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Still chance of return for Equitable’s Classic investors

Published 28 November 2010

Investors in $12 million of Equitable Mortgages Ltd Classic debentures will miss out on the Crown guarantee following the decision on Friday to put the company into receivership, but may still get their money back.

The other $179 million of debentures is covered by the Crown extended retail deposit guarantee scheme. Equitable has about 6000 depositors.

Reinvestment in the Spencer family finance company dropped to the 53-56% range in July-August before climbing back above 60% in August. That, combined with the risk that the Government would terminate the guarantee scheme at the end of next year, raised concern at the company that funds would stop flowing in. Meanwhile, past due assets & impaired loans reached 57.3% of the portfolio at 30 September.

In its 2 November prospectus, Equitable said it had decided to exit the life insurance sector and had stopped offering those bonds. From 1 November, Equitable Mortgages became the only investor in the Equitable Property Mortgage Fund and on 2 November, the fund was terminated and Equitable Mortgages acquired the portfolio of loans. In addition, parent company Equitable Group injected $10.5 million of capital. While that was going on, the prospectus said Equitable Mortgages would develop a PIE (portfolio investment entity) fund. The prospectus said the property mortgage fund had $108.9 million of past due assets & impaired loans at 30 September, representing 57.3% of its $190 million loan book. That was up from $103.2 million (53% of $195 million) in June.

The reinvestment rate dropped from 63.2% in June to 55.6% in July & 53.3% in August before rising to 62.2% in September. Because of the risk the Crown might withdraw its guarantees – and with a large number of debentures due to expire at the end of 2011 – Equitable Mortgages decided to entice investors back in with preferential rates of return, but with longer fixed terms and without the benefit of the Government guarantee.

Chief executive Peter Thomas said the Equitable Group had been winding its affairs down for 3 years, roughly halving its loan exposure, and the board had decided there was no longer a viable business. However, while the company preferred an orderly scaling down of its activities, under the regulatory regime a breach of the guarantee tips a deposit-taker into receivership. He said the group had achieved its simplification but could see perhaps another 3-5 years of no or low growth.

And then came several factors between filing of the prospectus and Friday’s board meeting, which influenced the company to pull the plug.

“We’d been on a simplification project that brought all the mortgages into Equitable Mortgages (making it sole owner in the group of the whole book) and we’d been grappling with that question (of the market’s failure to pick up). We’d just been slowly keeping abreast of financial indicators but it’s like, ‘What composes a pile of wheat?’

“The big thing was the financial stability report from the Reserve Bank on 9 November. Then came the money & credit aggregate statistics (out on 28 October), which showed continuing no credit growth, and NZIER’s quarterly survey of business opinion. Plus we had our own anecdotal evidence. We have a board meeting every 2 months and that meeting was on Friday.”

Equitable Mortgages is owned by Equitable Group Ltd, part of the business empire of the family of Peter Spencer, who died 2 years ago. Mr Spencer’s brother John has extensive Hauraki Gulf island landholdings, including Stony Batter on Waiheke Island, and a large holding at Belmont on the North Shore. The family sold the Caxton Paper business to Carter Holt Harvey Ltd in 1988 but continued to develop extensive business interests. One family member – Peter’s son Chris based in Sydney – is on the Equitable board as managing director. Chairman is Arthur Young, senior partner at law firm Chapman Tripp, deputy chairman is John Wadams, who’s chairman at accountancy firm Staples Rodway Ltd. The other 3 directors are Ross Aitken, Warkworth; Joe Ferraby, Marlborough; & David Forgie, Herne Bay.

Mr Thomas understands Rod Pardington at Deloitte Ltd is to be Equitable Mortgages’ receiver, but the appointment still has to be confirmed. The return to non-guaranteed investors depended on how the receivership was carried out – a quick wind-down or slower realisation over a period of years.

Most of the Equitable Mortgages portfolio – $179 million out of $191 million of debentures – is covered by the Government deposit guarantee scheme. “We assume all of the $179 million is covered by the guarantee but we don’t know if they’re going to pay the whole $179 million as they did with South Canterbury Finance, or go through line by line.

“The $12 million not under the guarantee scheme ranks equally with the guaranteed debentures, so they are equally entitled to the assets of the company.”

 

Mr Thomas said the company had $32 míllion of cash on deposit, $188 million of first mortgages and $31 million of capital, against $191 million of liabilities to debentureholders. “The carrying value of mortgages does not allow for impairment since 31 March, nor for further impairment which may arise as a result of the scaling down of activities. There is no bank or other indebtedness taking priority over debentureholder indebtedness. Equitable Mortgages does not have any loans to related parties.”

Treasury’s deputy secretary of financial operations, Phil Combes, said on Friday information gathering should take about 8 weeks, given the Christmas & New Year holidays, and ask depositors to be patient. Depositors can be assured that the Crown stands behind its guarantee," Mr Combes said.

Related story:

On the move, November 2010, Thomas heads from Equitable to BNZ Partners

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Attribution: Phone interview, company release, Treasury release, prospectus, Equitable website, story written by Bob Dey for the Bob Dey Property Report.

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