BC3: Tier 1 and Tier 2 Lending Covenants HY2016
Quote:
Originally Posted by
Snoopy
I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (AR2015, p32).
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:
Tier 1 capital > 20% of the loan book.
(Dorchester has only Tier 1 capital for these calculation purposes.)
Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $121.002m - $103.595m - $8.532m
= $8.875m
The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:
1/ 'Financial Assets at fair value through profit or loss': $17.350m
2/ 'Finance Receivables': $142.827m
3/ 'Receivables and deferred expenses': $5.946m
4/ 'Reverse annuity mortgages': $13.253m
For the FY15 year these come to $179.376m
$8.875m / $179.376m = 4.9% < 20%
=> Fail test
Care needs to be taken in interpreting a result like this. A big increase in Intangible Assets over the year have done the damage to this statistic.
From note 22 in the annual report, $45.6m of intangibles was brought onto the books with the acquisition of TUA. $30.454m was brought onto the books with the acquisition of Oxford Finance. These companies were bought outright to become profitable acquisitions. A good margin over asset backing was paid because these assets were highly profitable, demanding any buyer to pay a premium. The downside is that should either of these assets suddenly become less profitable than expected an urgent capital raising from TNR shareholders could be required!
I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (HYAR2016, p14).
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:
Tier 1 capital > 20% of the loan book.
(Turners has only Tier 1 capital for these calculation purposes.)
Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $125.810m - $105.145m - $5.310m
= $15.355m
The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:
1/ 'Financial Assets at fair value through profit or loss': $15.910m
2/ 'Finance Receivables': $164.436m
3/ 'Receivables and deferred expenses': $4.553m
4/ 'Reverse annuity mortgages': $11.878m
For the HY2016 year balance date these come to $196.771m
$15.355m / $196.771m = 7.8% < 20%
=> Fail test
Care needs to be taken in interpreting a result like this. The increase in Intangible Assets over the last six months (representing a business acquired over the period) needs to be considered. Southern Finance Limited was brought onto the books on 31st July 2015, just two months before the reporting period ended on 30th September 2015. .
From note 6 in the half year report, $1.677m of intangibles was brought onto the books with the acquisition of Southern Finance. The $1.677m is a measure of what Turners were prepared to pay over and above asset backing, because of the prospective profitability of the acquisition. Nevertheless $1.677m represents a minimal overall asset distortion to a company with over $100m of intangible assets on the books already. So I am judging the acquisition of Southern Finance, with a loan book of $9.5m, (under 6% of the total finance receivables loan book for TNR) , as not distortionary and hence not material for Tier 1 lending covenant purposes.
Put bluntly, while an improvement from the FY2015 position, I consider the capital behind this company is (still) insufficient for the size of the loan book.
SNOOPY
discl: shareholder and bondholder