Collateral damage continues as finance sector implodes

Times are tough when it is ruled false advertising for one of the country's largest finance companies to say it is big and strong enough to weather any storm.

Perhaps the collapse of a couple of dozen finance companies in two years makes this sort of scepticism inevitable.

But it still comes as a rude shock when Hanover Group is not allowed to say it is "a New Zealand business with the size and strength to withstand any conditions".

Hanover is New Zealand's third-largest privately owned financial services group, with assets of over $1 billion, and is hugely dependent on investor confidence because retail deposits provide more than 90 per cent of its funding.

The Advertising Standards Authority has dismissed a Hanover appeal of its ruling on a TV advert, saying the ad did not observe the high standard of social responsibility required by a financial advertisement.

The authority is perhaps more in step with consumer sentiment than other government bodies, and reflects the heavy loss of confidence in the finance company sector which is imperilling the good, and the bad, if they are reliant on people to keep on investing their money.

The number of finance companies hitting trouble has picked up pace in the last week or so, with first Dominion Finance then St Laurence signalling for help and owing around $500m to investors.

There is a domino effect. The boss of one of those left standing said the publicity around each collapse results in a significant falloff in reinvestment rates. St Laurence said its reinvestment rate fell into the teens from over 60 per cent before March.

It appears four loans not repaid on time were behind problems at Dominion Finance, which is considering a moratorium on repayments to investors after it became concerned about the liquidity of subsidiaries, Dominion Finance Group and North South Finance.

St Laurence, with the bulk of its loans in arrears as property developers had met a near complete dearth of buyers. St Laurence shareholder Dorchester Pacific is caught up in the collateral damage, and the shares of one of the companies it manages, National Property Trust, have plunged to a record low.

Reserve Bank fears about the property market stoking inflation will be receding, as the fallout from collapsing finance companies spreads from debenture-holders to property developers relying on the easy money they can't get from banks.

The rot set in in 2007 with the collapse of Bridgecorp, followed by a clearing out of generally smaller lenders as the effects of a global credit crisis spread.

But the current situation, with lending drying up across the board, is unprecedented, says the head of the Contractors Federation.

"My impression is that the property development market, the property development process, has stopped entirely," said federation chief executive Richard Michael.

"Everything from things like (Five Mile in Queenstown) at the very top end to guys doing a two- or three-section subdivision somewhere up in the hills in Wellington."

Federation members contract to put in infrastructure to subdivisions, everything bar the houses, with property developments making up about 10 per cent of their total work.

Property developers would often sell some sections off the plans, and on the strength of that borrow money to do the work. Banks are not too interested in property developments, so most of the financing is done short-term through the finance companies, or through other short-term financial outlets.

"In the property development market, the biggest influence has been that total turning off the tap of any kind of short-term finance, and the property market just can't work without that," Mr Michael says, noting that most developments are very sound.

"The people who've turned the tap off are the people five or six steps up the ladder from companies like Dominion Finance, their banker's banker's banker's banker."

While none of them had gone out of business, many contractors were owed substantial sums of money.

"My feeling is that it's going to be pretty short-lived, this downturn, because there's still a lot of capital in the world sloshing around looking for a home," Mr Michael says.

"(Lenders) have been burnt in the subprime market and that's going to take a while to get over, but there's still money looking around for a good place to invest – and the New Zealand market is a good place to invest."

With interest rates going down, a fundamentally sound economy, and pent up demand growing, he expected the housing market could improve by Christmas.

Property developers would take a while longer to bounce back, as they are bearing the brunt and some were likely to go out of business, he said.

But Christmas seems a long way off, with consumers throwing in the towel, a housing market looking for reverse, and the beginning of what economists expect to be a shallow recession.  

- NZPA