By Jenny Ruth
Monday 7th August 2006
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Sharechat: You say your bank lines have increased. What were they previously?
Dominion Finance managing director Terry Butler: When we purchased North South, we couldn't purchase it with those facilities ongoing. They had to be renegotiated. Their facilities have been renegotiated at the same level as they were (a three-year $20 million facility from Bank of Scotland and $15 million renewed annually from ASB). Dominion Finance previously had $15 million and that's been increased by $40 million. We're pleased with it.
SC: If your debenture flow continues strong, why did you want extra bank funding?
TB: It goes back to the concept of how a finance company should be funded. Over the last 12 to 18 months, I've had discussions with many international bankers. They've expressed surprise that we've continued to fund our business off the domestic debenture market. That's made me think a lot more about whether we should have large funding lines. New Zealand banks don't really support finance companies in providing those lines. That's why we looked internationally. It gives us a better mix of both retail funding and corporate funding lines. I don't think you should be reliant too much on just one source, otherwise it can land you in trouble. The Bank of Scotland doesn't give money away just because it's got it sitting on its balance sheet. They do due diligence. You don't get it overnight. I've been working on this for a number of months, long before any problems arose with Provincial and the others.
SC: What is your debenture reinvestment rate currently? Has it changed much over the last year?
TB: It varies from month to month and, generally over the last couple of years at least, our reinvestment rate has been running around 79% to 83%. Since this disturbance, so to speak, in the finance industry, it has dropped a little, but not very much. This month we would expect it to be around 74% which is still, in our opinion, quite substantially higher than the industry average. It's something we keep a very close watch on.
SC:Are you getting more requests for early redemptions? What is your policy on early redemptions?
TB: With the receivership of Provincial, especially, we had a period of a few days - and only a few days - where we had a couple of people concerned about their money, and fair enough. But we haven't made any early repayments whatsoever. We make early repayments in cases of extreme difficulty and that's running no greater than it was before. The inquiry for early redemption has stopped. I've got a huge degree of sympathy for those investors, in Provincial especially.
SC: Why is that?
TB: I really thought Provincial was a good company. I think their biggest problem was they took their eye off the ball. I don't think you can afford to do that.
SC: Have you considered getting a credit rating?
TB: I'm actually in support of a rating which is based in New Zealand for New Zealand debt issuers. I see little point in trying to have a Standard & Poor's rating because it's for large international conglomerates and it's not easily understood by the investing public. Any rating system should be easily understood by the ordinary man or woman in the street. Going from "BBB-" to "BB+", you don't know whether you're Arthur or Martha. I think it's extraordinarily confusing. I've had a discussion with Standard Y Poor's - this was quite a number of months ago. It was a courtesy visit which they made to quite a few companies. One of the things I was concerned about was whether or not they would have sufficient clientelle in New Zealand to be able to continue. The people came out of Australia. Australia's a totally different market to New Zealand. I'm very firmly of the opinion we should have a New Zealand rating system.
SC: What about Rapid Ratings:
TB: They've moved out of the market place now. You can't have a ratings organisation which is here one day and gone the next.
SC: Isn't the reason why most finance companies don't want a Standard & Poor's rating that they would end up with a junk rating?
TB: Absolutely. They don't rate anything less than $1 billion in assets. That only covers one or two companies. I still think there's an opportunity for someone to have a really good look at providing a rating system for all debt issuers, not just finance companies, so that people can determine exactly where they lie in respect of putting money into companies. Maybe it's a situation that the Securities Commission should look at. If it was available, everyone should have their business rated. I think the industry does need to look at itself and we need to move on. There's a lot of hype out there at the moment about the finance industry. A lot of it is incorrect, but we need to improve the information we give to investors but we have to keep it simple.
SC: Why hype is incorrect?
TB: That all finance companies are risky businesses, which they're not. The majority of the finance companies are very, very well run and are very profitable and will continue to be so.
SC: Why did you pay so much for North South Finance? (It had net assets of $12.1 million and $89.3 million finance receiveables and Dominion paid nearly $40 million)
TB: I don't think I paid over the top. In fact, it's proven to be a good buy. I'm very comfortable with what we paid. I prefer to pay more and have no problems than to pay based on a PE (price-to-earnings) and get surprises. I can say there are no problems in that company whatsoever. That saves us a lot of time and hassle as far as having to clean up someone else's mess. There was none of that. I think the price was very fair.
SC: How much was the capital notes issue over-subscribed? Why do you think it went so well? Why did you chose to issue capital notes rather than equity?
TB: It was over $45 million and we were looking for $40 million. Timing is always important and the fact that Dominion is a publicly listed company. There was an appetite at that time for capital notes. There were quite a few that were being repaid at that time. That was why we made the decision to do capital notes rather than equity. Timing is all important. You wouldn't want to be going out to the market at the present time for a capital notes issue, not if you're a finance company.
SC: Are all the North South personnel still working for the company?
TB: The only one who's gone is (former managing director) Darryl Eastgate. We knew at the time we purchased it he was very keen on purchasing a farm property in the South Island.
SC: Will you maintain both the Dominion and North South brands?
