BC2: Liquidity Buffer Ratio FY2014 (Attempt 2)
Quote:
Originally Posted by
Snoopy
We are looking here for a 'liquidity buffer' (including undrawn bank lines) of 10% of the loan book. My interpretation of this hurdle is that it requires us to look at how current liabilities are matched to current assets over a 12 month time horizon. It is akin to a 12 month cashflow 'stress test'.
Looking at note 25b in the annual report on liquidity risk, I see that Financial Assets that are held for availability over the next 12 months total:
$16.979m + $5.774m = $22.753m
Financial liabilities due for payment add up to:
$18.443m + $2.345m = $20.788m
That is a deficit of some $2m. Note 23 has detailed information on the bank facilities, but curiously no information on borrowing limits. Perhaps a longer term holder can advise me what is going on there?
Why is the liquidity buffer ratio important? It doesn't matter how profitable a finance company is. If there is a need for cash in the current year, and the company cannot call on enough current assets to pay up, then the company will likely go out of business. This is effectively what happened when almost the whole finance sector in New Zealand collapsed a few years ago. So with that still fresh in the memory of high interest hunting debenture investors (and finance company shareholders) , this is probably the most important financial statistic of all. It is very frustrating when a company's annual report does not detail the headroom in their banking facilities. However, with a little sleuthing I know have it (a minimum of $22m with the banks). So, at last, we can see where DPC stood at the end of their financial year.
From note 26b in AR2014, we can see that the company's Financial Assets that are due to mature in the next twelve months are:
$26.463m + $8.229m = $34.692m
On the same page we see that borrowings that must be repaid or refinanced with Dorchester's banking syndicate amount to:
$0.723m + $7.648m = $8.371m
Under note 24 secured bank borrowings are $17.565m. That still leaves borrowing headroom of:
$22m - $17.565m = $4.435m
This is the extra amount of capital that DPC could borrow at 31-03-2014 -should they need to- without any renegotiations with their bankers.
However, in this case the $34.692m in maturing business more than covers the $8.371m of capital due. So there is no need to resort to borrowing headroom. DPC's liquidity is just fine.
SNOOPY