Book Value and Public Float Profit of Heartland's Harmoney Stake
Quote:
Originally Posted by
Snoopy
Heartland was up 2c when the announcement came through it had acquired a 10% stake.
2c x 463.3m Heartland shares = $9.26m. So HarMoney in total must be worth
$9.26m/ 0.1 = $92.6m today, according to Heartland shareholders.
The above I wrote in September 2014 when the purchase of an 'approximately 10%' stake in Harmoney by Heartland was announced.
Not being a separately listed investment (yet) Heartland was under no obligation to revalue their Harmoney stake every year. I see from AR2015 p43 under Note 9 (Investments) that Heartland paid $6.719m for their stake in Harmoney (11% stake) AND an equity investment in another company "Ora HQ Limited" (12% stake). Ora HQ Limited provided business analysis through a cloud based software platform. The Company offered customers a platform for maintaining performance reports, market news, customer and competitor research, digital marketing channels and other related analysis and research. Ora HQ served small businesses throughout New Zealand. According to the NZ company's website
http://www.companiesnz.com/company/3...ora-hq-limited
Ora HQ Limited went into receivership in 2018.
On 12th January 2015 Heartland announced:
"Harmoney has completed a successful $10m capital raise in which Trade Me has taken a 15% shareholding in Harmoney. As part of this capital raise, Heartland has increased its investment in Harmoney to maintain its existing shareholding of approximately 10%. Based on the investment made by Trade Me, the current implied value of Heartland’s investment in Harmoney is in excess of $5.0m. Following the capital raise, Heartland will have invested approximately $3.5m in Harmoney. Heartland’s initial investment in September 2014 was prior to the launch of Harmoney’s platform and formed part of a wider commercial arrangement."
Working back through the numbers, if Trade Me had 15% of Harmoney after this capital raise, then Heartland must have increased their own investment in Harmoney by 15% to maintain the same percentage shareholding they had before Trade Me came on board. So the original investment (OI) by Heartland into Harmoney must have been:
OI x 1.15 = $3.5m => OI = $3.0m
The Harmoney investment by TradeMe would suggest an incremental gain on the holding value of Heartland's 'Harmoney' investment of:
$5.0m -$3.5m = $1,5m
What has been said on 'equity investments' in successive annual reports follows:
----------
FY2016/ The value of all equity investments increased over the year (see AR2016 p49 ) by:
$7.291m - $6.719m = $0.572m
This change is after a gain on the sale of investments of $1.136m (AR2016 p46). If we add the gain on the sale of investments onto the end of year balance figure, and then subtract the total investment balance from the previous year I get:
($7.291m + $1.136m) - $6.719m = $1.708m
That $1.708m could include the $1.5m gain recognised as part of a new carrying value of Harmoney. However, I am unable to see where such a change in value has been taken account of in the 'Statement of Comprehensive Income' for FY2016.
FY2017/ Moving on to note 9 of AR2017 the value of 'investments' has increased from $7.291m to $11.791m = $4.5m. During the year some investments were sold meaning a gain of $0.628m was booked as part of 'Comprehensive Income'.
FY2018/ By FY2018 'Equity Investments' had reduced from $11.791m to $9.694m, a drop of $2.097m (AFR2018 p28) although $0.156m of investment sale profits were booked during the year (AFR2018 p25).
FY2019/ Rolling on to FY2019 (AFR2019 p22) 'Equity Investments' have increased to $12.435m from $9.694m (a rise of $2.741m) after $0.174m gain was realised on investments sold (AFR2019 p18).
FY2020/ Finally by FY2020 (AR2020 p107) $16.335m of equity investments were recorded on the books. This represented a rise in the equity investment balance of $3.9m. There were no reported gains on investment sales over FY2020 (AR2020 p100).
--------
An interest.co.nz article on the October 2019 'C' capital raising:
https://www.interest.co.nz/news/1023...-and-2-unnamed
suggested that new investment of $NZ25m by Kirkwood capital of Melbourne implied an overall valuation of Harmoney north of $100m. Kirkwood's 13,4% stake at that time would suggest an overall valuation of the company of:
$NZ25m/ 0.134 = $187m
That $187m figure is 'considerably north of $100m'.
