Chris Lee & Partners Ltd

Taking Stock 1 May 2025

AT a time when fund managers and investors are cautious about the robustness of sharemarkets, attention logically turns to debt markets - bank deposits, bonds etc.

New Zealand can be grateful that the practice of buying into private credit loans is rare in our country, and generally restricted to these whose wealth can absorb large losses, or to those who control other people’s money. Bank deposits and the bond market here look robust.

A relatively new concept, private credit is usually offered by very large-scale fund managers, like BlackRock or Apollo, based in the USA or UK, where they arrange funding that main street banks prefer to decline.

Private credit, now a trillion US dollar sector, steps up when companies either cannot borrow from banks, will not accept the conditions of bank loans, or have no other choice.

The arrangers of the lending facility often provide the money and then on-sell chunks of the loan to other fund managers, to wealthy individuals, or, most often, to pension funds.

The likes of Apollo or BlackRock will retain some part of the loan to ensure the loan is managed, and that the borrower is supervised.

Fees result; handsome fees.

Generally the loans are to aspirational or troubled companies.

Default rates are rising to a level so far estimated at 1%, but according to BlackRock likely to settle between 2% and 4% this year. To me that forecast seems optimistic.

The additional margin priced into the private credit lending, compared to high grade lending, has risen from 2.5% to 4.5%.

Despite highly favourable repayment lenience, such as interest rate holidays, around 20% of private credit loans were "classified" last year. That is corporate speak for loans "under scrutiny," not performing as planned.

By comparison, US banks "classified" 3.2% of loans.

Private credit is not the same as high-yield bonds. Bonds have liquidity in a visible market and are high yielding if the credit rating of the company is at the lower range, say BBB, as opposed to AA.

By contrast, private credit is an opaque area of lending, often targeting high-risk lending to those who are buying out competitors.

When Elon Musk sought to buy Twitter he borrowed tens of billions, the banks unwisely participating in this transaction.

At least that arrangement was transparent, the Musk bonds selling at a painful discount almost from day one.

They now sell around 97c in the dollar, yielding 11% returns after failing to attract bids at just 70c in the dollar in 2022. The banks will be mightily relieved. They owned six billion of these securities. 

At the time of the Musk transaction, I was reminded of the gullibility gap between sage investors and high-risk investors, a gap that had been discussed in New Zealand when Telecom made its superbly timed exit from the now obsolete Yellow Pages (YP).

The consortium that bought YP was, as you would expect, led by a pension fund, managed by those without vested interest. At the time an NZ sales group rang our office and advised that the transaction would be funded by a huge bond offer to retail investors.

“How much would you want to reserve for your clients?” we were asked.

As you might surmise, the answer was “nil”.

The offered interest rate might have been extreme, but the risk of failure was obvious as by then most could see that the internet was excavating the ground below the Yellow Pages.

Much of the private credit now being rolled over and offered to pension funds and wealthy investors displays very similar characteristics to the Yellow Page transaction.

Whatever the truth about bank people the fact remains that the banks have a fantastic database, a very high level of real capital, and a future characterised by high, sustainable profits providing they do not walk into the traps set by struggling companies, or by greedy profit targets.

Private credit has grown to its extreme size based on banks not being willing to lend indiscriminately, and reacting to risk by demanding highly prescriptive covenants, imposing discipline, and even handbrakes, on aspirational risk-taking businesses.

When equity market valuations became extreme, and the flood of printed money was leading to improbably frequent merger and acquisition proposals, the private equity managers and hedge funds needed to find avenues for the high returns on which their bonuses depend.

Hedge funds might have turned to currency speculation, or to shorting different sectors.

Private equity turned to private credit.

Perhaps some of this “credit” was to salvage the very same companies in which the manager had invested other people’s capital. We will discover, probably this year, whether that strategy was pouring other people’s money into deals that could not be salvaged.

It is of comfort to me that those individuals I know to have invested into private credit deals, chasing double figure returns, can afford to write off any losses.

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IT is precisely because of the undeniably high risk of failure in financial markets - think debt levels, household debt, high risk merger and acquisition prices, high multiples of assumed future earnings in equity markets - that I remain perhaps the sole fan of former Reserve Bank governor, Adrian Orr. Perhaps I am the president of a club of one.

Let me back off this position first.

Orr was most unwise to accept some of the conflicting social engineering ideas of Ardern and Robertson and he should have campaigned against the converting of his board to people with no or precious little relevance to central banking. The knowledge of, and empathy for, central banking of Ardern and Robertson could have been written in lipstick on the wings of an aviating sow.

Orr should have been stronger on opposing inappropriate populists being appointed to trading banking directorships. He should have opposed any Crown underwrite of private finance companies.

But his merits far exceeded these errors.

Orr understood that the global financial markets rest on the tip of the nose of a crocodile, and may do so for years.

Having led the country's biggest investment fund, he had active networks that made global risk readily understood and discussed.

He knows what banking failures do to a society and an economy. He was not appointed to be “popular”, or political, or patient with “gotcha” media, themselves often with political bias.

Under his leadership, the banks operating in New Zealand were forced to increase capital and to prepare for a global event that could – could - be catastrophic. It may be averted. It may not. He understood.

Global debt levels might have been the trigger of his concern.

Never before has so much debt existed, relative to income, either at sovereign or household levels.

His response - to virtually double the capital requirements of banks - was an earthy, practical response, possibly the only option if governments around the world continued to prioritise re-election rather than solve the problems that begin with perpetual fiscal deficits.

Orr is fiery. So what? He is impatient with those who cannot do the calculus, or even the arithmetic. So what?

He would never have electorate appeal. His bedside manner is gruff.

Rightly, he does not care much about what unaccountable media people might write, yet, inexplicably, he graciously allowed even self-employed social media people to attend official functions.

He was accountable for solving problems and building protection against what he could see were dangerous possibilities, caused by a highly imbalanced world. Controlling inflation and ensuring banks were robust made up 99% of his agenda, if one ignores all the political stuff.

In many ways he was, and knew he was, the smartest person in the room.

Somebody has to be the smartest person in the room. I expect a CEO to be this person.

He largely ignored those who had previously worked in the Reserve Bank, had strong opinions, but had left, and now live amongst the bottom feeders in social media, who share their views with those in the media to whom central banking is a rather mysterious concept.

All of his tasks require a strong man.

Orr has now left his job. He is too young, too experienced, and too vital to disappear onto some riverbank, to fish for trout, ride his bicycle around the bays or write blogs to a tiny audience.

If the world is going to have a coterie of Trumps, it will need the likes of Orr to stand in their way.

His replacement, Christian Hawkesby, is a highly intelligent, socially mellow man with an impressive range of experiences. 

