Finance company FEI faces ratings downgrade after loan restructure to Tomizone

Friday 22nd April 2016

NZ finance company FE Investments (FEI) had its ‘B’ long-term and short-term credit ratings placed on CreditWatch Negative by Standard & Poor’s following the restructuring of its $1.7 million loan to loss-making wi-fi company Tomizone.

Standard & Poor’s said it had changed the ratings on FEI in response to a potential increase in its credit risk through the Tomizone deal. It expects to lower its long-term rating to ‘B-‘ and the short term to ‘C’ if the finance company’s forecast risk-adjusted capital falls below 15 percent in the next two years.

A 'B' or 'B-' credit rating means investment in the finance company, which in December extended its prospectus to raise $36 million in first ranking secured term deposits, is highly speculative while a 'C' rating shifts it into what the ratings agency deems to be a substantial risk and non-investment grade.

It had previously expected FEI’s risk-adjusted capital ratio to remain broadly unchanged through to the end of the March 2017 financial year from a static 15.1 percent at the end of 2015 when further capital injections from its shareholders were included.

FEI is majority owned by Mel Stewart and TK Shim.

Auckland-based and ASX-listed Tomizone announced details of the loan restructuring deal earlier this month, saying A$1.25 million of its loan will be rolled over into convertible notes which FEI will hold directly. Some unnamed company directors have agreed to personally borrow the remaining $425,000 from FEI which will be used to subscribe for that amount of loan notes. The restructure was conditional on Tomizone attracting a further $2.3 million in new investment.

Standard & Poor’s said it noted the loan restructure had, in some ways, strengthened FEI’s rights as a creditor of Tomizone.

“Nevertheless, we consider that heightened financial risks faced by Tomizone could expose FEI to a significant increase in loan impairments, given that FEI’s loan (post-restructure) would account for about 20 percent of the finance company’s capital base.”

As a result, the ratings agency said FEI’s ability to maintain its risk-adjusted capitalisation, which is currently assessed as very strong, is likely to come under increased pressure if Tomizone’s financial difficulties are not quickly and effectively resolved.

It also noted that FEI had cut new lending a few years ago when it dealt with a significant level of non-performing loans.

FEI’s auditor, DFK Oswin Griffiths Carlton, drew attention in a report last July to accounting notes in the finance company’s March 31 2015 financial results relating to a provision for impaired loans and that the accounts had been prepared on a going concern basis – an accounting term that indicates the directors don’t think the company will go out of business in the next 12 months.

FEI made a $620,000 profit on revenue of $3.2 million in the 2015 financial year with the accounts including a specific provision for $381,000 for an impaired loan. Notes to the accounts said the extent of the impairment couldn’t be accurately determined until all avenues of recovery had been exhausted at which stage additional write-offs may result.

The directors said they would increase both new debenture investment and to maintain reinvestment of existing debenture stock on maturity to reduce the company’s reliance on short-term debenture funding which was $15 million at the end of March. In the half-year accounts to the end of September that had risen to $18 million though total debenture stock had also increased to $24 million from $15 million.

FEI has 76 percent of its loan portfolio involved in commercial lending and 18 percent in property while the amount lent to its six largest borrowers accounts for 37 percent of its gross financial receivables.

BusinessDesk.co.nz

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