Originally Posted by
Snoopy
Iceman, I think I need to explain my post a little more. You are quite right to point out the difference between the property realisation risk of asset lending up to 90% on an uncompleted property development in the late noughties, verses lending 40% maximum (mostly much less) to a retired pensioner. However, I am talking about 'borrowing risk' of the financial institution, not the 'asset realisation risk' should the loans fall over.
I contend that the borrowing risk for Heartland funding these reverse mortgages today is very similar to that faced by South Canterbury Finance funding those late 2000s property developments. The main difference is that HGH is using wholesale funding. Wholesale funders -hopefully- are not as fickle as private investors in that they would not suddenly pull all their financial backing out on the whim of an internet rumour and cause a run on funds queuing out of the door to withdraw their money. But make no mistake, wholesale funders do not take their risks for granted. This is why Heartland have diversified their Australian funding away from just CBA bank, to now include Westpac and ME bank and their own wholesale fixed interest funding too. But although this wholesale provider diversification is good, it has not addressed the mismatch in borrowing and lending loan timing. Jeff is not a fool and I would be very surprised if there is not further work going on 'behind the scenes' to address exactly the issue I am talking about. However, exactly to what extent Jeff will be able to offset this timing risk is unknown. And while it remains unknown, this 'funding timing risk' creates an 'investment risk' for HGH shareholders.
The next question to ask is, what happens if this 'funding timing risk' becomes an issue? Unlike with South Canterbury Finance, it is likely that HGH will eventually get all their capital back. But the cost will fall not on Heartland directly but on those taking out the reverse mortgage who are forced to repay early. They will not have alternative funding available (because that is why they took out a reverse mortgage in the first place). They will be forced to sell their homes and forced to live out their days in some grotty rented bedsit. It would be a PR disaster for Heartland, and no doubt Australian politicians would be quick to put the boot into that 'greedy NZ institution Heartland' squeezing 'our elderly' out of their last coin and forcing their to sell their 'life savings within four walls'. It would make no difference whether reverse mortgage holders lost 90% of their capital or 20% of their capital. With no alternative funding available, they would be 'out on their ear'. That means that even if Heartland get all their money back, they would be finished in Australia. Now ask yourself what multiple would 'the market' pay for a business with no clients and no prospect of ever getting any clients? Heartland in Australia would most likely eventually get their capital back. But as a business they would be destroyed and be forced to retreat to NZ. With the Australian growth engine gone, how would investors value what would be left in NZ? Perhaps a 50% dive in the HGH share price would set things back on an even keel?
You would expect Heartland to say all of the above wouldn't you? It still doesn't address the potential issue I have raised though. Historical access to funds does not guarantee future access to funds. And yes a large discounted share recapitalisation would get Heartland out of any potential funding hole. But at what cost to existing shareholders? And if those Australian 'shorters' got into Heartland while it was in trouble, a recapitalisation might not be possible!
You are sounding a bit like Alan Hubbard. Heartland like SCF have many years serving a market they know well. No reason to believe anything will be different in the future. All deals 'kosher'. But will Jeff Greenslade be putting in his own capital to prop up a potentially faltering Heartland , like Hubbard did with SCF (until the funding mismatch got too big for even a very wealthy Hubbard to deal with?)
SNOOPY