Market News 29 January 2007

Any regular users of this site will be aware that several mainstream finance companies in New Zealand will need to "reposition" or "restructure" in 2007.

When these changes occur, do not expect many in the media to explain these changes with even a whiff of understanding.

Changes are occurring now.

Just how poorly the media enquire into these changes was illustrated last week by various articles about Hanover and Bridgecorp.

The media last week told us that Hanover was being pestered to sell some of its properties at very high prices. The requests, we were asked to believe, were unsolicited and at such high prices that Hanover would have to consider selling.

The media also told us that Hanover would offer to sell Nationwide Finance, its subsidiary which the media said made more than $4m after tax last year and was worth $50m to a competitor.

The media also said that Hanover's rookie chairman Grey Muir, whose exit from The Warehouse where he was CEO has never been publicly explained, was very proud of the Hanover Group, on whose board he has sat for two years.

Before examining this let us look at what the media did not say.

It did not say that last year the media once filled its front page saying UDC would buy Hanover for a price that valued Hanover at one billion dollars (three times the value of South Canterbury Finance). No such transaction was ever contemplated, let alone occurred.

It did not say that new tax changes will make the formation of listed public trusts the best game in town this year. Witness the soaring share prices of property trusts.

It did not say that Hanover is believed to be shedding more than 50 staff to cut costs, and is already actively doing this, a prudent act I believe.

It did not say that Hanover may have reversed its inexplicable decision to offer a funds management service, and that its general manager of this division is now on "gardening leave", and an ex-employee.

It did not say that Hanover's owner Eric Watson set fire to much of his wealth with his bizarre effort to transform Britain's Power House Group, now being liquidated.

Nor did it say that Nationwide's profit last year was boosted by a group company's purchase of a multi-million bad debt, so that Nationwide's profit was unaffected, arguably over-stated at $4 million.

Nor did it say that Hanover's CEO Paul Cropp left Hanover last year, far from gruntled, if not disgruntled.

It is possible that all these matters are unrelated to any sale of assets. Just possible.

My own guess is that Hanover remains a company with access to some shareholder capital, is still profitable, but is facing large redemptions because of its high level of 6m - 18m money, huge sums maturing in 2007, when renewal rates may be mediocre.

My conclusion is that Hanover should beef up its board skills, beef up its management team, focus on its lending/funding maturity schedules, prepare for more bad debts, and substantially improve its trust deed, to boost the confidence of the broking industry, which is increasingly fearful of inevitable litigation should recommended companies ever stumble, or even lose their gait.

Hanover might conclude that it should close down United Finance - its yellow brand - and focus solely on Hanover Finance, selling Nationwide and FAI for whatever it can get. I have complete faith that Hanover would survive should markets go pear-shaped in the next year, but I do not believe third form spin would help.

Disclosure: My company and family have about 250k in Hanover group investments and have no intention of seeking to cash these up prematurely.

I continue to recommend Hanover investors limit their term to a maximum of 18 months. Hanover's owners, Mark Hotchin and Eric Watson, are probably in a true sense, worth between them more than $100 million, and thus are capable of seeing Hanover through any bad year.

Hanover is forecasting a record profit this year, according to Muir.

No spin has accompanied Marac's recent effort to bolster its ability to compete with UDC and South Canterbury Finance, indeed no announcement has yet been made about a new company which Marac is busily forming, and may announce imminently, perhaps named Ascend Finance.

Ascend might compete in a different market, given that Marac is gradually moving away from its original car lending focus, which is unfashionable, though still profitable.

Marac's strength is its shareholder, Pyne Gould Corporation, which is perceived to be solid, South Island aristocracy, a perception that is somewhat romantic but still has some merit, and is probably the reason Marac can rely so heavily on bank facilities.

Formed from various car lenders and a property syndicator, Marac has pursued a banker's profile, by chasing lower-risk, lower-margin loans to offset the car lending profile and it has succeeded, achieving the same Standard & Poor credit-rating awarded to the universally acclaimed South Canterbury Finance, a remarkable and commendable achievement.

Marac last year is believed to have tried very hard to merge with SCF, or buy it, but has been spurned so far, not necessarily for ever.

So now it has hired a few former SCF managers with car lending experience to form Ascend, an unfortunate name similar to Ascent Corporation, once used by the former tennis player Robert Clarke, when he listed an awful bag of dusters in the 1980s, which failed almost before the ink dried on its stationery. Clarke now lives in Asia.

