Pyne Gould aims to turn dud Marac loans into gold with credit fund

Tuesday 29th September 2009

Pyne Gould Corp. aims to take the impaired property loans off its Marac unit books and transfer them to its fledgling Perpetual Asset Management arm where they’ll have a market value and be managed as an asset.

The deal kills two birds with one stone: Marac gets a cleaned up, strengthened balance sheet that may earn back an investment grade credit rating and a banking licence. Perpetual gets $90 million of loans over property ranging from rental housing to development sites – `assets’ that may help seed one of the nation’s first credit funds.

“It’s about patient capital at a time when banks are becoming impatient,” says John Duncan, the former Macquarie Group executive tapped last month to run Perpetual. “You can do quite well to get involved in workout-type situations.”

According to Duncan, the timing is good. Banks’ appetite for lending has waned while asset prices have declined. The low-hanging fruit in New Zealand is property-backed credit. In PGC’s case, the impaired loans leave Marac’s books valued at about $175 million and the parent takes an $85 million charge to write them down to the price Perpetual pays.

PGC is undergoing a transformation. It has turned over its executive ranks, bringing in banking and asset management specialists, and gained agreement from First NZ Capital to underwrite a $237 million rights offer. Total capital raised will exceed $270 million if institutions and habitual investors support a placement of up to $30 million.

In addition, PGC has agreed to buy an asset management business off director George Kerr for $18 million that will form the backbone of Perpetual.

The company is a favourite corporate whipping boy, though. Investors say PGC’s paying too much for Kerr’s business. They fret about a culture that allowed Marac to divert into riskier property development finance from its bread and butter consumer and commercial lending. Marac’s weakened credit profile saw Standard & Poor’s cut its debt rating to a speculative grade BB+, known in some circles as junk.

Pyne Gould’s annual loss was NZ$54.4 million, reflecting the Marac impairment and a reduction in the value of its 21% stake in PGG Wrightson.

The inter-relationships between Pyne Gould, Wrightson, the Norgate-McConnon vehicle RPI, even NZ Farming Systems Uruguay and South Canterbury Finance, created flow-one effects when assets of one were devalued. Shares of PGC sank to a record low 70 cents on Monday and are trading at less than one third their value at the start of the year. The company ‘s pro-rata rights offer of six new shares for every one held is at 40 cents apiece.

Last week chairman Sam Maling said the appointment of CEO Jeff Greenslade and his subsequent hirings strengthened the company going forward and along with operational changes, “ensure that we don’t repeat the mistakes of the past.”

The transaction with Marac’s bad loans puts them into a kind of holding pen within Perpetual, a special-purpose vehicle called Real Estate Credit Ltd. that is tasked with sorting through the book. It can either workout the loans and hope to benefit from more favourable rates, or become the owner of the assets and hold them long enough to return a profit.

Some would migrate to the as-yet formed Torchlight Credit Fund, which may be the most ambitious aspect of the asset management business of PGC. The fund would ideally be $500 million – any larger would become unwieldy, Duncan said.

Perpetual itself would put up $50 million, so-called sponsored capital.

“We’re starting with property because it is such a big part of NZ Inc.,” he said. Investors would be eligible, having more than $1 million to invest, typically in a limited partnership with a 10-year horizon. The fund would take positions for 18 months to two years before recycling, Duncan said.

“It is very much a special situation fund, where we focus on where there are shortages of capital in particular markets,” he said. “Once the market has recovered we’re looking to exit that space.”

Businesswire.co.nz

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