JENNY KEOWN
Heartland's chief executive Jeff Greenslade oozes confidence, and in his pin-stripe suit, is every bit the conservative finance man.
A bottle of "Heartland" Shiraz sits in his Auckland office. Is the finance company diversifying and producing its own labelled wine given the doldrums in the sector? No, he laughs, it was a present.
Greenslade's confidence and affable nature suits his role at Heartland, an amalgamated entity of the Canterbury Building Society, Marac and Southern Cross Building Society to form New Zealand's largest finance company.
The veteran banking executive is, after all, heading one of the few survivors of the catastrophic and heart-wrenching collapse of the finance company sector that saw thousands of ordinary Mum and Dad investors lose hundreds of millions of dollars.
Naturally, the investing public are now more wary, unwilling to take the same risks for potentially greater returns they previously signed up for. The remaining finance companies have had to adapt to the new environment.
In 2006 at the height of economic boom there were 65 finance companies. This fell to 15 by 2010, according to the Financial Services Federation, and more have fallen by the wayside since then.
Only three major finance companies still take investments from the public, and are known as non-bank deposit takers (NBDT): Heartland, ANZ-backed UDC Finance and Fisher & Paykel Finance.
?The Big Three
The collapses and ensuing fall-out with several high-profile companies and their directors accused of misleading investors means the sector has lost much of its former integrity and allure.
To understand the scale of the devastation, it's worth examining what went wrong.
According to KPMG's Financial Institutions Performance Survey, last year was the first time the non-bank finance sector could look forward with a degree of clarity as to what was required to operate a sustainable business.
Between 2007 and 2010 was a period of fundamental change, prompted by the collapse of property finance, domestic recession and flow-on effects of the global financial crisis, causing a number of finance companies to fail and the Government guarantee scheme to be called on.
KPMG acting head of financial services John Kensington said the trouble began with small finance firms that offered returns of between 8 to 10 per cent to a public eager to replace low interest returns at the bank.
These companies attracted a major influx of money, in some cases many millions of dollars.
Many lent that money on property predominantly, a market the directors often didn't understand as well as they thought they did.?
New Zealand had a property slump, developments went into receivership leaving most of the finance companies as unsecured creditors.
Lurking in the background was the dodgier aspects of the industry - a plethora of related-party lending and outright lies told to investors.
Regulators are still investigating but a number of former finance company executives have been taken to court or still face charges for a range of criminal and securities charges, including allegations of fraud and misleading investors.
How did the last of the big finance companies survive the tumult and what is their long-term future?
For a start, UDC and Fisher & Paykel Finance have never invested in property.
UDC is involved in vehicle, plants and equipment and F&P Finance only provides revolving credit through retail channels to consumers.
The companies have a more stable business model, says Kensington, a long-serving retail deposit client base, and on the flip-side, long-serving loan customers.
New regulations have created more certainty in the sector as finance companies must now tick a series of boxes including creating risk management profiles, getting annual credit ratings, and having a certain amount of capital on their books.
Kensington says companies have to pay between $500,000 to $1 million annually to comply with the regulation.
In order to afford these costs, firms must have an asset base of about $100m which knocks out a lot of the cowboys.
However the sector shakeout has left holes in providing funding, particularly for small to medium-sized businesses.
These holes include property, car loans between $5,000 to $10,000, and equipment, says Kensington.
Who will fill these gaps is unclear, he says.
While the major collapses and consolidation has reached an end, the issuing of debentures to the investing public to raise money for loans is expected to further drop off because of the dual impact of lost investor confidence and tougher regulation.
In the future, finance companies will have to look wider for their funding sources including bank drawn facilities and bonds, Kensington says.
Doubts remain in banking circles about the finance companies' ability to access capital and to make healthy profits in what is now a highly-regulated sector.
"I can't see them surviving," said a senior banking executive with experience in finance firms, who declined to be named.
The last tranche of the Crown Retail Deposit Guarantee Scheme is due to expire in December this year, and he expects several firms to liquidate their assets, and pay out debenture-holders.
But Financial Services Federation executive director Kirk Hope disagrees finance firms will have trouble accessing capital.
"They may stop issuing debt securities to the public and use wholesale funding - say from offshore securities. There is no lack of off-shore funding, our interest rates are attractive in terms of what they can get for their money."
Hope is eager to point out the bleedingly obvious - that the general impression of finance companies has been tainted by recent events.?
In the decade from the late 1990s through to the onset of the GFC in 2008 most finance companies enjoyed unprecedented growth but he says prior to that they had been fairly stable.
"We are just going back to a period of normality.''
That's fairly hopeful given there's still some cleaning up of the mess to go first.
The Financial Markets Authority is aiming to complete its remaining 16 investigations into collapsed finance companies within the next two years.
Chief executive Sean Hughes is keen to clear up the "stench and cloud" hanging over the sector once and for all.
"For the directors and managers of the good finance companies, who are meeting legislative requirements, it's equally important that their reputation isn't sullied or their reputation dragged by those that have gone before them."
They've still got a way to go with out of pocket investors for whom the charges laid against malfeasant directors has been cold comfort.
- BusinessDay.co.nz
Source: http://www.stuff.co.nz/business/money/5638355/The-finance-company-shakedown
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