TB: Yes, at this point in time. At the time of purchase, in fact the day of purchase, North South had $100 million of invested funds. It gives investors another opportunity to spread their investments, even though it's under the same management. There are two totally separate operating companies and at this point in time I wouldn't want to change that, especially given current conditions. Not this weekend but the next, they will come under the same umbrella. They will be operating out of our offices. They are very close, just down the road, but this is going to be a saving in running costs. Right from day one, all the accounting came under our control at Dominion Finance. They used to our-source their accounting. We do all the treasury functions and also all the administration under the same group. We're in the process of changing their systems to our systems so everything runs identically. There are good savings there.
SC: I presume you don't want to upset the brand loyalty?
TB: Very much so. North South is a very good brand. We paid a pretty good price for it. I'm not going to discount that cost and incorporate it all into Dominion Finance. It's becoming better and better and that's part of what we paid for.
SC: Are there any major differences between Dominion Finance and North South? Both businesses seem pretty similar in such things as not having more than a 75% LVR (loan-to-valuation ratio).
TB: They're absolutely identical from that point of view. The major difference was that Dominion Finance had probably lost part of its business to North South in the area of up to $1 million lending. North South still cover that area and that was one of the major areas we were missing out on.
SC: Why was the latest second half result so much stronger than the first half?
TB: Last year was an election year. For the first six months things did slow down quite dramatically in both companies. Probably around September, it took off again and for the next six months we were extremely busy.
SC: Profit growth in the last year was considerably slower than in recent years. Is that likely to continue in the current year?
TB: As you get larger, you can't maintain the same percentage increase. It just becomes very, very difficult to do. Our profitability is running right on track at the present time with what we've budgeted for. That has taken into consideration the current climate and economic circumstances, not only in New Zealand but worldwide. We did anticipate a slowdown but our profit's still running right on target.
SC: Can you explain your bad and doubtful debts increase and the increase in past due loans?
TB: You're looking at the combined accounts of both Dominion and North South. There hasn't been an increase in provisions. We make a percentage, 0.75%, as a provision going forward. That accumulates - it's never reduced if our book reduces. We've made no change to that whatsoever.
SC: Why do you favour property as security so much?
TB: Probably for quite a few reasons. It doesn't disappear as much as a second hand car. It's much nicer dealing with someone who wants to borrow money against a property rather than a chattel or a second hand car. I have some extremely good lending managers. It's better for them to keep them interested.
SC: You told last year's AGM you were surprised the share price hadn't risen more. What is your current thinking?
TB: I still think it should be more. That's controlled by the market. One of the biggest problems the company has is that it has very limited liquidity in the shares. The largest shareholders cover in excess of 80%. That doesn't allow a lot of liquidity.
SC: Are you still looking for acquisitions?
TB: I think you've always got to look at the opportunity. We've got to keep a close watch on our gearing because of the increase in total assets. We can't allow equity to get too low. We certainly monitor that. We would have to look at whether or not we do another rights issue or whether we bring in additional capital into the company for future expansion. We've also got to make sure our capital is working for the benefit of the shareholders. I'm a conservative person, I make no bones about that. I've always been that way. We're not going to show the huge growth that some companies have shown. Our investors receive a very good return on their shares. I don't have the right to just sit back and say, she's going along sweet. I've always got to look at the opportunity to increase shareholder value. We're not going to acquire something just for the sake of it. It has to be as good as North South with no hassles. If the opportunity comes along, we will give serious consideration to it.
SC: Why did Ann step down from her executive role? Do you have any plans to retire? Is Hayden still working for the company? How is he progressing?
TB: She's still fully involved on the board. She was fully involved in the due diligence in respect of our purchase of North South. She's still pretty much hands on in other areas of the business. She's a full time director. At some stage I will probably be put out to pasture. We're always on the lookout for good people to join us with new ideas, progressive ideas. Maybe there might be some slight change in the role. You can't afford to take your I off the ball in business. If you're looking at other opportunities and analysing them, I want to make sure we've got the right people to make cover our normal day-to-day business. I can't see either Ann or I disappearing from Dominion for many, many years to come. Yes, Hayden's still here. He's wonderful. When Ann and I first started working together, some friends gave us three months. That was back in 1990. Over the years, when we were talking to Hayden about the possibility of coming on board, the reaction was, I'm not sure I want to be working with my mother and father. We said, you've seen how we've lived and worked together and haven't had any problems. He's fitted in extremely well. It's not easy. He'd got fellow workmates that are his equal. We've got to make sure one's not favoured above the other. There's been none of that. He knows full well where the boundaries are and he wants to make his own way. We still have a very good social life together outside of the business.
SC: Do you expect any further finance company failures?
TB: My feeling is it's not going to be as easy for some of the smaller ones going forward, especially from April 1 next year with IFRS coming in. That's going to have some effect on some of the smaller companies, especially those who don't have a good capital base. You may see some amalgamation of the smaller ones to give a better capital base.
Footnote: Since this interview was conducted, Dominion Finance announced that Butler will step down as chief executive later this year and take up the new position of deputy chairman. Butler says his new role will include strategic planning and merger and acquisition opportunities. The company says Butler's replacement has been appointed but can't be named yet because of confidentiality and employment issues. It expects to name the new chief executive in early September and the appointee will take up the role in early October.
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