The 30th October Harmoney prospectus is now touting a 'market capitalisation offer price' of $A353.2m, after the completion of the public capital raising. At that price, the Heartland 8.4% stake would be worth:
0.084 x $A353.2m = $A29.7m / 0.94 = $NZ31.5m
There is a missing peace ti this puzzle. In the pre-Restructure Shareholdings, the Heartland stake in Harmoney was 11.8% (Harmoney Prospectus p35). So did Heartland add in some more capital to take their stake from 11% to 11,8%? I can't find a press release that says so. P35 in the Harmoney prospectus notes that Heartland owned 1,966,555 'Series B' shares. A report on the Sries B capital raising on 16th February 2016 is here:
https://www.altfi.com/article/1744_k...inancing_round
This suggests that a UK based company 'Alternative Credit Investments' took a stake worth up to $8.5m. Spread over 3,933,109 shares (Harmoney Prospectus p35), this suggests a capital raise share price of up to: $8.5m / 3,933m = $2.16. I will guess the capital raise was done at the 'round figure' of $2. If that is what happened, then Heartland must have increased their investment in Harmoney by
$2 x 1,966,555shares = $3.955m
However that figure doesn't correspond with any new Heartland equity investment capital outlayed over FY2016 as I have reported above :-(. Oh dear! It is getting late and this is the best I can make of a far from clear situation. However, whatever way you slice this deal, it does appear that Heartland will be in for at least a $20m 'windfall one off on paper profit', should the Harmoney float go through at the price projected.
SNOOPY
Heartland's funding committment into Harmoney
Quote:
Originally Posted by
Snoopy
Harmoney & Other Consumer Lending" had an OK year over FY2020 (p19 FY2020 presentation, PR2020) with the loan portfolio up 2% to $211m compared to FY2019. I am unclear as to exactly what has happened here. From the information in the link below:
https://www.interest.co.nz/news/1067...gging-consumer
Harmoney are now a much smaller business. (Loan Book down from $367m to just $129m). Heartland own just 11.85% of Harmoney. (source NZ Companies Register below)
https://app.companiesoffice.govt.nz/...2BBiKNrJq6AAAA
But 'ownership' and 'providing capital with which to make loans' are two different things, And I think Heartland do both of those things for Harmoney.
In direct contradiction to the 'interest.co.nz' Harmoney results reference above, p19 of PR2020 shows "Harmoney receivables increasing to $199m." Who can explain that discrepancy? Whatever the explanation, it certainly sounds like the Harmoney loan book is being incorporated into the Heartland loan book. But the reason for doing that is another mystery in itself (question posed below). Despite the slightly bullish tone on p19 of the AR2020 presentation, I don't see sufficient information to override my (previously stated in the quoted bubble) bearish outlook for this sector.
It does definitely appear as if Harmoney loans are listed in the 'Finance Receivables' in the Heartland balance sheet. However, a word search for Harmoney in the FY2020 accounts comes up blank. So I am not clear where Harmoney fits into the Heartland 'Finance Receivables'. One possibility: If I look in the Segmented Analysis of the AR2020 p98, we see the 'Other Personal' category having $214.759m in assets. This is similar to the $211m in assets figure listed on p19 of PR2020 for 'Harmoney and Other Consumer Lending' (again I can't explain the small difference).
I thought I might find Harmoney under note 11 'Investments' (AR2020 p106) under the equity sub header. But
if Harmoney was an 'investment' based on the just 10.85% shareholding that Heartland held, then why have the Harmoney receivables -apparently - been consolidated inside the Heartland receivables? I don't follow how Harmoney has been treated in the Heartland accounts. So if anyone can unscramble it for me I will be all ears.
A bit more on how Harmoney gets the finance dollars to operate their business is disclosed in the Harmoney Prosoectus of 30th October 2020. This has ramifications for Heartland shareholders who were some of the earliest funders of Harmoney.
From Section 3.2.7.1 of the Harmoney Prospectus on New Zealand funding:
---------
"Prior to its New Zealand launch, Harmoney was granted the first New Zealand peer‐to‐peer licence by the FMA in 2014, creating a peer‐to‐peer marketplace that enabled retail lenders to lend to creditworthy customers. Alongside the launch of the peer‐to‐peer marketplace, Harmoney attracted $85 million of peer‐to‐peer funding from multiple institutional partners. The institutional peer‐to‐peer funding included a $50 million facility from a New Zealand bank." (Snoopy Note: I believe this NZ bank to be Heartland, consistent with Heartland's 8th September 2014 press release).
"This institutional peer‐to‐peer funding, in conjunction with the peer‐to‐peer marketplace, allowed Harmoney to successfully demonstrate the viability of its peer‐to‐peer lending model. Harmoney subsequently added three additional institutional peer‐to‐peer funders: a second New Zealand bank, a London Stock Exchange listed investment trust, and a New York-based asset manager. The terms of these commercial agreements vary but all compensate Harmoney with upfront fees paid by the peer‐to‐peer lender to Harmoney at the time the loan is funded. In addition, some peer‐to‐peer lenders also pay Harmoney a service fee and performance fee, with the potential for some of the upfront fees to be rebated by Harmoney to the peer‐to‐peer lender depending on the performance of the underlying receivables."
-------
I read that as though the funding banks (including Heartland) pay an up front fee when a loan is initiated and an extra fee on top of that if the interest charged ends up being 'above market expectations' (I am not sure what other interpretation you could put on a 'performance fee' for a loan). But also that Harmoney's 'finder fee' to Heartland will be rebated if a loan subsequently goes bad.
