The $2.7b debt could cost Kiwis

2012 begins with debenture investors in the collapsed finance companies awaiting final news on the fate of some $2.7 billion they are owed by 45 finance companies in moratorium, receivership or liquidation.

That Sunday Star-Times estimate is based on the latest reports from receivers, liquidators and the finance companies surviving in moratorium.

But that number flatters the failed companies, as the Crown's retail deposit guarantee scheme has been responsible for repaying debenture investors some $1.8b, the bulk of that to debentureholders of South Canterbury Finance and, to a lesser extent, Allied Nationwide Finance.

The companies themselves have managed to "repay" somewhere in the region of $750m, either under their own steam during the moratoriums approved by investors or through the actions of liquidators or receivers.

The capital recovery investors have either received or expect to receive runs the full range of nothing for Capital + Merchant to 100% at Beneficial Finance.

So far, according to receivers' reports, the Crown has been paid back just $520m, but that includes the repayment of a separate $175m government advance to pay prior charge holders.

According to the latest reports of the companies the Crown bailed out, taxpayer losses could be anywhere from $695m to $1.5b, or between $157 and $343 for every person in New Zealand.

Of the sums debenture investors are still owed, a large amount looks unlikely to be repaid – somewhere in the range of $2.5b-$2.7b, according to Sunday Star-Times calculations.

Although the sums are large, they also represent only part of the losses delivered by finance companies. Many unsecured investors lost all their money (unsecured note-holders in OPI, for example, lost some $57.5m), while hundreds of millions of dollars in interest has also been forgiven ($12.3m at Property Finance Securities alone, for example) or lost.

Investors in individual companies will be waiting a long time to get a final figure on the loss of their capital.

A tsunami of civil action is threatened, but as civil cases tend to be stayed until criminal cases are concluded, many look likely to have years to run.

Of the 45 finance companies studied, 16 are involved – or have a reasonable likelihood of being involved – in civil litigation to return money to investors, according to their receivers' reports. Notably only one case includes action against a trustee.

Some of the actions, such as that spoken of by the receiver of Nathans Finance, involve suing directors. Others involve suing third parties, such as the receiver of Capital + Merchant who has spoken of taking action against the brokers that sold the company insurance supposed to protect investors from losses.

However, investors should recall the plight of Equiticorp debenture investors, who are still awaiting the outcome of legal action following the 1989 collapse of that company.

RATS' NEST:

Investigations, trials and prosecutions in the finance company sector reveal a sorry saga, in many cases showing:

Loan books of far lower quality than investors were led to believe.

Valuations supplied by finance companies turned out to be woefully wrong.

Insurance policies supposed to cover losses were often worthless.

Related party loans were sometimes obscured.

Prospectuses or investment statements were absent or inaccurate.

IRD pursuing unpaid tax ahead of investors, threatening further investor losses. In one case, security for some loans was described by the receiver as "non-existent".

The refinancing of old, bad loans into new loans, obscuring their distressed nature.

- © Fairfax NZ News