One hopes he too can stand tall, as does Jerome Powell, the chairman of the US Federal Reserve.

The last thing the world needs is mousey central bankers bullied by politicians with a hidden agenda.

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IF all timetables are met in July the NZ government will underwrite bank deposits, finance company deposits, and those of credit unions and building societies, to a level of $100,000 per investor, per deposit.

An investor may use multiple banks and finance companies to chase the highest returns without risk, up to the $100,000 figure per person, per bank.

Oddly, there is no signal that banks can offer higher deposit rates that do not attract the guarantee, instead passing on the cost of the guarantee to clients.

If there were such an opportunity for a higher rate I would assess the bank and potentially take the higher rate.

In my opinion the scheme has erred egregiously in offering guarantees to private finance companies, building societies and credit unions.

At the very least, such munificence ought to be offset by fees payable to the Crown to reflect real risk. Fees ought to be equal to what an insurance company would charge for such a guarantee.

In the case of virtually all NZ finance companies that seek retail funding, that fee would be around 5%.

Instead, the Crown will charge around 0.2%, and only a little less to the much more sustainable banks.

Investors can chase risk with impunity, using the taxpayer guarantee as a free backstop.

One must hope that Hawkesby’s leadership puts heavy emphasis on micro-managing any non-bank that is eligible for the guarantee and is particularly harsh on adjudicating whether their directors and managers are fit and proper people.

Prior to the 2008 finance company debacle I would have met at least 100 directors and managers.

Pitifully few would be judged as fit and proper people and many who gave no signs of being unfit or improper proved to be spineless and incompetent when the markets subjected them to pressure. The Crown bonfired more than two billion dollars.

Hawkesby, one hopes, has enough back street wisdom to be fierce in protecting taxpayers from such people.

$2 billion equals a Dunedin hospital.

_ _ _ _ _ _ _ _ _ _

TWO billion dollars also equals the current expected benefit to the Crown if the Central Otago proposed gold mine at Bendigo/Ophir proceeds, mines gold, and sells it at existing prices.

The gold price has surged for several reasons, the biggest being global central bank buying to hedge against falling confidence in fiat currencies like the US dollar.

Another major influence has been retail buying in China and India, where gold is more revered than bank deposits.

Nobody, least of all me, can foretell gold prices, though Goldman Sachs tries.

It forecasts the gold price will rise by a further 20% in the next 12 months.

If New Zealand chose not to produce gold in the current pricing environment, it would be an outlier.

The Bendigo/Ophir project planned by Santana Minerals will file its consent application within the next eight weeks. The Environmental Protection Agency (EPA) will review the application to ensure it addresses all issues relevant to the environment.

A Fast-track panel, including a representative of the Central Otago District Council, will then assess the proposal, weighing economic benefits against environmental concerns. The EPA has 15 days to review what will be literally hundreds of pages of environmental information. If it finds the application has not addressed all relevant issues, it may decline to forward it to the Fast-track panel.

The Fast-track panel will have no more than six months to make a decision on any application handed to it by the EPA. One would hope that the Fast-track panel would process applications efficiently. Six months sounds like a very lengthy deliberation.

If the project proceeds and if the gold price remains elevated, the Cromwell town and its surrounding areas will celebrate.

Support for the plan is high, as illustrated at a recent A&P weekend in Wanaka, where Santana directors and staff manned an information centre. Support recorded exceeded opposition by a ratio of around 197 to 3.

Santana shareholders, which on a small scale (1.25%) includes my family, will be paying attention to what will be one of the first projects subject to the Fast-track legislation. 

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Travel

Auckland (Albany) – 2 May – Edward Lee

Palmerston North – 6 May– David ColmanWellington – 7 May – Edward Lee

New Plymouth – 9 May – David Colman

Nelson – 12 May – Chris Lee (FULL)

Blenheim (pm) – 13 May – Chris Lee (One appointment time available)

Auckland (North Shore) – 26 May – Chris Lee

Auckland (Ellerslie) – 27 May & 28 May am – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners

Taking Stock 24 April 2025

THE role of trust companies has rightly been disrespected for at least two decades, resulting from its failure to attract competent, trained executives and skilled, demanding directors. As a business model, the trust company sector deserves no future. 

Back in the 1970s, I valued the input of the trust company which oversaw the finance company I managed. The trustee oozed knowledge and wisdom. Regular meetings helped me adapt to the conservative but sensible standards of the trust manager in charge and helped our directors to ask the right questions.

By the turn of the century trust companies seemed to have deteriorated, employing only those low-value people who were scornfully fended off by the companies which were required to engage with them.

I recall one finance company CEO, a competent banker, telling me of how the only communication he ever had with his trust company was not to discuss investor protection, but to seek agreement of the trust company’s next year’s fee.

In that awful era, which must have started in the 1990s, the other functions of a trust company also were performed dreadfully, in most cases. Wills and estates were, as they still are, often grossly over-charged, and sometimes managed with no respect for the beneficiaries or the settlors.

I recall how NZ Guardian Trust persuaded a 90-year to redocument her intentions, creating a testamentary trust, which provided NZGT with decades of ongoing (ridiculous) fees.

Perpetual and NZGT were the worst that I saw in trust and estate work. I regard them as trustees of last resort. Ironically, along with Covenant, these three companies have now been cobbled together by George Kerr and Andrew Barnes and now form Perpetual Guardian.  Hmmm.

One other function of trust companies is in an area where extreme money is made. This is the function of overseeing fund manager portfolios where, especially in bond portfolios, the charges are far in excess of value. The charges are based on a percentage of the size of the fund.

Fund managers, even those at the bottom of the pile, do not benefit from such supervision, so a trust company charging 0.1% of a billion-dollar bond fund for its “oversight” is scoring a million-dollar fee for a task that a schoolboy could perform adequately. This is a box-ticking task. 

Fees for overseeing fund manager portfolios fill the coffers of trust companies and are the only explanation for their continued existence. 

But it is another source of fees, from the overseeing of unlisted syndicates, that raises questions about the “value” that trust companies add to the investors, who ultimately pay the fees.

In the case of unlisted property syndicates and forestry syndicates, the promoters often must appoint a trust company to oversee the deed that directs the management of the syndicate. Specifically, the trustee must ensure the management honours the commitments it made in its marketing documents, built around a trust deed which makes promises about the syndicate management.

Imagine a forestry syndicate where the promoters offered a thousand $5000 units to buy land and then plant trees, committing to create a special partnership so that every investor had a vote on any major decision. 

The plan might have been to grow a forest, manage and then harvest it, undertake a new round of planting, and then to sell the land and the immature trees of the new planting.

The commitment might have been to maintain the forest (prune it, develop roading etc.), harvest the timber, return the proceeds from the wood sales to investors and, after replanting, sell the fledgling second forest, either to a new younger batch of investors, or to another forestry manager.