--------
"For the period the peer‐to‐peer marketplace was operating, approximately 20% of monthly New Zealand loan volumes were allocated to retail lenders, with the remainder, prior to the introduction of the warehouse funding model, being funded by institutional peer‐to‐peer funders."
---------
If we take the balance sheet at the end of FY2019 (30th June 2019), a 'time snapshot' where the retail peer to peer lending operation was still in full flight, we have total Harmoney lending of $NZ149.7m (NZ) + $NZ39.8m (Oz) = $NZ189.5m on the Heartland books (PR2019 p18).
So we can work out that 'institutional peer funders' funded approximately: 0.8 x $147.7 = $118m of that total. Of that sub total, Heartland will have funded up to: $50m/$118m = 42% of the institutionally backed portion of the NZ Harmoney loan book (more if you remove Warehoused loans)? This is substantially more than Heartland's 10.85% equity stake in Harmoney might otherwise suggest, if their loan book commitment and their equity stake in Harmoney were in balance.
------
"During this period, the retail peer‐to‐peer loan book grew to approximately $80 million, which was funded by approximately 10,000 retail lenders."
-------
$189.5m - $118m = $71.5m. $71.5m is 'approximately $80m'. The actual peak figure (which would be higher) would most likely have been reached after 30th June 2019 but before the wind down in the Harmoney retail peer to peer loan book was initiated later in calendar year 2019. The $80m figure would suggest that the initial expansion by Harmoney into Australia was entirely funded by retail peer to peer investors.
--------
"In December 2018, Harmoney established its second funding channel – the New Zealand Warehouse Trust. This limited recourse, revolving warehouse securitisation trust funds loan originations in the New Zealand market. Total warehouse funding on commencement of the New Zealand Warehouse Trust was $50 million, which was a combination of senior note and mezzanine note funding. The senior note funding is provided by a major bank, which initially subscribed to $35 million of senior notes. A large Australian asset manager subscribed to $9.75 million of the mezzanine notes."
---------
'Securitization' means collecting a set of like loans together and selling these packaged loans off to a third party. However, such securitzed loans would generally still appear on the Harmoney books, because any organization that buys these loans requires a guarantee that could see the loans returned to Harmoney under conditions of extreme loan stress. With loans securitzed to a third party, that means the original $50m of bank funding that Heartland provided to Harmoney can be recycled into newly written additional loans,
----------
"The New Zealand Warehouse Facility limit was increased to $100 million in May 2019, $140 million in December 2019, and $153 million in September 2020 in order to support the continued growth in Harmoney’s loan book. Harmoney has recently commenced a process to obtain a formal credit rating for the New Zealand Warehouse Trust with a global external credit rating agency. The senior financier has approved a further limit increase of the New Zealand Warehouse Facility to $200 million once the rating is obtained."
-----------
I find it astonishing that the 'warehouse funding' (securitisation) of Harmoney loans has exploded from an initial $50m to $200m in little more than a year.....
-----------
"Furthermore, in anticipation of establishing an Asset Backed Securitisation program, the rating will facilitate the ability to term out loan receivables to recycle warehouse capital. In September 2020, Harmoney also received credit committee approval from a global asset manager for up to $200 million to establish a second Warehouse Facility in New Zealand."
-----------
....and that the establishment of a 'Warehouse Facility Credit Rating' (with no indication as to what that hoped for rating might be) will immediately allow the securitization program to for Harmoney to double in size yet again, with a combined $400m facility!
So what does this mean for Heartland? It appears that going forwards Harmoney will not require Heartland's 2014 $50m cash funding commitment to grow, as Harmoney's loan book grows. That will be positive for Heartland going forwards as they manage their own limited capital base. Yet despite Heartland not having to put up more cash, Heartland will still have to raise more capital of its own to stand behind Harmoney's ever expanding and 'consolidated within Heartland' loan book, and satisfy our Reserve Bank's capital requirements for NZ banks. I think it is not so good for Heartland shareholders having to raise capital for a 'rapidly expanding part of a loan book' that you do not control!
Does Heartland's $50m funding commitment to Harmoney also explain my unanswered question (see quoted post) as to why Harmoney's full loan book appears on the Heartland balance sheet, even though Heartland is only a 10.85% shareholder in Harmoney? Up to $50m of that Harmoney loan receivables balance is directly funded by Heartland. Taking out the securitised loans (loans that have been sold off that nevertheless still appear on the loan book), that might mean that over 50% of Harmoney's loan book is funded by Heartland. Perhaps owning over 50-% of the loan book is a sufficient interest to justify incorporating that Harmoney loan book into the Heartland loan book, despite Heartland's equity ownership in Harmoney being well below the 50% threshold consolidation level for result consolidation. Anyone know?
SNOOPY