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Market braces for further finance company reports

Investors will remain on tenderhooks today as a further 18 finance companies report their status to the Securities Commission.

Thursday, 30 August 2007
Yesterday Five Star Consumer Finance was the sole casualty from the list of 49 firms that were asked to confirm their current prospectuses "comply with the law and are not false or misleading".

The Commission said it would reveal the fate of the remaining 18 finance companies after all responses had been received.

Last week the regulator wrote to all finance companies requesting written confirmation they were meeting compliance obligations.

"Finance companies are required to keep their prospectus, including the financial information in it, up to date at all times while they are offering securities," the Securities Commission said in a statement yesterday. "If there has been a material adverse change they must not take any further investment money until the prospectus has been amended."

The regulator's action followed increasing uncertainty in the industry prompted by the collapse of Bridgecorp and Nathans Finance in rapid succession. Earlier this week the NZAX-listed firm Property Finance Group also announced it had entered receivership.

Binu Paul, head of research firm FundSource, says the Commission's move is unlikely to stave off any further collapses in the finance company sector.

He said the issue now was one of cashflow risk rather than poor credit quality as many investors were now scared off the sector.

"While there are a few companies out there carrying credit risk, I believe everybody is prone to cashflow risk," Paul said.

He said the "big unknown" now is the recovery rate from the failed companies.

Just over $1 billion has been put at risk from the seven finance companies already put into receivership since last year. Paul said the recovery rate to date has averaged 45% in a range of 20-80%.

"As more finance companies fall over that recovery rate is likely to get worse and could ultimately go down to zero for some," he said.

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