SC likely to have finance victims

Hanover Finance is the latest -- and biggest -- finance company to admit it has problems and announce it has frozen investors' money and started work on a restructuring plan.

The news from Hanover takes the toll of collapsed or troubled finance companies to 26 in the past two years with 23 of those in just the past 12 months.

However, South Canterbury Finance was yesterday rated highly for survivability.

The company is one of only three New Zealand finance companies with the "five survivability factors" according to managing editor for interest. co.nz Bernard Hickey.

The five factors he sees as the company's strength are their diversified lending, diversified funding, a strong backer, strong New Zealand bank funding line and an investment grade credit rate of BBB- or better. South Canterbury Finance has a BBB-rating while the other two companies Mr Hickey said have all five "survivability factors"

The only other companies Mr Hickey sees in the same category are UDC with an AA rating and Marac with its BBB- rating.

His chart of the 20 largest existing and failed New Zealand finance companies shows only the top three had survivability factors and a high enough investment grade credit rating, while Hanover Finance managed only one of the five factors, with its credit rating of BB+.

Maurice Matthews, of Matthews Financial Services, said clients were not wanting to invest in the finance company sector.

"People are running scared, and they're tending not to reinvest."

Mr Matthews said finance companies had always offered a margin over and above the banks, which took into account the relative risks, but said people had to make a judgment on whether they were being adequately compensated for the risk they were taking on.

"I'm sure there will be some Hanover money around South Canterbury, but obviously the bulk of South Canterbury money is with the local firm."

Mr Matthews said the volatile market meant that the ultimate aim for investors had changed slightly.

"The return of your capital is paramount now, not the return on your capital."

Stephen McFarlane of One to One Financial Management, said most prudent financial advisers had been unwilling to use finance companies for several months, if not a year or more.

"And there's not a return big enough in the world to put my own money in a finance company today."

The collapse of the various finance companies lent weight to the principle of diversification. Mr McFarlane said some of the people who had invested in finance companies had done so without seeking advice.

"I've come across people in the community who have done it themselves -- one person had $100,000 invested across five different finance companies -- they've all collapsed."

However, Mr McFarlane said it was important to realise that in many of the finance company collapses, the companies were working towards a return to investors, so they should get most, if not all, of their money back.

"Yes, it's bad news, but it's not the worst possible news."

Peter Hayes, from Peter Hayes and Associates, said people were not reinvesting in finance companies.

"Two years ago, even one year ago, things were a little bit busier in that area."

Now he said he would be telling people if they couldn't sleep at night, to leave their money in the bank.

Finance companies still offering Hanover-style returns

Finance companies are still offering high interest rates, despite a string of failures in the sector leaving $3.3 billion owed to investors.

Last week, the Weekend Herald's table of finance companies showed Hanover Finance was offering investors a year deposit rate of 10.05 per cent and a three-year deposit rate of 10.80 per cent.

Hanover then became the 25th finance company to crash when it froze repayments on $544 million of investors' funds on Wednesday.

The latest figures released by interest.co.nz show a further 10 finance companies are offering term deposit rates of 10 to 13 per cent.

Sharebroker Chris Lee, managing director of Projects Resources, said there were some high-risk companies still lending and "it just doesn't make sense to put your money there".

But he said it was difficult to pull all finance companies under one umbrella.

"The sad thing is the public may end up dragging money out of perfectly good companies for no reason at all other than emotion."

Failed finance companies had either performed "rotten" business, or had fallen under the model of lending long-term and borrowing short-term, he said.

Bernard Hickey of website interest.co.nz said risky finance companies were not offering high enough returns to justify the investment.

This came down to a "chicken and egg" situation: risky finance companies were reluctant to offer high interest rates because investors would think it must be too risky and would put their money elsewhere, Mr Hickey said.

Mr Lee agreed and said an investor putting money into a low-rated company offering 12 per cent interest took a significant risk.

"If you can get 8 per cent from the banks and 10 from a good finance company with a proper credit rating, then a company with not as high a rating should be rewarding investors with a much higher rate."

Only four New Zealand finance companies sport a credit rating: UDC Finance, Marac Finance, South Canterbury Finance and Equitable Mortgages.

A credit rating is a formal assessment by an independent credit rating firm where analysts investigate the company, assess the strength of its balance sheet and give it a rating.

The Government intends introducing legislation that will make credit rating necessary for finance companies. Until then, investors will have to do their own research.

The only problem, according to Mr Lee, is that financial literacy is generally low in New Zealand - many investors do not understand credit ratings or the jargon in investment statements, are guided by television advertising and attracted by media personalities.

He said the market was the worst he had seen it in his 30-year career and his greatest advice to investors was never to put more than 10 per cent of their money into a company.