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Lombard Group Ltd

The Jenny Ruth Column

Wednesday 2nd August 2006

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Lombard's 2004 balance sheet epitomised much that was wrong with the burgeoning finance company sector: it was geared to the nth degree, had grown extremely fast and had a raft of loans many times the size of its equity.

Two years later, the company has undergone radical changes for the better, including becoming a listed company through its backdoor listing through the former Pure New Zealand.

With the shares trading at 2 cents, the company is still in penny dreadful territory and managing director and major shareholder Michael Reeves says that if he had his time again he wouldn't take the backdoor listing route.

"It cost more than it should have and the company wasn't as clean as we thought it would be," he says. A "frontdoor" listing would have cost about $1 million and using Pure ending up costing about $750,000. The one thing it did provide was a quicker listing than could otherwise have been achieved.

Reeves says a share consolidation is a logical step but that he wants "runs on the board" from a few current projects first.

There have certainly been major changes to the balance sheet.

The company's equity in March 2004 was less than 1 per cent of its total assets but was a much sturdier 11.2 per cent two years later, climbing in dollar terms from $886,768 to $22.7 million.

The company has raised a further $563,400 in equity since balance date, although clearly it would have liked to have raised more. Its share offer launched in January had aimed to raise up to $10.5 million but managed only $2.5 million.

Reeves says the major problem was that the offer was priced at 3 cents a share and the market price dropped below that level shortly after.

Two years ago the company had 26 different loans that were more than 100 per cent of its equity including one that was more than 880%. By March this year, there were only two, the largest less than 150% of equity.

"We've made a concerted effort to change the profile of our book. We've reduced the size of our loans in keeping with the size of the company. We've gone about removing loans and causing them to be refinanced," he says. Now its loans are predominantly in the range from $500,000 to a few million dollars.

The company specialises in lending against property and 97 per cent of its loan book was secured with mortgages at March 31 and 76 per cent was secured by first mortgages.

The company's growth has also slowed dramatically and Reeves says that was also deliberate as the company concentrated on building equity. From more than four-fold growth in 2004, asset growth in 2006 was 22.2 per cent.

The recent failures of finance companies National Finance 2000 and Provincial Finance has had a dramatic impact on the company's debenture sales but Reeves says the company had anticipated this four to six months ago. "It was looking pretty obvious to those who were living it."

And that's one reason why Lombard had $21.85 million in cash sitting in its balance sheet at March 31. "We're sitting on more money than we would like to be sitting on. It impacts on our profit, but liquidity is next to godliness."

In the latest year, the company increased its debentures on issue by $22.4 million to $165.9 million, but only $7.1 million of that occurred in the second half.

The company prides itself on building strong relationships with its debenture holders but even so the current climate has had a big impact. Reeves says the reinvestment rate has dropped to about 60 per cent from 80 per cent plus before the collapses.

The company is currently working on diversifying its income streams, moving into financing business equipment and hiring specialists in that area and starting up an insurance operation. Reeves says the latter will provide a complimentary revenue stream while keeping the company within its core expertise. "Fundamentally, we're in the risk business."

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