It takes around 30 years for seedlings to become timber, so the original investors, average age, say 40, would reap the rewards at an age when starting again with seedlings might be a tad optimistic.

During the first iteration problems occur, and projections of the rewards vary as timber prices and currency values change. One of the promoters personally buys a run-down timber mill, presumably to process the timber.

Projections deteriorate.

The special partnership is changed to a general partnership which appoints a board to make all decisions. The board includes the original promoters. The “one unit, one vote” is lost in the change. 

The investors allow this to happen. The trustee offers no effective intervention. The new board decides to buy the run-down mill from the director that bought it, with plans to restore it.

The bank declines to lend on this proposal. But another bank agrees to lend several million, in exchange for a first lien over the timber, meaning the investors are relegated to a secondary status, and in effect have their future determined by the success of the mill, rather than the value of the timber.

The trustee remains ineffective, presumably failing to see the risk that has been added.

The mill processes timber from the forest but also processes timber from other sources. The other sources are paid.

But the original syndicate investors learn to whistle. The bank is paid before investors see any return.

Eventually the investors recover about their original unit price ($5000), meaning after 30 years their original capital is not lost.

At a 6% per annum return, well below the promoter’s original projection, $5000 in 30 years would have grown to $30,000. An investor who put up $20,000 for four units has seen $100,000 of original projections disappear.

Investors become quite good at whistling, but they have no audience.

All of this history begs the questions:

1. Why did the trustee not warn investors about the risk of allowing the promoters to make all the decisions?

2. Why did the trustee not warn about the risk of buying a run-down mill from a promoter and director of the syndicate?

3. Why did the trustee not warn about borrowing several million to restore the mill?

4. Why did the trustee not warn about the risk of granting a first lien to the bank in return for the loan to refurbish the mill?

If the trustee was not silent, but was simply ignored, what value would there be in his service?

The lasting question is whether the trustee ever had any value to add, any understanding of running a forestry syndicate, or any power to prevent the promoters/ decision-makers from making drastic changes that clearly changed the risk for investors.

Perhaps the bigger question was whether the trustee added any layer of effective support for the investors.

Should the trust company now be sued by investors?

Having met a fair few of the trust company people over the past 50 years, I have observed the trustee concept going from being of value to both investors and the supervised entity, to being of little if any value, except in rare cases. (The Public Trust once had an excellent corporate manager.)

 The idea of having a deed (a promise) filled with covenants (unalterable commitments) to protect investors from selfish or foolish promoters/decision-makers was a good idea. But it assumed the trust company would employ experienced, wise, and energetic people, with the right mix of corporate, legal and accounting knowledge to be effective.

The original concept did not assume that trust companies would slot comfortably into the Old Boys network, effectively employing box tickers with neither the knowledge, experience, or energy to add value.

Within financial markets trust companies have the same sort of respect from market participants that is awarded to those who act as consultants to government departments by teaching teamwork based on sessions of basket-weaving. (Do not think I am joking. Ask MBIE how many of its staff have been taught how to weave baskets, and how much the “teachers” were paid!)

Trust companies in my observation have a healthy appetite for revenue, but inadequate skills to add value.

Forestry partnerships, property syndicates, and supervisors of deeds need a new model that reverts to value-add practices.

_ _ _ _ _ _ _ _ _ _

THOSE who borrowed money from ANZ and ASB prior to 2019 are unlikely to be regular readers of Taking Stock.

Our audience is more likely to be those who invest money or deposit it with banks, not those who take out consumer loans.

But every parent and grandparent should be at least intellectually interested in the current dilemma facing lawmakers, the judiciary, and 170,000 people who are involved in a claim against two Australian banks (ANZ, ASB) which regularly breached disclosure law prior to 2019.

The issue begins with typically sloppy law, approved first by Key’s government in 2014, and then amended even more brainlessly by Ardern’s government in 2019.

The relevant act was the Credit Contracts and Consumer Finance Act.

The act attempted to ensure every loan accurately and completely disclosed all relevant details, like the actual interest rate being charged, and any fees being charged.

There was nothing untoward about the intention of the law.

Disclosure is a duty and is essential to any fair contract.

The problem was that Key’s government passed carelessly framed law that treated minor administrative errors by banks as though they were of the same origin as the dreadful lies and concealment that were in back street lending textbooks. Bankers are NOT comparable with pay day lenders.

Accordingly, Key’s people prescribed extreme punishment for error.

Any failure of disclosure meant that the lender could retain no interest or fees at all until the error had been noticed and properly disclosed. Banks were treated like rip-off merchants.

The most minor error, perhaps of a decimal point, meant that banks would have to refund perhaps years of interest and fees for the period before the error was discovered and corrected.

The punishment was the equivalent of sending a retailer to jail for making an error when giving a customer a receipt.

By the time Ardern was in charge, she and her cabinet of people with precious little commercial orientation were persuaded by the banking lobby to change the law so that the punishment fitted the crime. That is, the client was compensated fairly and any punishment for the error was relative to the error.

Furthermore, Ardern backdated the new corrected law so that errors made from 2019, before the new law had been passed, were corrected reasonably.

The government and the bankers did not backdate the law to the time when Key had introduced it. So there is a gap of some years, not addressed by Ardern’s retrospective law.

The result has been catastrophic for banks whose software was unreliable.

The banks recognised that they had a liability for pre-2019 errors so after some research there was a confession made to the Commerce Commission and, without consultation or negotiation, the banks offered clients a small sum that put right any previous errors in the banks’ calculations and disclosures.

The banks asked the clients to sign off this offer as a full and final settlement. Perhaps the banks offered someone $50 if the error had a cost of $40.

We will never know. There was no consultation. The settlement formula was never revealed.

One does not need hindsight to observe that the banks made an error of strategy, typical of banks. The banks had acted unilaterally; you could say they had acted arrogantly. Probably nobody needs reminding of which politician by 2020 was on the ANZ board.

An alert lawyer noticed the lack of consultation and/or negotiation, ferreted around, and consulted a litigation funder with a proud record of fighting for disadvantaged consumers. The funder based his support on the relevant law at the time of the error.

The result was a case against the banks for pre-2019 errors demanding the full return of all interest paid.

The amount involved is not known to me but is likely to be hundreds of millions, perhaps a billion or two.

The bank lobby visited the Beehive again. So now the government proposes to introduce new retrospective law to prevent what the banking lobby quite naturally claim would be an excessive penalty for minor errors.

Retrospective law is a dangerous concept. One could argue that retrospective laws should be used sparingly and only when society rules an injustice might have occurred.

