New Zealand's third largest financial services group with assets of over $1 billion, Hanover Finance Ltd, today suspended repayment of its deposits.
"Against a backdrop of global credit uncertainties, falling property prices and lower reinvestment rates, the industry model has collapsed," said Mark Hotchin, joint owner of the company with Eric Watson.
About half the 49 finance companies operating in New Zealand 18 months ago have either collapsed or been unable to repay deposits on maturity and analysts have predicted the $18 billion sector will shrink to about 20 companies.
Mr Hotchin said his board was also suspending capital and interest repayments, investments with Hanover Finance subsidiary United Finance Limited, and sister company Hanover Capital Limited.
Earlier this year, the Hanover Finance book comprised of about 13,000 investors with $465 million in debentures.
United Finance had around 2400 investors with $65 million in debentures and Hanover Capital, offering secured preferential bonds, had about 1100 investors with $24 million worth of bonds.
The company's boast in extensive TV advertising has been that it would protect deposits whatever the economic "weather".
A detailed proposal will be presented to investors in late August after consultation with the trustees - New Zealand Guardian Trust for Hanover Finance, and Perpetual Trust for United Finance and Hanover Capital.
Mr Hotchin said the company's board was "acting early to preserve value" as market conditions continued to deteriorate and uncertainty mounted over borrowers' abilities to repay.
"Alternate financiers are increasingly unwilling to step in, and we're also now starting to see borrowers trying to take advantage of the uncertainty to delay payments - further compounding the situation," Mr Hotchin said.
The company could still meet its trust deed obligations and had a financial capacity to trade, but directors were working on a plan to restructure the business.
"Given the future uncertainty for the industry and the impacts now being felt by even the most well-established finance companies, we believe it is prudent to act early."
About 24 other finance companies have so far collapsed or reported problems in paying back deposits. As some of the first victims, Five Star Consumer Finance, Property Finance and Nathans Finance, fell over 11 months ago, Hanover Group's then chief executive Sam Stubbs called on the Government to fast-track proposed tighter regulation of the sector.
He said the Government should allow finance companies to voluntarily come under a supervisory regime of the Reserve Bank from today.
That would be a strong signal and help restore public confidence, he said.
He agreed with Stock Exchange chief executive Mark Weldon that finance companies should be required to get a credit rating from a reputable international rating company.
Mr Stubbs left Hanover last December, when Hanover Group, a holding company for Hanover Finance and other finance companies, said it was refining its structure.
