Property finance Ltd goes bust

So that makes it six finance companies in 15 months. What does this mean for the NZ credit market?

NZ banks should not be significantly effected. Banks are in relatively good shape, and all the recent trouble in secondary, non-bank financial institutes, is likely to increase demand for low yielding, low risk bank products.

However, non-bank financial institutions are going to have one hell of a time trying to find funds in the current tight credit market. The failure of so many finance companies is likely to make thing more difficult for them, by increasing investors level of risk aversion. Without a steady stream of deposits, some efficient and well managed finance companies are going to be flushed down the toilet. That is what happened to Property Finance.

My concern is that this may make it difficult for firms to borrow money. NZ currently has a tight labour market, and NZ firms are making low margins. In this sort of situation, firms are unwilling to remove staff, and as a result need to borrow to stay afloat. Now, something will have to give, either the flow in the credit market will improve, unemployment will creep up, or firms will be run into the ground. Only time will tell I guess.

Update: A couple of finance companies say they are feeling good. They expect regulation to occur, but how should we regulate the non-bank financial sector?

Update II:  So Five star consumer finance has gone under.  Guess it wasn’t really five star 😉 .  Look I’m an economist with no sense of humor I just had to say it.  But it didn’t deserve a new post, as the company was small and not that exciting.  It might scare people, but I suspect it was just dead wood.

  • Kimble

    Lets take a look at the finance companies that have fallen over (from memory):

    Western Bay – Small, poorly run

    National Finance- Small, poorly run

    Bridgecorp – Medium sized, basket case

    Nathans – Small, poorly run, confusing structure

    Property Finance Group – needs capital.

    Provincial – mostly well run, supported by owners with capital injections, repay most if not all it owes, went bust because of ill advised venture into South Auckland car yard finance.

    The people with their money in decent finance companies would only have been hurt by one or two of these collapses. And I think that is the lesson that will be learned. The badly run finance companies will find it very difficult to raise money and they will collapse. And probably deservedly so.

    Finance companies who have been tightening their lending criteria, that are backed up by their owners (ie, willing to inject capital), who have healthy balance sheets will survive.

    This isnt a fatal problem for the finance company sector in NZ, it is only a fatal problem for poorly run companies sailing too close to the wind.

  • Matt Nolan

    Kimble, I think you hit the nail on the head, I completely agree. However, I am concerned about short-term liquidity troubles for firms. From what I’ve heard firms are having a lot of trouble finding capital at the moment, and with margins squeezed this is quite problematic for them.

    Ultimately I don’t think this will be bad to bad for the credit markets (we are flushing out some of the crap, sadly a few good bits get taken out as well), but contagion to the goods and labour markets would be a concern.

  • Kimble

    The good ones have been lining up alternative sources of funds, storing liquid cash and securing banking facilities.

    This isnt the first time this sort of thing has happened, many wise old-heads in the industry have been aware of the potential hazard and have worked to protect their business from it.

    The goods market will only be affected at the margins. I really cant imagine Bridgecorp and their ilk was funding an awful lot of productive activity in NZ.

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