Published: 21 March 2005
FundSource Research Ltd (David van Schaardenburg) has launched a service to monitor finance company debentures.
Mr van Schaardenburg announced the launch of FinanceWatch today â€“ along with a strong hint that there should be plenty of despair to keep an eye on as the industry goes through the top of its cycle.
The service is designed to help financial advisors make “robust, diligent & defensible debenture investment decisions.”
Mr van Schaardenburg said: “The research comes at a time when finance company investments are likely to once again come under the microscope following the Reserve Bank’s decision to raise the official interest rate to 6.75%. This reiterates FundSource’s view that New Zealand is nearing a peak in the business cycle with tougher economic conditions imminent.”FundSource said the finance company sector had been extremely profitable for most participants in recent years: “The average net profit margin for companies 3 years or older is 15%, with a range of 34.73% down to -4.14%. Interest margins, the difference between what money is sourced & loaned out at, ranges from 29.66% to 3.3%, with an average of 7%.”FinanceWatch found finance companies were generally highly leveraged. Consumer lenders had average equity of 13.8%, but the range was from 32.81% down to just 4.37%.Property lenders, with much larger loans, averaged 9.7% equity and ranged from 18.54% down to 0.90%.Asset quality“Many finance companies, especially those that lend on property, have been found to have concentration (lack of diversity) within their loan book, where a default by a single loan or in a single industry has the potential to expose investors to risk not compensated for.For example, property finance companies’ average single loan size is near 30% of their entire equity, while their largest single loan on average is 171.3% of the entire equity of the company.”Conversely, consumer lenders’ average loan size is typically 1.2% of equity, and their largest exposures average 50% of equity.”Asset/liability management
“A theme that has emerged from our survey is the level of liabilities outstanding in the industry that are not matched by assets. While on average around 30% of liabilities are not matched by assets, companies ranged from some with over 90% of liabilities not matched by assets while others enjoy an excess of assets maturing in the coming year or so over their liabilities.”While any such mismatches may be made up by issue of debentures, the profitability of such strategies will be challenged by any slowdown in the economy.” FinanceWatch research
FundSource said the research by the new FinanceWatch service would consist of individual & specific profiles of the top 30 finance companies by size, where key risk assessment factors are disclosed.
“In addition, FundSource has produced a comprehensive report & guide on the finance company industry, aggregating the findings and providing risk assessment guidance. Finance companies that lend the majority of their loan book (70%) to property are treated separately to consumer & commercial lenders.”The survey included direct contact with the companies, and FundSource said 85% provided non-public data.