For example, the days when homosexuals were convicted and jailed (for what were illegal acts, like sodomy) ended, and homosexual law reform adjudged such behaviour was lawful. Those convicted in the distant past under previous law were pardoned. Retrospectivity was judged to be fair.

Retrospective commercial law is more troublesome.

The lawmakers had intended to punish all lenders, including banks which had been inattentive, or careless, or simply had made an error.

Did the lawmakers intend to punish a disclosure error that actually cost the borrower nothing, by requiring the bank to refund in full all interest received? If so, why?

A personal loan of $10,000 at 10% from 2015-2019 would have earned the banks a few thousand dollars of interest. If the bank had disclosed the interest rate wrongly, say describing the rate as 9.9% or 10.1%, should the client be refunded the whole amount of interest paid?

This issue is dividing the commercial sector.

Often, for idiotic reasons, many people hate Australian banks.

Perhaps these critics do not know of the occasions when Australian banks have quietly rescued NZ from the risks of disaster, for example when National Australia Bank in 2008 bailed out its subsidiary, the BNZ, when it was on the verge of contractual defaults. NAB coughed up a billion during the 2008 crisis.

Loathing Australian banks is irrational, perhaps xenophobic.

But retrospective law, irrespective of how unwisely it had been crafted and amended, is a concept that is fraught.

My solution would be for parliament to invite the banks and the 170,000 investors (through their litigation funder) to find a suitable settlement that acknowledged the banks’ errors, without grossly over-punishing those errors.

Parliament could also instruct all banks to surrender to the Commerce Commission by the end of this year, with any other previously undetected errors, and let the ComCom decide the amount of compensation and the separate sum as punishment.

Perhaps the new law would then note that any unrecognised errors, when discovered in the future, should lead to a penalty, payable to the Crown, that fairly assessed the gravity of the offence.

A typing error in the calculation would be of the “parking ticket” dimensions.

A concealed error would attract an eyewatering penalty.

Errors happen. Cheating is a different matter.

Whatever the outcome, the banks were arrogant and most unwise to attempt to settle their errors unilaterally, without having their formula endorsed independently.

The politicians who processed the flawed law almost certainly were targetting back street cheats, not having the wit to see that main street banks might fail to foresee the potentially extreme costs of a minor software error.

The banks should have read the law and been frightened into micro-managing every disclosure documented.

But the crime cannot be reasonably assessed as being worthy of a fine of hundreds of millions. 

_ _ _ _ _ _ _ _ _ _

Travel

Lower Hutt – 29 April – Fraser Hunter

Auckland (Ellerslie) – 1 May – Edward Lee (FULL)

Auckland (Albany) – 2 May – Edward Lee

Palmerston North – 6 May– David Colman

Christchurch – 7 May – Johnny Lee

New Plymouth – 9 May – David Colman

Nelson – 12 May, 13 May – Chris Lee (FULL)

Blenheim – 13 May – Chris Lee (FULL)

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners

Taking Stock 17 April 2025

WHETHER it is in governments, boards of directors, or even households, extreme stress inevitably threatens stability and leads to poor decisions.

In government, the outcome might be programmes that are poorly researched, implemented with no credible plan, and perhaps executed by people with little social or intellectual intelligence.

In households, stress — for example, loss of employment or insufficient money to meet essential costs — might result in a doomed attempt to find peace in alcohol or drugs, or even seeking a solution at the Lotto shop. It would not be unknown for stress to end in ugly biffo, broken families, general dysfunction, and jail.

But it is in the corporate world that stress leads to issues that most affect investors, an audience Taking Stock addresses.

Many of my generation will recall one simple well-known disaster that began with stress.

In the 1980s, Chase Corporation for a short while was a sharemarket hero, its directors pursuing a strategy of erecting glitzy buildings, with lots of reflective glass, in prime city areas. Many have long since been demolished.

The company was built on debt and on pumped up property valuations in the same era that bred a wide range of quite dreadful property shysters, many of whom failed, many borrowing to pay the interest on their debt, many regularly lying to the media and the stock exchange. (None exist today on the NZX.)

Towards the end of Chase’s life, the outstanding banker, (the late) John Anderson, compiled an intricate analysis of Chase, proving it was similar to an edifice built with playing cards. 

The National Bank understood Anderson’s analysis and withdrew any funding as fast as it could.

Facing cashflow deficits, losing banking support, and observing a weakening share price, Chase figured it could solve its problems by pumping up its share price, presumably anticipating that this would boost institutional confidence. 

So Chase bought Farmers which had a large, internally managed staff pension scheme, wisely invested in high-yielding bonds and in equities. 

Having acquired Farmers, Chase sold off the pension fund assets and bought Chase shares with the proceeds, hydraulicking its own share price for a very brief short period. (A cynic might wonder who was selling at the contrived prices.)

Wise institutions sold any Chase shares they held to the Farmers pension scheme, controlled by Chase.

Confidence was not restored. Cash flow remained dire. Credit was hellishly expensive and became unavailable. There was no market to buy Chase’s buildings at anything like the phony valuations.

Chase collapsed in disgrace, inevitably, as Anderson had foreseen. The abused Farmers’ pensioners lost virtually all of their pensions. There was no accountability.

Stressed, Chase had responded to panic with a quite stupid strategy which resulted in even more people losing their money, and their directors losing their credibility.

I have observed similarly stupid responses often, for example during the finance company collapses, when the likes of St Laurence, Hanover, Bridgecorp and even South Canterbury Finance (SCF) sought to glue wallpaper over gaping holes in the gib board.

SCF, one recalls, even hid a $60 million non-performing loan behind the son-in-law of a director, the son-in-law unaware of the duplicity, aimed at hiding a stupid loan.

Stress messes with the minds of directors, and politicians, and households unless it is contained by strong, sane leadership, which insists that spilt milk must be mopped up, not hidden by a mat.

One cannot think of what the universally-derided Donald Trump is doing without noting that the cause of his mindset is extreme stress.

Huge global debt, unaffordable and unserviceable in many countries, has led to idiotic behaviour in many places.

Such debt can be serviced only if the cost of debt is virtually free.

There are no roadways to cheap funding unless inflation is restrained.

So we have tariff wars, and currency wars (China devaluing the yuan), and trade wars, lurking behind them devastating real wars, with Taiwan’s future looking to be rising on China’s agenda.

Stress in global markets is hardly new.

I have argued for some years that excessive use of debt had to lead to a resetting of global asset values - the sooner, the better.

This is just one of the reasons why I oppose the buying back of one’s own capital. (Ask ANZ about this!)

Trump’s erratic ad hoc tariff policies have not been supervised by wise people.

He has shifted his rationale from reciprocity, to punishment for “disrespect”, to trade deficits, to a plan to replace taxes with tariffs, to a plan to close border issues, to a plan to stop fentanyl invasion, to a plan to stop the world from dealing with Iran, to a plan to rebuild the US manufacturing base.

