan book either now or into the future. If you look at Table 9 in the Harmoney Prospectus, then you will see that the 'finance receivables' growing from $129,222m to $473,351m overnight is a bookkeeping exercise. It is, I believe, caused by bringing what were previously 'off the book loans' (managed directly between peer to peer lenders and borrowers) directly into the Harmoney loan book instead.

Looked at this way, the concomitant statement in the prospectus in section 3.7.2.1 that I have already quoted below:

----------

"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.

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."

-----------

outlining an expansion is Harmoney's current warehousing facility can be seen in a new light. Expanding 'Warehouse 1' from $153m (all except $20m of this facility has been utilised to 30-09-2020, see Harmoney Prospectus p26) to $200m, and adding a second new NZ warehousing facility of $200m may not be signalling a sudden expected growth spurt in the NZ loan book after all. Instead these new Warehousing facilities may be needed to transition the existing loan book away from its peer to peer funded model to an in house funded model with no loan book growth. IOW the 'grand expanded warehouse funding plan' outlined in the Harmoney prospectus is not indicative of any future growth after all!

SNOOPY

[Snow Leopard]

Snoopy. It looks like you are beginning to get a grip on the Harmoney funding transition.

With regard to Heartlands $199 of Harmoney receivables vs Harmoneys $129 of receivables: They are not the same thing.

Heartland is a peer-to-peer lender through the Harmoney platform and the $199 is part of the $344.

So the question is: What happens to that $199 (from Heartlands view point) over the next year or so as Harmoney unwinds the p2p?