Red lights flashing
Warnings about the risk of a collapse in the fixed interest sector are coming thick and fast at the moment, including from people who offer investments in this area.
Tuesday, June 10th 2003, 6:37AM
People from Equitable, Strategic Finance and the Hanover Group (Elders Finance, FAI, United Finance and Nationwide Finance) all told delegates at the Society of Independent Financial Advisers (SIFA) conference in Rotorua over the weekend that some companies offering high yielding investments such as debentures and mortgages are likely to fall over and investors will lose money.
Another to recently add his voice to this chorus is financial adviser Gareth Morgan.
Morgan’s criticism is at the unsecured capital note market, where companies are offering attractive, but insufficient returns, to investors who are desperate to generate positive returns.
“Surely we are seeing some of these investors manoeuvre themselves into a position where the risk they're exposing their capital to is soaring. There are going to be some casualties.”
Likewise, Herald columnist Brian Gaynor has been critical of the capital note market for the same reason.
Neville Giles from the Hanover Group told SIFA the main risk facing his group of companies was not a non-performing loan, but the “risk of a debt issuer going under.”
He says it’s not a matter of if, but when.
“There is going to be a debenture issuer default.”
When that happens funds flows in this market are likely to dry up and companies will have difficulty meeting interest payments to investors.
Giles says Hanover have put in place a contingency plan for this event. He says the company has decided it has to have enough cash on hand to meet all payments for a three to six month period when no money is coming in the door.
The company has established a liquidity buffer where a significant sum of money is kept in trust accounts of AA rated issuers and is realisable in three to six hours.
Giles says the move impacts on Hanover’s profitability but is sensible for the long-term future of the business.
He says the company is after good profits every year for 20 years, not one year of super-profits.
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