My view is that this unstable president has been the catalyst for a recalibration of sharemarkets, which by any historical basis had been approaching the Dutch tulip madness of the 17th century.

Stress is growing.

It never produces excellent solutions.

_ _ _ _ _ _ _ _ _ _

THE certainty of chaos, with the unpredictable outcome for listed securities, will again bring attention to the support, or lack of it, for all retail investors in New Zealand.

The patterns of the past will recur. That much is for certain.

As those behaviours become visible, investors will again want to know what value for them is in those who are paid to protect investors.

The protectors should begin with the companies’ directors and executive managers.

The good news is that much tougher penalties should dissuade the weak, the dishonest, and the unethical from actions that undermine investors.

Better law now exists. Useless directors, like those at Mainzeal, have been fined tens of millions, and are now, or if not should be, unusable in the well-paid roles they might seek as directors. Litigation funders have made a welcome difference. But we still seem to have many directors with no ability to understand risk.

The second layer of protection should be the trust companies, where they exist. They usually exist in unlisted securities, like property syndicates, forestry syndicates, and managed funds.

There is very little good news here. History suggests they add no value.

At least these ineffective people are now registered and regulated by the Financial Markets Authority. Surely the concept of a trust company supervising anything is demonstrably anachronism.

Read the item in next week’s newsletter to gain insight into the fallacy that trust companies perform a useful function (for anyone, including estate and trust administration). Trust companies continue to offer no value to investors.

The third defence for investors should be the auditors.

They are definitely more effective than they were at the time of the 2008 global financial crisis, when all the major audit firms displayed weaknesses, some worse than others.

In NZ I recall a rare exception. I contacted the trustee, the chairman, and the auditors of Lombard Finance in March 2008, pointing out the appalling betrayal of investors by that deceitful company.

It was toying with critically important covenants in its trust deed; worse it was behaving egregiously, covering up the breaches, with no obvious regard for the investors, by trying to hide its worst loans.

Lombard’s commercially inept and pompous chairman, Doug Graham, swatted away the breaches, in his response to my letter. (As an aside Lombard was at different times governed by two other hopeless ex-politicians, Hugh Templeton and Bill Jefferies).

The trustees, Perpetual, exhibited their third form standards by claiming they knew of no breaches. They added zero value for their money.

However, the auditor, Deloittes, responded like an adult, thanking me for my research. Within two weeks Deloittes had moved into Lombard, discovered the rot, and Lombard had been put into receivership.

Deloitte’s decisiveness was rare.

Many auditors, including Ernst Young, when it was put in to sort out South Canterbury Finance, displayed poor standards by signing off valuations that were roughly as authentic as a nine-dollar note.

Happily, the hefty penalties now imposed on auditors are delivering a better standard than before, though we might find out the degree of improvement when the 2025 market upheaval is revealed.

Please note that globally the auditor crisis is still alive. Google the audit failure with e-fisheries, an Indonesian fishing start-up which fabricated its accounts, was audited without comment, attracted hundreds of millions of dollars from world-leading fund managers, including the Singapore government,…. and then just five months ago went broke, investor money incinerated.

The fourth defence for NZ investors should be from the banks, which have covenants aimed at enforcing sensible terms and conditions on all organisations to which the banks lend.

Banks are remarkably self focussed. Equally remarkable is the banks’ group view that they have no social responsibility to other stakeholders, like unsecured creditors or shareholders.

Will the 2025 upheaval reveal any improvement in their standards?

Then we have the receivers/liquidators, whose task is to achieve the optimal result when they are called in.

They can be likened to the ambulance staff who arrive at an accident. One would sing the praises of a receiver/liquidator who exhibited the decency and devotion of ambulance staff. I hear no melodies.

On any social chart, receivers would have sat close to repossession agents, in terms of respect, after their frankly awful behaviour following the 2008 crash, with McGrathNicol setting the standard that signalled the bottom of any waste-water facility. (My view was the MN should have been prosecuted for their errors).

Very very few such people, perhaps John Fisk of PwC, Tony Maginness, Damien Grant, and previously Stephen Tubbs of BDO Spicers, have risen above the pack that I have noticed.

Finally we fall back to the regulators, currently the Financial Markets Authority.

After an astonishing period of ineptitude in the years between 2000 and 2010, when only its senior legal counsel, Liam Mason, ever seemed to understand, the Securities Commission was euthanised. Thank heavens for that. It was hopelessly governed, hopelessly led, and largely ignored the information supplied to it. Some of its appointed governors were poorly selected.

It was cynically underfunded by successive governments, a tiny excuse for its abject failure to be curious about highly improbable claims of finance companies like Bridgecorp, and financial selling groups like Money Managers, Broadbase, Vestar and Reeves Moses Hudig.

The FMA has much better governance now, and more intellectual grunt, energy and curiosity than the Securities Commission had.

Sean Hughes, a gutsy admirable man, then Rob Everett, a calm, intelligent chief executive, put the FMA on a track that has been more effective than the Securities Commission had been under Jane Diplock’s leadership (or lack thereof).

The FMA makes and enforces rules.

It is still under-funded.

The imminent messes created by the current upheaval will reveal whether the Crown has succeeded in establishing standards that really do protect investors.

I repeat that we are now in a stressed environment, historically defined by panic-ridden behaviour by boards and executives of companies that face exposure for poor decisions, poor assessment of risk, and subsequent unsignalled losses. Synlait Milk displayed examples of such panic, as did Ryman Healthcare.

Panic has previously produced tactics designed to buy time while new risks are undertaken to offset existing, but perhaps undisclosed, losses.

We should by now have a series of moats to prevent losses spreading, beginning with directors, trustees, auditors and bankers.

We do not want receivers/liquidators to be the solution, and we certainly do not want the FMA to be dragged in to deal with illegal behaviour.

The coming months will test the system as stress produces its inevitable results.

Offenders cannot simply blame Trump.

_ _ _ _ _ _ _ _ _ _

Travel

Lower Hutt – 29 April – Fraser Hunter

Auckland (Ellerslie) – 1 May – Edward Lee (FULL)

Auckland (Albany) – 2 May – Edward Lee

Palmerston North – 6 May– David Colman

Christchurch – 7 May – Johnny Lee (FULL)

New Plymouth – 9 May – David Colman

Nelson – 12 May – Chris Lee (FULL)

Nelson – 13 May (morning only) – Chris Lee

Blenheim – 13 May (afternoon only) – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners

Taking Stock – 10 April 2025

Fraser Hunter Writes:

Last week, President Trump unveiled his highly anticipated “Liberation Day” tariff package, marking a historic shift in US trade policy. The aggressive package aims to overhaul global trade rules to favour American economic interests.

