Lombard flags new pressures on finance sector

Sunday Star Times

THE COLLAPSE of Lombard Finance could be a tipping point for the finance sector because it is the first finance company to fail as a direct result of the property downturn.

McDouall Stuart finance sector analyst John Kidd said other failures had been caused by their inability to attract new money from investors.

Lombard ran into trouble because its property developer clients could not repay their loans from the company.

Over the past two years 17 finance companies holding more than $2 billion in investors' funds have gone to the wall.

"Until now, the problems finance companies have run into have been at the funding end," said Kidd.

Debenture flows and roll-over rates had been weak and that was where finance companies had felt the greatest pressure.

"Lombard's announcement is quite interesting because they have referred exclusively to the fact that the quality of their lending book has deteriorated to the point where money coming in won't enable them to cover money going out next month."

Lombard's main area of business is lending to property developers, and chief executive Michael Reeves blamed the property slump for the company's woes.

"In recent months our borrowers have found it increasingly difficult to sell properties and equally difficult to refinance their mortgages and repay their loans to Lombard Finance," Reeves said when he announced the company could not repay its 4400 investors, who are owed around $127 million.

Kidd believes more finance companies could start coming under similar pressure.

"In the last couple of months we've seen the property market soften and a lot of finance companies lend heavily in that space," he said.

"You might see a bit of a compounding effect of the pressures that might be felt from here on in.

"You've got funding pressure and now at debt end of the book you've got lending quality pressure as well. It's another level of stress finance companies are going to be subjected to."

Kidd said a number of finance companies had ridden the property wave for the last 10 years.

Developers involved in commercial property projects or new subdivisions would start to come under pressure and that would flow through to their financiers, he warned.

Those pressures are also likely to affect the returns received by investors in finance companies that have already gone bust.

Lombard's failure capped a week of hell on the finance front with a string of receivers delivering bad news to long-suffering investors.

Receivers for Bridgecorp and Five Star Consumer Finance all reduced their estimated payouts to investors last week, while receivers for Nathans Finance said their payout would take longer than expected.

Bridgecorp's receivers said investors would probably only receive between 16% and 51% of the money they invested, compared with their previous estimate made just three months ago of 19% to 63%.

They laid the blame squarely at the door of the weakening property market.

"A number of the loans relate to properties which were sold during the March 2008 quarter," they said in a letter to investors. "These properties realised significantly less than earlier estimates, due to the weaker property market and as a result, loan recoveries were lower than anticipated in December."

 PILING ON THE AGONY

Investors hoping to salvage some of their money from finance companies which have fallen over received an avalanche of grim news about their likely payouts last week:

Bridgecorp's receivers reduced their estimate of the amount investors would be likely to receive to between 16% and 51% of the amount originally invested, down from their December estimate of 19% to 63%. Bridgecorp owes $458.7m.

Five Star Consumer Finance's receivers reduced their estimated payout to investors to 25%, compared with their earlier estimate of 40%. The company owes $51m.

Nathans Finance receivers said any payout to investors would take longer than expected. The company owes $166m.

Capital + Merchant's receivers advised investors they would probably get only 59% of the money they originally invested, and that conditional on specfic events occurring. The company owes $165m.

Lombard Finance said it would be unable make interest and capital repayments as they fell due. It owes investors $127m. Kapiti Coast investment adviser Chris Lee estimated that unsecured investors would get nothing back and investors in Lombard's secured debentures may only receive 30% of the amount originally invested.

MFS Pacific Finance had no news for its investors last week after earlier promises that it would have a moratorium proposal to them by late last month. It suspended interest and capital repayments on $290m of investors' funds in early February.