Marac will be successful, will survive bad years, and will no doubt one day be approved as an Authorised Deposit Taker by the Reserve Bank, as will UDC, SCF, and very likely Strategic and St Laurence, if those who decide these things are paying attention to market realities. Its status might be further elevated if Marac carved off its car lending and property lending into another company.

The media mentioned none of this but it did focus on Bridgecorp, reporting that it had called in a receiver for some loans to some Napier and Queenstown properties, which had failed to meet their obligations to Bridgecorp and other lenders.

The media also reported that Bridgecorp had sold $45m of Fijian loans, without recourse in the event of a Fijian upheaval like a military coup.

Unbelievably the media reported that the buyer of these higher-risk loans was the local Auckland accounting firm that Bridgecorp engaged as an "independent valuer" of its shares in Dorchester Pacific Corporation, Howarth Porter Wigglesworth.

The media did not ask why a small accounting firm would buy $45m of loans, how it funded such an enormous deal, or whether it was actually simply acting as a nominee for some other buyer, in which case, the real buyer's name might have been relevant.

Why the media failed to ask such obvious questions was a mystery.

But the effect of these articles again raises the question: when will Bridegcorp adopt a no-surprises philosophy and inform their own investors about these matters, before they appear in the media, albeit appearing incompletely and inadequately?

Bridgecorp has an urgent need to be more transparent to its existing and potential investors.

One major error made by the media was the report that Bridgecorp had lent money to hotels in Napier and Queenstown, with securities that ranked ahead of other loans from Strategic Finance.

Strategic confirms it has never lent money to anyone or any company over which Bridgecorp had higher-ranking securities, and that an apology will be printed soon by the offending media.

All of this had left some obvious questions.

Is Marac taking on Face Finance, owned by SCF, and maybe UDC, offering profit-sharing to its key staff, not available to other lending staff or is Ascend to take up higher-margin property lending, or split car lending from the "bank"?

Why would a local accounting firm "buy" $45m of Fijian loans without total recourse should the loans be hard to collect because of military coups?

My imagination cannot supply a defensible solution to this conundrum. Why do Labradors chase seagulls?

To our investors please note the following:-

1 The Albany City Property Fund, with a further capital sum put in by an Australian institution, is now a very attractive offer (10.5% for 3 years), whereas before it was simply attractive. The Aussie interest and money is significant.

2 Infratil's offer is still open. (9% - perpetual, annual reset rate) is and always was, an attractive fixed interest offer.

3 St Laurence Capital Note (10.0% for 3 years and 10.25% for 4 years) are still available. I guess this issue will close within a fortnight.

4 Strategic 8.6% for 20months; NZ Finance 9.0% for 2 years; St Laurence 9.0% for 3 years; Mascot 9.0% for 2 years; North South Finance 9.25% for 3 years; South Canterbury Finance 8.25% for 5 years. All of these are fair return for risk.

5 NZ Oil & Gas succeeded in raising its goal of $25 million, aided by a special placement.

Denis, Ed, Paddy, Linda and myself are at work all week.

Our only functional phone number is now 29 61023, the number we will retain with multi-lines, when we move to our new offices at Paraparaumu Beach in late March/early April. All other phone callers will hear Ed's cheerful voice telling them of this.

Chris Lee Managing Director Projects Resources Ltd

Market News 22 January 2007

When St Laurence offered a higher-risk property development fund last year, with the prospect of a high (13.5%) income return and a possible capital gain, the response of the public may have surprised St Laurence.

The issue was over-subscribed in just a few weeks, probably reflecting the reputation gap St Laurence has established between itself and other property development competitors.

Undeniably St Laurence has done several things really well, the most notable being its honest description of risk, and its willingness to reward risk with a higher share of the achieved returns.

Perhaps this commitment to accuracy, when describing risk, resulted from its fleeting relationship in the early 1990s with a selling group which too often was motivated by selling, rather than building trust through accuracy.

Whatever the reason, St Laurence's risk investors, including virtually everyone who invested in its many property syndications, have done well.

It is too early to be sure that the 2006 St Laurence 5-year property development fund will be another winner but it has started well.

It made a small profit last year after paying 13.5 per cent interest and it has an investment in Albany and another in Queensland, which appear to be successful.

Its just released annual report says there are approved projects to commence this year and St Laurence says it is "positive" about the outlook.

Obviously any fund that pays 13.5 per cent and seeks to share additional gains has more than normal risk.