Central to the plan is a blanket 10% tariff on all imported goods, which came into effect last week. Additionally, further higher "reciprocal" tariffs were announced earlier this week to target the countries deemed to engage in unfair trade practices. China was the most impacted with tariffs in excess of 100%. The change in policy has been framed as a corrective response to longstanding trade practices that have disadvantaged the US.

Note – this morning a pause was placed on most tariffs being applied to most nations, resulting in a surge in US Markets. Overnight, the S&P 500 finished up +9.5% and the Nasdaq +12.2%, recovering some of the ground lost over the month to date. 

There is still a lot to play out in what is looking more and more like a high stakes game of chicken. The announced pause is set to last 90 days, with tariffs for most nations reduced to the baseline 10%. At the same time, the tariff on Chinese goods was lifted to 125% in retaliation to China’s 84% tariff on US goods. The EU is forging ahead with tariffs on select US products starting next week. 

The landscape is continually changing, causing large swings in markets. The 90-day pause provides some stability for the time being. Most of this article was written prior to this morning’s events. 

---

In the last few years markets have been resilient in the face of global conflicts, political change, major bank failures, high inflation and interest rates, however the tariff announcement has been a ‘circuit breaker’ event, with the market reaction being compared to recent economic crises like the Global Financial Crisis and the COVID-19 outbreak. 

The reception to the tariffs has been overwhelmingly negative, both from within the US and understandably outside. Key amongst the concerns are the significant disruptions to global supply chains, higher consumer prices, and a potential erosion of confidence in the US economy and leadership. 

Globally, major trading partners such as China and the European Union have already announced retaliatory measures, escalating fears of a prolonged trade war. Many emerging economies were faced with the prospect of cripplingly high tariff rates, while longstanding allies like Australia expressed disappointment over the unilateral nature of the policy.  The 90-day window will be welcomed by many to provide time to find some middle ground. ---

The New Zealand share market was one of the first to open following the initial announcement and barely budged in Thursday’s trading, even despite a warning from our largest company and US exporter, Fisher & Paykel Healthcare. The mood quickly changed once US markets opened later that day. 

Over Thursday and Friday (US time), Wall Street was thrown into chaos, with volatility levels not seen in years. The S&P 500 plunged -9.5% across the week, including a -10.5% fall over just two days—making it the fifth-worst two-day decline since World War II. By Monday, the rest of the world had caught up, with global markets reacting sharply to what was increasingly being recognised as a major economic shock.

While markets appear to have found some footing- at least for now – uncertainty remains high. Markets are grappling with how long the tariffs will stay in place, how other countries will respond, and whether this signals the beginning of a broader unravelling of global trade.

---

Tariffs are essentially a tax on imports, designed to raise the cost of bringing overseas goods into a country and make locally sourced products more competitive. Under the US's current tariff package, a blanket 10% tariff is imposed on all goods entering the States, with even higher rates to target specific “bad agent” countries accused of using unfair trade practices.

While President Trump has framed these tariffs as a cost worn by foreign companies, the reality is more complex. Legally and practically, it is the importers who pay the tariff when goods arrive at the border. Importers then have three main options: absorb the costs themselves, negotiate lower prices from overseas suppliers, or pass the costs onto American consumers in the form of higher prices. 

In practice, businesses may adopt some combination of these strategies. The immediate concern is clear—tariffs risk driving up costs for households and businesses, potentially reigniting inflation just as the Fed was beginning to signal possible interest rate cuts.

Further muddying the waters is the US perception of GST and VAT systems, which some in US deem as giving foreign exporters an unfair edge. GST is rebated on exports but applied to imports, creating the impression that overseas goods are getting favourable treatment at America’s expense. Economists have typically disagreed with this framing, but regardless, it forms part of the US argument and justification for the tariffs. 

---

The narrative surrounding tariffs has shifted significantly over Trumps time in power. Initially, tariffs were championed by Trump as a way to revive domestic manufacturing and protect American jobs (MAGA). Tariffs on Chinese steel and aluminium during his first term were framed as critical to revitalising industries like automotive and construction, which had suffered from foreign competition.

Tariffs were then repurposed into a geopolitical tool to pressure allies into meeting broader agendas. Tariffs were imposed on Canada and Mexico late last year to address border security and drug trafficking concerns, tying trade policy directly to national security. Similarly, higher tariffs were threatened against NATO allies for failing to meet defence spending targets.

More recently, the rhetoric has evolved further, portraying tariffs as a revenue-generating tool to offset income taxes domestically while encouraging other countries to lower their trade barriers. 

---

The case for tariffs 

The White House’s senior trade adviser, Peter Navarro, defended the new tariff regime earlier this week, calling it a response to decades of one-sided global trade. In an opinion piece, he argued that while the US has adhered to WTO rules, its trading partners have exploited loopholes - imposing higher tariffs and using non-tariff barriers such as subsidies, strict product standards, and opaque licensing rules. He singled out the European Union’s VAT system and Vietnam’s alleged “non-tariff cheating” practices as examples of policies that disadvantage US trade. This remains the administration’s stated rationale despite the temporary pullback.

The White House has frequently referred to these tariffs are “reciprocal”, aiming to match the treatment the US receives from other nations rather than a negotiating tool. 

---

Market Moves Reflect More Than Just Tariffs

While the tariff announcement dominated headlines, the sharp sell-off has been driven by more than just trade barriers. The real concern is the dramatic shift in tone—toward uncertainty, protectionism, and geopolitical risk—that has left companies and investors scrambling to understand what global trade might look like in the months ahead.

For a real-world example of the dilemma companies face, look no further than Apple, the world’s largest company up until a week ago. While it has tried to diversify its production base, 90% of iPhones are currently produced in China. Analysts estimate to relocate ~10% of its supply chain to the US could cost up to $30bn, while nearly tripling the cost of production and would likely not be completed in Trumps presidential term. 

Last week’s trading appeared to be a tipping point for existing fears. US markets were already expensive and vulnerable, global growth was slowing, and corporate earnings—particularly in the tech sector—had been softening. The announcement of sweeping tariffs amplified these concerns, triggering sharp declines across major indices and pushing sentiment toward panic levels not seen since the COVID-19 outbreak.

Nearly a week later, investor sentiment remains at “Extreme Fear” levels, with no clear resolution in sight. Concerns about escalating trade wars, geopolitical conflicts, fractured supply chains, and the re-emergence of inflation continue to weigh heavily on markets. In response, major US investors have shifted to cash or defensive assets, adopting a wait-and-see approach as they brace for further volatility.

