Finance co in spotlight over US deal

Sunday Star Times

Finance company Nathans Finance, which has raised $150 million from debenture investors, is being probed by its trustee over the implications of a complex deal in America by its owner, NZX-listed VTL Group. Nathans lends the bulk of its debenture money to VTL, a franchiser of vending machines and related systems.

Its most recent prospectus, for the year to June 2006, shows loans to VTL of $79.6m, all of which was due to be repaid by June 30 this year. The prospectus also notes that Nathans lends significant sums to VTL, and that VTL is "actively seeking to repay these loans by arranging loan facilities in the country of origin".

"If VTL... is unable to repay this debt then... the company is likely to become insolvent itself."

On June 8, VTL announced a change in its accounting balance date, from June 30 to August 31, delaying the publishing of its accounts by two months. Then, in July, VTL announced a deal involving its US operation, implying that it had sold those assets for $US67.5m ($94m).

Nathans' trustee Matthew Lancaster of Perpetual Trust, which is responsible for overseeing Nathans on behalf of debenture holders, said he had sought more information about the transaction.

"We want to understand it, specifically the implications for Nathans, because there is talk of Nathans being involved in some way in the financing of it."

Lancaster said he had been talking to VTL co-founder John Hotchin since the deal was first revealed on July 13. "With there being a $US67m receivable coming in, when they told us about it, we thought it would be a good thing as it would reduce Nathans' exposure. But as the details unfurl, you realise it's not much of a cash deal at all. Because of that, the inquiries are ongoing."

The Sunday Star-Times asked VTL chairman Gary Stevens for an interview to discuss Nathans Finance, but he declined. "I'm not at all happy talking with the Star-Times based on my experience over the last weekend," he said.

On August 5, Star-Times analysis by columnist Jenny Ruth commented that the market's view of VTL's deal was "$US67.5m yeah right".

Since the announcement, VTL's market capitalisation has been about $26m.

The Star-Times also asked to discuss the issue with Nathans Finance chairman Roger Moses. He said: "The chairman of VTL made a decision he didn't want to talk to the Sunday Star-Times in view of their attitude, so really I'm not in a position to say anything.

"I can tell you that the current proposal does not affect Nathans' current business structure."

Moses added: "The Nathans business continues to operate very soundly."

The Star-Times understands that Nathans raises most of its money direct from the public, principally through the use of direct mail. Its debentures currently offer 9.25% for one year.

In its autumn 2007 newsletter, catchlined "security, performance, peace of mind", the company said there was strong support from its investor base, "with strong levels of new funds flows and maturity retentions".

Nathans' accounts show that in each of the past two years, the company's trading activities have generated not enough cash to pay interest and redemptions on existing debentures, so it has required new debenture investment to cover those costs.

Although interest income of $13.3m from its loans to VTL is shown contributing to profit of $4.97m for the year to June 2006, notes reveal this money is a "non-cash item" ie, not available to pay interest on debentures. Nathans' operating cashflow, as a result, was minus $5.8m.

Asked whether Nathans' accounts could portray a situation in which new investors are required to pay out previous investors, Perpetual's Lancaster said: "I understand where you're coming from."

He said VTL shareholders would get further details of the American deal in due course, and had demanded the information "a hell of a lot sooner than later".

In a side deal requiring shareholder approval, Halpern Denny's principals John Halpern and George Denny had agreed to buy out VTL co-founder Mervyn Doolan for $6m, taking their joint stake in VTL to 42.4%. Doolan was selling "for lifestyle reasons".

On Monday that sale fell over, "by mutual agreement", according to the NZX statement.