But if one is to punt on this sort of fund, it seems to me that one should ensure the people managing the risk are utterly honest, demonstrably competent, and the sort of people who want to build a great long-term company, not the sort of people chasing a fast buck so they can slink off to retirement anonymously.

Another excellent company offering investors something interesting is Strategic Finance, whose shares are now owned by Allco in Australia, a very substantial company.

Allco has created a public listed company Allco Hit, which will own Strategic Finance and be available to New Zealand investors though is Australian listing.

We selected Strategic, as we did St Laurence and South Canterbury Finance, many years ago, largely because of the excellence of their people, their long term personal commitment and their access to genuine capital.

Strategic, as is the case with the other two, have certainly justified that confidence.

These three companies have somewhat more than 50 per cent of our clients' debenture investments, and all now have superior credit ratings assessed by others as well as our own comparative rating system.

All three remain useable for terms up to five years whereas other good companies, such as NZ Finance, Mascot and North South, should be used for a maximum term of three years, while others we use are usually restricted to two years.

Another property fund we have used - Albany City Property Fund - remains open and is useable, but is quite different from the St Laurence Property Development Fund.

Albany City's fund, which has just enjoyed a new significant capital increase from a major Australian fund, offers 10.5 per cent with a secured bond, backed additionally by real capital.

The bond is secured by a mortgage which though second ranking takes secured debt levels to no more than two thirds of the value of the land.

The land in Albany is adjacent to what will be New Zealand's biggest shopping centre, built by Westfield. The Albany City Fund intends to build apartments, offices and other facilities to complement the shopping centre.

Given the unrelenting growth of Auckland, with the wealth going towards Albany and the more price-conscious heading towards South Auckland, it seems to me this new fund offering high rates, security, but no capital gain, is a fair bet for those wanting income.

Of interest this week will be news of the outcome of the NZ Oil & Gas rights issue.

My guess is that those who applied for some of the shares not taken up by those with the rights for the shares, will get at least some extra shares.

My next guess is that NZOG's share price is likely to rise if the amount raised achieves the target, enabling NZO to ensure it will have access to the bank facilities it, and indirectly Pike River, will need for their various projects.

Pike River's issue, next Month, will be largely reserved for NZOG shareholders, and the clients of the organising broker, which, one assumes, will be First NZ Capital.

If it is not FNZC, this may imply that there have been problems and will not be good news for prospective shareholders.

New Zealand really has painfully little broker expertise in mining stocks, by international standards none at all.

Given the amount of cynicism about NZOG and Pike River, the coal float needs the endorsement of a real broking firm.

One obvious strategy that has been done well has been to pay for various journalists to visit the Pike River site and get some publicity on the project. Expect this to continue for the next month.

If NZOG's two production wells, Tui and Kupe, are both built to budget and proceed smoothly, and if Pike River indeed is producing coal profitably by next year, there will be income streams and presumably profits at levels that will allow dividends for NZOG - Pike River.

I guess you either believe in this, or you do not!

This week Denis, Ed, Paddy, Linda and I will all be available.

Ed, my second son, is now a permanent staff member I am delighted to say, and will be managing our move in March/April to our new office at Paraparaumu Beach. He has been a traveller in the last two years but at 24 will now settle, if there is such a word, for a time in Wellington.

I am delighted to have him with us, and believe clients will find him helpful and fun, in his role helping Denis and me, and in administration.

Chris Lee Managing Director Projects Resources Ltd

Market News 15 January 2007

At a time when important issues like property prices, debt levels, and interest rate trends are all worrying serious analysts - problems akin to a build-up of cloud - our skies do not need to be further darkened.

So both Lombard and Bridgecorp would be taking away some worries by coming out this week with some strong assurances on some specific issues.

Lombard, investors may recall, last year had an issue which sought to sell around 333 million shares at three cents each, to raise $10 million of what would have been real capital, and what would have relieved balance sheet concerns.

The issue was not underwritten, it was arranged without the support of a major broker, or possibly any broker at all, and it was surprising to me that it raised close to a half of the $10m it sought.

The only reason I could imagine to buy those shares would be to get a say in a poorly-performed company, perhaps to protect a substantial debenture investment.

And that might not have been a flash strategy.

Whatever, the issue did raise around $4 million from investors, selling around 130 million shares at three cents.

Today those shares are freely available on the market at just over half the three-cent entry price and any large sale might test even that 1.5 cent price.

Yet Lombard has announced nothing, other than that two of its directors had serious charges against them withdrawn, while two of its highest-paid managers were found guilty of charges relating to the promotion of investments.

Why has the share price halved?

Lombard would be well advised to release very specific figures relating to profitability, liquidity, maturity schedules, and bad debts now, so that fact, not rumour, can be analysed.

Last year Lombard sold down some loans, relinquishing prior securities, thus taking greater risk, to reduce lending exposure or obtain cash, they being the only reasons to sell down existing loans.

Neither the public, nor investors were advised by Lombard or its trustees, as to the justification for these sales.

As an aside, this is yet further evidence of the chasm between what investors expect of trustee companies, and what trustee companies believe they owe to investors, a chasm that adds to the doubt that trustees play any meaningful role in alerting investors to major issues.

Lombard is not alone in owing some explanation.

Bridgecorp recently was quoted as having re-stated to the NZX that is owns 20% approximately, of Dorchester.

Wrongly, I took this to be a signal that Bridgecorp had regained control of those Dorchester shares, which were pledged to St Laurence on September last year, in return for a loan of $8 million that enabled Bridgecorp to pay its third quarter interest to its investors.

St Laurence lent this money for three months only and you can take it as read that there would be some hefty fees involved, made heavier still if the loan was not repaid on due date.

Incidentally, St Laurence investors should not be frightened by the Bridgecorp loan. The Dorchester shares are worth nearly $17m according to Bridgecorp, around $13m according to the stock exchange, and at least $9m according to our biggest broking firm, which would be pleased to sell them if need be, I am told.

Wrongly, I wrote recently that the loan must have been repaid and surmised that some of Bridgecorp's troubled Australian and Fijian loans must have finally been repaid, to facilitate the settlement.

The St Laurence loan has not been repaid. It has been rolled for another three months, at Bridgecorp's request.

Bridgecorp investors were paid their fourth quarter interest and maturing investments continue to be repaid, despite what is clearly at least an inconvenience, that some major loan repayment schedules are not being met.

Bridgecorp in recent weeks has taken to issuing statements to those who sell Bridgecorp debentures, suggesting that comments I have made are on these important matters are "incorrect".

So now would be a good time for Bridgecorp, like Lombard, to come out with statements, signed by all directors, regarding liquidity, maturity schedules, loans in arrears, forecasted profitability, its plan to recover its money from Fiji and Westpoint in Australia, and its most recent credit rating from what used to be Rapid Ratings.

Bridgecorp continues to advertise, claiming that it makes "good sense" to invest in Bridgecorp debentures and even its capital notes.

A full statement, covering the issues mentioned above, would enable analysts to comment on this claim accurately.

At best, it might lead to an easing of any concern that might be felt.

Another set of investors who will be concerned are NZ Oil & Gas investors, who must decide on the rights issue this week.

With the combined share and option price, barely above the $1.00 rights strike price, many will be tempted to flag the issue, getting a cent or so for each right sold.

I am a believer that NZO will within two years be a profitable company, perhaps paying dividends, though I acknowledge that the NZO board of directors, for nearly 25 years, has been approximately as forthcoming with information as the Kremlin was in the 1960s.

So I have today taken up 30,000 rights ascribed to me, and applied for more, from the pool that might be left by investors who do not share my optimism.

Investors will have to make a personal decision that reflects the risk and the possible return.

Those fixed-interest investors who bought the South Canterbury Finance perpetual preference shares will be pleased that there are buyers now at prices above par.

This issue was fully subscribed, in the truest sense (not with the help of the lead broker's cheque book).

Infratil's perpetual bond has also been successful, raising more that $110 million by Xmas, more than half of its goal, in a month.

We should have access to these bonds for another month at least. The first-year rate of 9% is competitive and not locked in, if interest rates rise.

Also available are the Albany City Property Fund (10.50%) and St Laurence capital notes (10% - 10.5%) both of which, by my definition, make good sense for a small part of a fixed interest portfolio.

St Laurence, of course, is also contemplating an issue of St Laurence Property & Finance convertible notes.

These notes will one day be swapped for shares in a listed company, and if the swap is done at asset-backing, or thereabouts, they will have proved to be an excellent source of income and capital gain.

In my view, anyone able to buy these notes at par, or thereabouts, should do so.

This week I am back at the office, in Wellington on Wednesday, having enjoyed a break in Auckland, Tauranga and Taupo, without much use of sun screen.

Paddy, Denis, Linda & Ed are also at work all week. So the holiday delays should be over. Out will come the sun, of course!

Chris Lee Managing Director Projects Resources Limited