---

The general view is New Zealand has avoided the sharpest end of the stick and retaliation has never been on the cards. New Zealand’s stance, for a long time, has been that we are a trading nation and encourage as few trade barriers as possible. This view has been reinforced by the FTA currently being prioritised with India, as well as recent media comments by our Prime Minister this week in response to the tariffs. 

Finance Minister Nicola Willis updated the media on Tuesday, indicating that the impact on our exports is expected to be modest, but the wider economic implications are harder to quantify. Treasury is forecasting slower growth among our major trading partners, rising global inflation risk, and the potential for flow-on effects to investment and supply chains. In short, the global backdrop has darkened, and the small trading island of New Zealand will not be immune.

The Government hasn’t indicated any major changes are occurring, reaffirming the commitment to a pro-growth, fiscally responsible agenda. Willis also left the door open to corporate tax relief and a reprioritisation of existing spending to support productivity and business confidence if needed. 

---

The local market vibe has also not been one of panic. The NZX 50 fell -4% on Monday, the sharpest daily fall since 2020, but it was more of a catch up to global markets in free fall. Global exporters, especially those with US revenue or global supply chains, bore the brunt of the fall, with Fisher & Paykel Healthcare, Mainfreight, and a2 Milk presenting the most earnings risk.

The reaction highlights the resilience of the NZ market. Since the SOE listings, the NZX evolved into a defensive, income-oriented market, with a major tilt toward utilities and infrastructure. This caused it to lose some of its shine during the global growth and AI boom, but is now beginning to look like the steady partner you should never have left. 

---

For some time, we’ve been stressing that valuation matters, particularly for an entry point to companies and markets. While excitement around American exceptionalism, AI, a productivity boom, and global growth stories had pushed some valuations to stretched levels, the recent correction has pulled many prices back to more palatable territory. 

Whether this marks a short-term bounce or the start of a longer unwind remains to be seen, but from a long-term investor’s perspective, entry points seem to be heading towards more reasonable prices.

The dark clouds may linger for some time yet, but for long-term investors, moments of disruption can create the conditions for stronger future returns. In today’s reset landscape, fundamentals and discipline are back in focus—and that’s not a bad place to be.

Travel

Christchurch – 15 April – Fraser Hunter

Ashburton – 16 April – Fraser Hunter

Timaru – 17 April – Fraser Hunter

Tauranga – 15 April – Johnny Lee

Hamilton – 17 April – Johnny Lee

Lower Hutt – 29 April – Fraser Hunter

Auckland (Ellerslie) – 1 May – Edward Lee

Auckland (Albany) – 2 May – Edward Lee

Palmerston North – 6 May – David Colman

Christchurch – 7 May – Johnny Lee

New Plymouth – 9 May – David Colman

Nelson – 12 May – Chris Lee

Blenheim – 13 May – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners

Taking Stock 3 April 2025

NEARLY a half of NZ adults will have been made wealthier by the financial gains made by the US communication platform Meta, the owner of Facebook and Instagram.

Harvesting advertising revenue as a result of its success in overseeing the billions of users of its platforms, Meta is by any money-focussed yardstick a roaring success. 

Many would also argue that it is a large contributor to society’s dysfunction, invading privacy and creating a means by which sick people can scar the lives of others.

But Meta is a triumph for its anti-social, emotionally damaged founder Mark Zuckerberg, like many other very smart people, a man at the far end of the Asperger's chart, probably quite close to being autistic. 

His single focus is Meta’s dominant money-generating business. He dresses as he sees fit, seems to shrink from social obligations, and will lick Trump’s cheeseburgers, if in so doing he advances Meta’s future.

Anyone who has worked in the US, or regularly visits their star companies or banks, will know that the American business culture is quite different from ours. 

My list is not comprehensive, but I have watched with astonishment:

1. An absurd demand on executives and staff to sacrifice a balanced life in return for useless excessive wealth.

2. A vulgar attitude towards female staff, including locker room language, coarse behaviour, and an absence of good manners, as well as a reluctance to recognise and promote genuine talent.

3. Acceptance of the ubiquitous use of harmful drugs.

4. Abuse of shareholders’ money by executives, either through personal use of the money or by donating it in huge dollops without shareholder approval.

5. Gross, crass, absurd “stealing” by extracting company money to pay “bonuses”.

The most recent example of the latter was the paying of US$80 million to a Goldman Sachs manager to constrain him from leaving, and the paying of $130 million to three senior executives at that firm.

I doubt any New Zealand investors are unaware of these behaviours. We condone them when we allow our Kiwisaver funds to invest in companies that exhibit these characteristics. To be fair, we probably do not have much detail unless we read whistle-blowing books such as those written by those disaffected by the likes of Goldman Sachs, Amazon, and the Sackler Purdue (OxyContin) company, all of which companies have dreadful practices.

All of this sets the scene for the very recent behaviour of Meta when confronted with a book written by a young New Zealander who had naively joined Meta, believing it would be the source of fairy dust if she could influence it.

Sarah Wynn-Williams, the author, had a brief career as a junior in NZ Foreign Affairs, and at an early age had developed an unworldly dream of making Meta an empire that would convert the world to goodness and transparency.

When she left Meta she wrote a book. The only reason her book hit headlines was because of the quite stupid response of Zuckerberg and his advisers who sought to prevent her from promoting the book. They cited a Non-Disclosure Agreement (NDA) which she had signed at some stage as part of the engagement and termination process. They could not stop the publisher promoting the book.

By attempting to quash her book, Zuckerberg, this smart technology guy with few social skills, drew such attention to it that it sold millions in the first few weeks, grossly over-rewarding what I have to say is a quite anodyne, almost childish book, written by someone disenchanted with the realty of the US business model.

Indeed, without the attention he drew to the book, its sales might have been minimal.

I had it delivered, waded through it, and learned nothing about Meta that I would not have expected, given an understanding of the crazy overworking of those in such companies with their almost singular focus on the financial success and share price of the company.

We all know of the crude and selfish behaviour in such businesses. The book revealed nothing that was newsworthy.

Wynn-Williams wrote a chapter about the lack of sympathy when, as a new mum, she was lactating. She wrote a chapter about the beastliness of managers who expect well-paid staff to sacrifice personal life balance.

She recorded the excruciating details of how former Prime Minister Key literally snatched a photograph of himself with Zuckerberg, after the American had made it unmistakeably clear that he had no wish to meet with Key.

She writes about the problems of trying to set up meetings between Zuckerberg and leaders of countries like Myanmar, that figured their country did not need to engage with Meta. She noted its tax avoidance focus, and saw how the Davos economic forum in Switzerland was an event for plonkers and the media, amongst the real business and political leaders.

Wynn-Williams is clearly a staunch young person, idealistic, ambitious, but hopelessly unworldly when she stalked Meta to land her dream job.

