Finance companies adopt new rules
Non-bank depositors are now operating under stricter rules now the Reserve Bank has prudential supervision of the sector. Sophia Rodrigues looks finds out how each company has changed its trust deed.
Wednesday, January 26th 2011, 5:00AM
by Sophia Rodrigues
Under the rules there is some consistency on issues like capital and governance, however when it comes to liquidity and related party exposure companies have had to develop their own criteria in consultation with their trustees and within the overall framework provided by the Reserve Bank.
Liquidity requirements, in particular, are varied across finance companies as each trust deed now includes one or more quantitative liquidity requirements that are appropriate to the characteristics of the business.
Fisher & Paykel Finance's new liquidity rules state that its liquid assets and undrawn committed facility amount less the amount of committed facilities expiring within the next three months shall be greater than the sum of term retail borrowing due within the next three month and on-demand retail borrowings, and uncommitted bank borrowings. The company must provide to the trustee with a report on or before the last day of each month that provides calculation of liquidity covenants, minimum capital ratio, exposure to related parties, liquidity summary and overall liquidity position.
The trust deed also states that any non-compliance in the risk management programme must be notified to the Trustee and within 14 days after that there should be a plan provided on how compliance will be restored.
Asset Finance and NZF Money, which both use Covenant Trustee as their trustee, have largely similar requirements listed in their trust deed.
Both the companies are required to manage their liquidity in such a way that for the first three months of each monthly liquidity report, the projected liquidity position is positive. Apart from liquidity reports, at the end of each month the companies are required to produce capital adequacy and a trust deed financial ratio compliance report. NZF Money is also expected to provide the Trustee with a copy of management accounts that are prepared for the Directors.
For both companies an event of review will happen if capital ratio is within 2% of the minimum percentage and the Trustee has reasonable grounds to believe that the company is likely to breach covenant within the next six months. A negative liquidity projection also triggers an event of review and requires the company to immediately inform the Trustee.
NZF Money also has another norm to meet as its directors in their quarterly report have to confirm that the company will be able to continue as a going concern and also meets the solvency test.
General Finance's liquidity rule states that the level cannot fall below 10% of total tangible assets.
PGG Wrightson Finance's amended trust deed stipulates that its available liquidity cannot be less than 30% of call retail liabilities and short term available liquidity cannot fall below 65% of short term retail liabilities.
In case of UDC Finance, the company is required to ensure that the total of the amount available under committed credit facility and 70% of the total securities and shareholders' funds will not fall below 65% of total tangible assets.
Apart from this, UDC's directors are required to state that such amount have at all times since Dec 1, 2010 been at least 65% of total tangible assets.
Combined Building Society (CBS), the new merged entity comprising of Marac, CBS Canterbury and Southern Cross Building Society is required to ensure that the liquid assets of the consolidated group are at least 15% of total liabilities. The same norm applies for CBS's guaranteeing group.
Among all the above, Avanti Finance is the lone finance company which has a stricter regulation on related party exposure. The company is required at all times to ensure that total exposure to related parties does not exceed 10% of capital. All others have a higher 15% ratio which is the maximum specified by the Reserve Bank.
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