Dear ....
Thanks for your call.
It is important to remember that when we issued the Capital Notes in the world was a different place. As you well know, things began to unravel with three firms National Finance, Provincial Finance and Western Bay forced into receivership. As New Zealand entered recession in 2007, four more were placed in receivership. By the end of that year, the situation had deteriorated with 20 percent of total finance company deposits at risk. With the onset of the global financial crisis in 2008, the number of failed finance companies sharply rose to 48, involving depositors funds of over $6 billion. Throughout this period we have paid the interest due on the Notes on the due dates at all times.
Also at the time the Notes were issued, other factors included:
o The Global Financial Crisis did not occur until 2008
o There was no credit squeeze
o We had a high interest rate environment – at the time the OCR was 7.25%
o We had a highly active and rising property market
There has to be a balance between paying a competitive rate of interest and not causing undue pressure on the issuer. While we would have liked to have offered a higher rate to investors, we believe the Interest has been set at a competitive (3% over the OCR whereas the previous margin was 2.5%), yet manageable level, given our sector challenges and the economy in NZ and Globally, all of which are still in recovery mode. Paying a high interest rate which could possibly put stress on the company is not a responsible action as any failure would obviously lead to a loss on Capital Notes being sustained by investors
In this regard, over the last 3 years there have been many financial service company failures, resulting in Capital Note holders loosing most if not all their money. Over that same period we have paid interest on Capital Notes on time.
As a result of the GFC, Finance sector failures and dramatic slow down in consumer lending, housing market activity and losses, all sectors of our business have been effected, thus preventing us accumulating funds within the group and denying us the opportunity to offer a cash redemption option on the Capital Notes. For the same reasons, finding a funder to provide up to $20m to replace the Capital Notes in this market is simply not possible at the moment. However, we remain committed to finding a replacement facility and are continuing the process.
In summary we believe the rate offered is set at a rate that is competitive, but also manageable for the group in the current environment we are operating and is:
o Double that of the OCR
o Significantly above the rate of inflation (providing a real return to investors)
o Above the rate offered by Dorchester (5%) which is arguably in a similar position in most respects
Capital Note Holders do have the option of not taking the offer of renewal and instead taking the shares, although I am sure they will look at the Hanover/Allied debacle of swapping an investment for equity and the resultant share price. If note holders choose this option then that is their choice, we are simply not prepared to pay a rate which could have a detrimental affect on the Group as a whole.
In regard to our offer to Debenture Holders, this rate is offered by our 100% subsidiary NZF Money Limited and not NZF Group Limited. You have already raised your issues about rates in the market and I have outlined the reasons why the rate was set at that level and while we would like to have set a higher rate, this would not have been prudent in the current environment.
If it is any consolation, (a) your capital remains intact (b) you have been paid interest on time, every time and (c) our intention is to continue to pay interest on time every time for the term of the new Capital Notes.
Kind regards
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