All of this would make nice reading for her grandchildren one day, but it is the core of the book that would never have sold millions of copies had Zuckerberg done what an intelligent person should have done – read the draft, yawned, and reverted to his role as a technology person who thinks his platform rules the world.

I can cast my doubt because never in my life have I used Facebook, Instagram, Twitter (X), Snapchat, or any other such frippery, and thus have never been stalked by lunatics or by advertisers, who will never have heard of me.

This may date me as a survivor from the era when an asteroid put paid to dinosaurs.

Sorry about that!

_ _ _ _ _ _ _ _ _ _

SIMON Whimp, the founder of DGL (Dangerous Goods Logistics) changed his name to Simon Henry, perhaps because he discovered that Whimp was the 996,001st most common surname in the world, a humble obscure rating.

Or perhaps he was expressing a view to distance himself from his brother, Bernie Whimp, whose financial misadventures had been widely published by the likes of the Financial Markets Authority, and are readily available on Google, with quite explicit discussion of his low-ball offers to shareholders 20-odd years ago.

Simon Whimp/Henry founded his company DGL, publicly listed in Australia, and has built wealth by offering to transport and dispose of toxic goods.

His company fortunes slumped a few years ago because of a sensible and accurate forecast he made about the awful My Food Bag, created by Theresa Gattung and a cooking enthusiast, Nadia Lim. Instead of focussing on the improbable growth forecasts, he ruffled the public with disparaging comments about Lim, who adorned the promotional guff that MFB produced.

Had he chosen to be analytical, rather than colourful, he might have been applauded for his prescience. MFB is now worth one-tenth of what Gattung obtained by selling out, and DGL is similarly disregarded by investors.

I was reminded of foolish behaviour by so-called leaders when I read of the juvenile behaviour of the CEO of the land developer, Winton.

The CEO and founder, Chris Meehan, faces a significant fine for his immature response to an unpleasant experience while using public transport.

He fired his assistant, a young woman, for using a travel agent that arranged for him to sit in a seat near a bathroom for a long international flight, yelling at her with the sort of vulgar language that no intelligent man would use in a discussion with staff (or for that matter would use in normal discourse).

The young woman went to the Employment Court and won a six-figure award. One hopes this was not met by the already disgruntled shareholders of Winton, its share price now barely half of its issue price.

Yet within days of this event, I came across headlines in our two major newspapers using the sort of language that one might have overheard outside the cabin in which Lady Chatterley became acquainted with her gardener.

With dismay, last week, I found the same sort of language in Business Desk articles.

I shuddered and I imagine many other investors felt the same.

Perhaps as noted in the previous item in this week’s Taking Stock, the standards of the era of the moa have been swamped. Foul language must be acceptable to the young people of today.

Disclosure: I do not own shares in Winton. This will not change.

_ _ _ _ _ _ _ _ _ _

THREE years ago it would have been unimaginable that three of the most reliable NZX-listed companies, Spark, Ryman, and Heartland, would have shares able to be bought for less than the cost of a TT2 ice block.

Spark shares had hovered around $5 for some time, Ryman had reached $15, courtesy of KiwiSaver funds which pledge to track the NZX indices, and Heartland, paying a robust 12c dividend, was well clear of $2.

Today Spark shares are around $2.05, Ryman $2.65 and Heartland 75c, yet one would find it hard to find any analyst that would forecast continuing corporate mistakes by any of these three companies.

We all know Spark’s board of directors made the unhappily common mistake of using revenue to buy back shares at a time when the share price was elevated. Surely this mistake will never be made again. If I had my way, such behaviour would be illegal.

Spark does have more competition, its profits are likely to reflect this, its dividends may fall a little and it has dropped out of one of the indices that hapless fund administrators pledge to follow.

Yet at $2.05 its dividend yield is around 9% (nett), a healthy margin above the NZX50 yield.

Ryman’s woes also reflect poorly on its previous governance and management, which misread the demand, underestimated the extraordinary rise in construction costs, borrowed quite stupidly from American piranhas, misread the housing market, and neglected to raise capital when the share price was soaring, again thanks to index-tracking funds.

Yet its shares are priced today at levels much less than half of acclaimed nett asset backing, making it an obvious source of interest to private equity funds, which usually focus on mis-priced assets.

The problem here is how one assesses the value of Ryman’s assets. Its villas and apartments are easily priced, based on sales, but its assets like its common buildings, bowling greens etc would have no value at all if the organisation closed down. Their valuation is more like an assessment of their contribution to the total package that draws in the residents.

I recall as a moneylender once declining to lend to a sports club that had spent a huge sum on its pavilion. I had questioned its value should the club continue to lose members and eventually merge elsewhere. Of course that eventually happened. More fool the mortgage fund that stepped up.

Who recalls the Foxton and Levin Racing Clubs? What are their grandstand buildings worth now the racing clubs have closed? An old racing club pavilion has at best a value of salvageable building materials.

Ryman is surely a takeover target, as would be Oceania Healthcare, given the discount being applied to the assessable assets.

Heartland has endured profit falls after write-offs and after bearing the cost of Australian expansion. Given the Australian operation’s ongoing success, largely due to the spadework of its former manager, Andrew Ford, the odds are that Heartland will achieve the commitment its board has made to a return to nett profits of around $200 million by 2029, bringing with it a healthy dividend pool.

It too must be a takeover discussion behind closed doors in Australia.

The truth is that when global events are eating into investor and fund manager confidence many opportunities emerge, given the errors typically made during stressful times by spooked markets. Trump’s new attempt to make America an island will undoubtedly bring responses that change the approach of international companies.

Takeovers strip shareholders of value, if they are made at discounts by people who can execute their strategies.

It is fair to note that many private equity purchases do not work out well, a fact probably reflecting the difference between entrepreneurs and hardened business leaders who know how to execute plans. Ron Brierley was an entrepreneur. Jim Wattie and Woolf Fisher were business leaders.

My guess is that in the next financial year fundamentally sound companies will face unwanted takeover offers if market pricing were not reflecting underlying future value.

If the cost of money is to a fall to a level that is improbably low, perhaps led by private credit lending, then the new financial year might be a period when well-governed companies are forced to think of strategies that fend off opportunistic takeovers.

_ _ _ _ _ _ _ _ _ _

Travel

Christchurch – 15 April – Fraser Hunter

Ashburton – 16 April – Fraser Hunter

Timaru – 17 April – Fraser Hunter

Tauranga – 15 April – Johnny Lee

Hamilton – 17 April – Johnny Lee

Lower Hutt – 29 April – Fraser Hunter

Auckland (Ellerslie) – 1 May – Edward Lee

Auckland (Albany) – 2 May – Edward Lee

Christchurch – 7 May – Johnny Lee

Nelson/Blenheim – 12/13 May – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners