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  1. #11461
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    Great to see a wise discussion on reverse mortgages in mainstream financial media and Mary Holm suggesting she may even get one herself, eventually. Of course Heartland gets a bit of free advertising https://www.nzherald.co.nz/personal-...ectid=12129348

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    Quote Originally Posted by oldtech View Post
    And me

    Although, I don't understand why HBL doesn't carry forward the residual balance. Not overly bothered by it as the amount I lose is trifling, but still ... how hard would it be?
    I got $0.71 worth more shares than the dividend amount this time, so either they silently carry forward or they round the number of shares.
    om mani peme hum

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    Quote Originally Posted by Snow Leopard View Post
    I got $0.71 worth more shares than the dividend amount this time, so either they silently carry forward or they round the number of shares.
    Thanks for pointing that out. Looks like they round it up as based on a strictly arithmetic calculation I should have got xxx6.5046 additional shares but ended up being allocated xxx7 extra shares which is 0.4954 extra share at $1.625 = 0.805 extra value. Not exactly a free lunch but maybe a free half a can of diet coke
    Last edited by Beagle; 22-09-2018 at 01:22 PM.
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    Default BC6/ Liquidity Buffer Ratio aka 'Meads Test' FY2018

    Quote Originally Posted by Snoopy View Post
    The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

    The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

    1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
    2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
    3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.

    Loan Maturity Expected Behaviour Multiple FY2014 Financial Receivables Maturity: Contracted/ Expected FY2015 Financial Receivables Maturity: Contracted/ Expected FY2016 Financial Receivables Maturity: Contracted/ Expected FY2017 Financial Receivables Maturity: Contracted/ Expected FY2018 Financial Receivables Maturity: Contracted/ Expected
    On Demand 100% $50.254m / $50.254m $37.012m / $37.012m $84.154m / $84.154m $57.040m / $57.040m $49.588m / $49.588m
    0-6 months 132% $477.190m / $629.445m $664.557m / $877.215m $743.389m / $961.274m $618.271m / $816.118m $609.268m / $804.234m
    6-12 months 132% $367.564m / $483.727m $450.638m / $594.842m $484.420m / $639.962m $521.215m / $688.004m $469.632m / $619.914m

    Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.

    Deposit Maturity Expected Behaviour Multiple FY2014 Financial Liabilities Maturity: Contracted/ Expected FY2015 Financial Liabilities Maturity: Contracted/ Expected FY2016 Financial Liabilities Maturity: Contracted/ Expected FY2017 Financial Liabilities Maturity: Contracted/ Expected FY2017 Financial Liabilities Maturity: Contracted/ Expected
    On Demand 3.01% $629.125m / $18.922m $748.332m / $22.450m $718.587m / $21.630m $836.829m / $25.189m $924.072m / $27.815m
    0-6 months 32.4% $748.129m / $242.431m $1,213.450m / $395.102m $892.944m / $289.314m $1,191.957m / $386.194m $1,345.316m / $435.882m
    6-12 months 36.4% $538.050m / $195.682m $686.159m / $249.762m $837.844m / $304.975m $729.145m / $265.409m $572.731m / $208.474m

    Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

    If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.

    Deposit Maturity FY2014: 'Expected' combined Loan and Deposit Cashflow FY2015: 'Expected' combined Loan and Deposit Cashflow FY2016: 'Expected' combined Loan and Deposit Cashflow FY2017: 'Expected' combined Loan and Deposit Cashflow FY2018: 'Expected' combined Loan and Deposit Cashflow
    On Demand $31.332m $14.562m $62.524m $31.851m $21.765m
    0-6 months $387.014m $482.113m $691.960m $429.924m $368.352m
    6-12 months $288.045m $345.080m $334.987m $422.595m $411.440m
    Total $706.391m $841.755m $1,089.471m $884.370m $801.557m
    Time to update the "Liquidity Buffer ratio" for FY2018.

    Dear old Colin has now 'left the building', but what better way to immortalise his contribution to society than continuing with the 'Meads Test', and the 'solid as' quote with which he will alwys be identified? When Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as coined by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic data I need to check this out has already been calculated (see above). So let's get going.

    To check out the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

    (Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%

    On the numerator of the equation, we have borrowings.

    HLB Borrowings

    1/ Term deposits lodged with Heartland. $2,881.805m
    2/ Bank Borrowings $689.346m
    3/ Securitized Borrowings total $47.504m
    4/ Subordinated Bonds $3.378m
    4/ Subordinated Notes $22.172m
    5/ Unsubordinated Notes $151.853m
    Total Borrowings of (see note 13) $3,796.058m

    Note 13 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

    Banking facilities are provided by CBA Australia but for both Australia and New Zealand. These facilities are, I believe, in relation to the Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2019. That means they are classed as ‘long term’ for accounting purposes (talking from a 1st July 2018 looking forwards perspective). And Heartland can’t rely on CBA Australia as a source of short-term funds.

    The information given in note 13 on the securitized borrowing facilities is as follows:

    Securitized bank facilities total all in relation to the Heartland ABCP Trust 1: $100.000m maturing on 31st August 2018 (*)
    less Current level of drawings against this facility $47.504m
    equals Borrowing Headroom $52.496m {A}

    (*) I do not expect any problem in rolling this facility over for another year.


    HLB Lendings vs HLB Borrowings

    Customers owe HNZ 'Finance Receivables' of $3,984.941 There is no breakdown in AR2018 (note 11) as to what loans are current or longer terms. However, if we look at note 21 'Liquidity Risk', we can derive the expected maturity profile of total finance receivables due over the next twelve months.


    On Demand 0-6 Months 6-12 Months Total
    Expected Receivables Due $49.588m + $804.234m +$619.914m = $1,473.736m
    less Expected Deposits for Repayment $27.814m + $435.882m + $208.474m = $672.170m
    equals Net Expected Cash Into Business $21.774m $368.352m $411.440m $801.566m {B}

    If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for debenture holder liquidity. That is the case here.

    Summing up:

    (Total Current Money to Draw On {A})/(Expected Net Current Loans Outstanding {B})
    = $52.496m / $801.556m
    = 6.5% < 10%

    => Fail Short term liquidity test

    Of course there are other ways to satisfy liquidity requirements. Issuing new shares or corporate bonds are two, and Heartland has done both in the past. But sometimes these are not options when market conditions change. This is why it is important to retain some 'headroom' with your existing borrowing arrangements. It appears that from the annual report, there is no indication there is enough.

    SNOOPY
    Last edited by Snoopy; 01-10-2019 at 09:17 AM.
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  5. #11465
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    Default Heartland ABCP Trust 1: the sudden decline

    Quote Originally Posted by Snoopy View Post
    A web search uncovered some information about ABCP trust financials.

    From: http://www.thaipr.net/finance/718556

    "Heartland ABCP Trust 1 is a single-seller, ABCP program sponsored by the New Zealand-based Heartland Bank Ltd. The ABCP is backed by hire purchase agreements, finance leases, and loans secured by motor vehicles and equipment and originated by MARAC, a division of Heartland Bank Ltd."

    "We are affirming our 'A-1+ (sf)' rating on the ABCP issued by New Zealand Permanent Trustees Ltd. as trustee of Heartland ABCP Trust 1 after a restructure of the trust."

    This comment was attached to the top of what looks like an Oz market news release (my italics):

    ------

    "MELBOURNE (S&P Global Ratings) Aug. 16, 2016--S&P Global Ratings today said it has affirmed its 'A-1+ (sf)' rating on the asset-backed commercial paper (ABCP) issued by New Zealand Permanent Trustees Ltd. as trustee of the Heartland ABCP Trust 1. The rating affirmation follows a restructure of the trust."

    That is interesting. "Heartland ABCP Trust 1" now has a higher credit rating than Heartland Bank!

    "Heartland ABCP Trust 1 is a single-seller, ABCP program sponsored by the New Zealand-based Heartland Bank Ltd. (Heartland). The ABCP is backed by hire purchase agreements, finance leases, and loans secured by motor vehicles and equipment and originated by MARAC, a division of Heartland Bank Ltd."

    "The restructuring of the Trust involved the replacement of Heartland as Trust Manager with AMAL New Zealand Ltd. (with certain functions delegated to Heartland) and a change in the beneficiary of the Trust, with the intention of ensuring that the Trust would not be considered an associated person of Heartland."

