A finance company chief has said problems in the New Zealand sector are ‘‘a systematic failure of an entire industry''.
Lombard Group chief executive Michael Reeves was commenting on the decision by troubled 100% subsidiary Lombard Finance and Investments Ltd which owes investors $127 million to call for a moratorium on its payments to investors.
Lombard Finance and Investments Ltd is the 16th New Zealand finance company to run into difficulties. Payments have been suspended.
Mr Reeves' comments coincided with remarks by BNZ economist Stephen Toplis indicating he believed there was the ‘‘possibility'' of further finance-company problems.
While the finance-sector collapses were not the New Zealand version of the United States subprime woes, there were ‘‘some similarities'', Mr Toplis said.
In addition, a report prepared separately by BNZ economists indicated house prices were thought to be overvalued by about 30%.
‘‘We believe house prices risk falling by more than the 10% we already presume for this year,'' the report said.
Since mid-2006, it is estimated more than $3 billion has been lost to more than 30,000 New Zealand investors through financecompany collapses, receiverships and losses, beginning in May 2006 with National Finance through to the February fall of Blue Chip New Zealand, whose full liability is still to be determined.
Lombard Finance and Investments Ltd has a loan book valued at $143 million on mortgages held over New Zealand properties.
Mr Reeves said the company was seeking a moratorium on paying investors, as business confidence had fallen because of a downturn in real-estate values, lack of sales and lack of bankfinance availability prompted by the international credit squeeze.
‘‘In recent months, our borrowers have found it increasingly difficult to sell properties and equally difficult to refinance their mortgages and repay their loans to Lombard Finance,'' Mr Reeves said.
As a result, Lombard was ‘‘unlikely to be able'' to meet obligations to pay investors when the due dates for capital and interest fell in late April or May.
‘‘It is clear from recent events that this is a systematic failure of an entire industry. From our perspective, a moratorium is now the only responsible course of action,'' Mr Reeves said.
As the list of finance-company woes increased in New Zealand, investors withdrew their money as soon as possible and did not reinvest, causing severe cashflow problems for many of the finance companies.
Mr Toplis said there were ‘‘some similarities'' in the valuation of the assets involved in New Zealand and US woes.
‘‘There's similarities of sorts, in that lenders got caught short because assets on their books, namely property, were lower in value than anticipated,'' he said.
He believed there was a possibility of more finance-company problems, given investors wanted to place funds in more highly rated companies, banks were offering higher rates of return, and property prices were flat or falling.
The BNZ economists' report said a correction in the housing market was inevitable, and would be painful for many people but good for the economy.
‘‘And the potential downside bears thinking about as our indications of a 30% housing overvaluation attest to. But let's also bear in mind the good news, in that many potential homeowners, long squeezed out of the market, stand to be big benefactors,'' the report said.
Mr Toplis said investors had ‘‘finally woken up to'' the risks involved in some high-return assets.