    -----

    Now I am more confused than ever. If "Heartland ABCP Trust 1" is no longer considered "an associated person of Heartland" (Note HY2017 is the first reporting period after the "Heartland ABCP Trust 1" restructuring), why are the

    "Undrawn committed bank facilities of $49.3 million are available to be drawn down on demand."

    for Heartland ABCP Trust 1, still part of Heartland's accounts?
    To answer my own question first.

    Heartland ABCP Trust 1, are still part of Heartland's accounts (despite Heartland ABCP Trust 1 being independent) , because there must be some guarantee that I don't remember ever reading about (has it ever been disclosed?) that means "Heartland Bank" must share a significant part of any shortfall should the independent 'Heartland ABCP Trust 1' ever get into trouble. Thus even though the 'Heartland ABCP Trust 1' has been sold, it cannot be deconsolidated from Heartland bank.

    I am looking at the 'Heartland ABCP Trust 1' again because it is one of those securitized loan vehicles that Heartland (and maybe not co-incidentally Turners) are very keen about. Heartland seem keen to roll up their Australian Reverse Mortgage loans into such structures. If things go well this means higher profits for Heartland, offset by a higher risk for 'Heartland Group' if things don't go so well. I for one will be very interested to see any Australian wholesale funding vehicle prospectus for funding Aussie RELs, because those might 'at last' reveal what kind of downside risk 'Heartland Group' could face. Yet back in New Zealand the 'Heartland ABCP Trust 1' vehicle used for packaging up and on selling loans to third parties ( i.e. creating securitized loans) seems to be winding down.

    Heartland ABCP Trust 1 (facility available) CBS Warehouse A Trust (facility available) Total Facility Available Total Facility Drawn Total Facility Headroom Remaining
    FY2013 $400m $100m $500m $259m $241m
    FY2014 $400m $400m $229m $171m
    FY2015 $350m $350m $259m $91m
    FY2016 $350m $350m $284m $66m
    FY2017 $300m $300m $214m $86m
    FY2018 $100m $100m $52m $48m

    Of particular note is the very sharp decline as at EOFY2018:

    1/ In the size of the facility drawn.
    2/AND the size of the facility available.

    Now why would Heartland be reducing their securitized loans in New Zealand, while at the same time telling shareholders this is their preferred method of funding loans in Australia? Sorry to keep asking the awkward questions!

    SNOOPY
    Last edited by Snoopy; 23-09-2018 at 01:59 PM.
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  6. #11466
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    Default 'Shortage of Capital' FY2018 6 year Perspective

    Quote Originally Posted by Snoopy View Post

    Winner has looked at what Heartland has asked of their funding stakeholders over the last year. It must be time to update the Heartland hunger for 'capital flow' table for the last five years:

    Financial Year Capital Notes Issued during FY New Shares Issued during FY Total Shares on the Books EOFY Net Money Raised During FY (excl. Capital Notes) Dividends Paid ROE
    2013 0 m 0 m 388.704m $0m $13.951m 7.2%
    2014 0 m 75,562 m 463.266m $64.774m $19.930m 8.0%
    2015 0 m 6,624 m 469.980m $9.163m $30.188m 9.9%
    2016 0 m 6,579 m 476.469m $6.798m $37.690m 10.7%
    2017 $22.000m 40.215m 516.684m $50.991m $41.977m 10.6%
    Total Cash Raised $22.000m $131.726m
    Total Cash Returned $143.736m

    Notes

    1/ The Australian 2017 'Subordinated Unsecured Capital Notes' issue for $A20m, which at $NZ1= =$A0.909c is equivalent to $NZ22m, was confirmed on April 7th 2017, and therefore issued in FY2017.
    2/ ROE figures calculated using normalised earnings based on equity on the books at the end of the financial year.

    If you add up the amount of capital that 'funding stakeholders' (bondholders and shareholders) have put into the business over the last five years, it exceeds the total dividend flow that Heartland has paid out over that same time period by $10m. Note that the five year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place.

    Winner says that Heartland should pay out less of their profit as dividends, and so reduce their need to raise new capital at the same time. But as this table shows, Heartland have been quite adept at raising new capital to the extent that all of the capital paid out as dividends (and $10m more) over the last five years has now been 'reclaimed'.

    Heartland management has been quite clever at pandering to the dividend hounds. Probably there are several holders of Heartland today who would not invest in Heartland if there was no dividend on offer, Some of the generous dividend is reclaimed immediately via the DRP. The rest is taken back later (not necessarily from the same individuals it was paid to) via share cash issues and bond issues. The net effect is that in the five years ended June 30th 2017 Heartland has paid out a net nothing. Yes the underlying business base has grown over that time, even if no net cash has been generated. So what we have here is a share with 'ponzi type' characteristics. As long as there are confident funding stakeholders willing to put up more cash, the Heartland business will continue to grow, But as soon as Heartland loses the confidence of its funding stakeholders, the cash needed to expand the business will dry up and growth will stop. And we all know what would happen to the share price if that were to happen. This is the primary reason I don't invest in Heartland. A great business will generate lots of cash. Heartland generates none.
    Time to update the Heartland hunger for 'capital flow' table for the last six years:

    Financial Year Capital Notes Issued during FY New Shares Issued during FY Total Shares on the Books EOFY Net Money Raised During FY (excl. Capital Notes) Dividends Paid ROE
    2013 0 m 0 m 388.704m $0m $13.951m 7.2%
    2014 0 m 75,562 m 463.266m $64.774m $19.930m 8.0%
    2015 0 m 6,624 m 469.980m $9.163m $30.188m 9.9%
    2016 0 m 6,579 m 476.469m $6.798m $37.690m 10.7%
    2017 $22.000m 40.215m 516.684m $50.991m $41.977m 10.4%
    2018 $150.000m 43.463m 560.147m $71.726m $47.895m 9.6%
    Total Cash Raised $172.000m $203.452m
    Total Cash Returned $191.631m

    Notes

    1/ The Australian 2017 'Subordinated Unsecured Capital Notes' issue for $A20m, which at $NZ1= =$A0.909c is equivalent to $NZ22m, was confirmed on April 7th 2017, and therefore issued in FY2017.
    2/ ROE figures calculated using normalised earnings based on equity on the books at the end of the financial year.

    If you add up the amount of capital that 'funding stakeholders' (bondholders and shareholders) have put into the business over the last five years, it exceeds the total dividend flow that Heartland has paid out over that same time period by $190m. Note that the six year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place.

    Winner commented on viewing the HBL AGM broadcast:

    "That shareholder who asked why his dividend had not increased this year got short changed in the answer he got."

    "We are growth mode and we’re holding more back for growth was the response in a rather gruff tone ....so there you stupid shareholder."

    I would pose the follow up question: If you have paid out a 'net nothing', is it even possible to hold more earnings back?

    The table shows, Heartland have been quite adept at raising new capital to the extent that all of the capital paid out as dividends (and $12m more) over the last six years has now been 'reclaimed'. And that figure does not include the money raised as capital notes!

    Heartland management has been quite clever at pandering to the dividend hounds. Probably there are several holders of Heartland today who would not invest in Heartland if there was no dividend on offer, Some of the generous dividend is reclaimed immediately via the DRP. The rest is taken back later (not necessarily from the same individuals it was paid to) via share cash issues and bond issues. The net effect is that in the six years ended June 30th 2018, Heartland has paid out a net nothing. Yes the underlying business base has grown over that time, even if no net cash has been generated. Does this matter? As long as there are confident funding stakeholders willing to put up more cash, the Heartland business will continue to grow, But as soon as Heartland loses the confidence of its funding stakeholders, the cash needed to expand the business will dry up and growth will stop. And we all know what would happen to the share price if that were to happen. This is the primary reason I don't invest in Heartland. A great business will generate lots of cash. Heartland (still) generates none.

    SNOOPY
    Last edited by Snoopy; 09-10-2019 at 08:11 PM.
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  7. #11467
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    Snoops

    I would contend that Bonds/Notes are just another form of borrowing, debt rather than ‘capital’. As such shouldn’t form part of your reasoning

    I would also contend that as 2014 capital raise was to fund Seniors acquisition and shouldn’t be considered in this discussion (creates your $40m more)

    What would you conclude re shareholder capital raised and dividends paid if you started from 2015 or even 2016
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    Quote Originally Posted by winner69 View Post
    Snoops

    I would contend that Bonds/Notes are just another form of borrowing, debt rather than ‘capital’. As such shouldn’t form part of your reasoning
    I put the bonds in the table because they are an alternative fund raising mechanism to shares to raise funds from public stakeholders. However, they aren't central to the point I was making. Even if you leave all the bond money raised out of it, Heartland still hasn't generated any cash.

    I would also contend that as 2014 capital raise was to fund Seniors acquisition and shouldn’t be considered in this discussion (creates your $40m more)
    The purpose of my exercise was to look at how much cash has been generated by Heartland, excluding the cash injection at the time of Heartland's formation. I agree that if you leave out the capital created as part of the Seniors acquisition, that might turn the near $20m cash deficit into a near $20m cash surplus over the study period. But I don't agree with the premise for doing such a thing.

    Seniors was acquired and around $40m of Heartland share capital was created as part of the acquisition process. There is no denying this did happen, and I can't see the attraction of looking at the Heartland history assuming no cash was created for buying Seniors. I also suspect that because the REL business has continued to grow, it is consuming more cash than it creates for Heartland. That isn't necessarily a problem if there are other arms of the Heartland business that do generate cash to cover the shortfall. But it does seem that this isn't happening.

    What would you conclude re shareholder capital raised and dividends paid if you started from 2015 or even 2016
    Financial Year Capital Notes Issued during FY New Shares Issued during FY Total Shares on the Books EOFY Net Money Raised During FY (excl. Capital Notes) Dividends Paid ROE
    2015 0 m 6,624 m 469.980m $9.163m $30.188m 9.9%
    2016 0 m 6,579 m 476.469m $6.798m $37.690m 10.7%
    2017 $22.000m 40.215m 516.684m $50.991m $41.977m 10.4%
    2018 $150.000m 43.463m 560.147m $71.726m $47.895m 9.6%
    Total Cash Raised $172.000m $138.678m
    Total Cash Returned $157.750m

    Around $20m of cash generated.

    Note: ROE figures based on normalised earnings and shareholder equity at the end of the financial year

    SNOOPY
    Last edited by Snoopy; 25-09-2018 at 10:00 PM.
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  9. #11469
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    OK Snoops, I think I misunderstood you earlier, or at least what you meant by ‘cash generated’

    So last 4 years Heartland have got $139m cash from shareholders and given $158m to shareholders as dividends — yes?

    Somebody did ask me during one of raises why are they asking for cash when they are just going to give it back to me in a months time. I replied yep doesn’t seem to make sense does it eh?

    Suppose Heartland know what they are doing
    Last edited by winner69; 25-09-2018 at 01:22 AM.
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    Quote Originally Posted by winner69 View Post
    OK Snoops, I think I misunderstood you earlier, or at least what you meant by ‘cash generated’

    So last 4 years Heartland have got $139m cash from shareholders and given $158m to shareholders as dividends — yes?

    Somebody did ask me during one of raises why are they asking for cash when they are just going to give it back to me in a months time. I replied yep doesn’t seem to make sense does it eh?

    Suppose Heartland know what they are doing
    I think Heartland have been quite clever in that their business model meets the needs of two types of shareholders.

    1/ Dividend Hounds: These are catered for by offering a decent dividend yield, well above what those shareholders would get if they took that money and put it in a bank term deposit.

    2/ Growth Hounds: These are catered for by having a DRP that allows shareholders to accumulate shares at a discount to market price in lieu of a cash dividend. This discount then expands with future share price growth, leaving the growth hounds happy.

    Where the 'satisfy everyone' strategy starts to unravel is when the share price stops growing and the 'discounted' shares that the growth hounds receive go underwater. If as a result, shareholders pull out of the DRP, then this means less capital for the company to expand, decreased earnings relative to the lofty forecasts (made assuming more share capital would become available) and more weakness in the share price.

    The REL business is good for profits, but bad for cashflow. Heartland needs a constantly increasing capital base. This is capital that the REL business can't generate from reverse mortgage payment holder interest payments (this interest is capitalised and so not available to Heartland as cashflow until the loan is terminated). Thus REL business growth will stall without access to new supporting capital: either more shares (dilutionary in eps terms) or more wholesale debt funding (which has its own liquidity risks). If the current 'cash generation' (as I put it) from normal operations is poor now, what do you think will happen when Reverse Equity Release Loans make up an even greater proportion of the Heartland's business?

    SNOOPY
    Last edited by Snoopy; 25-09-2018 at 08:00 AM.
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