$64m finance company ‘vulnerable’

A finance company with $64 million in term deposit investments from mum and dad investors may have to write down the value of major loans, and is in a ‘‘vulnerable’’ position.

FE Investments survived the global financial crisis, which saw the demise of many finance companies including Hanover, Bridgecorp and South Canterbury Finance, but international ratings agency Standard & Poor’s downgraded the company’s credit rating to CCC on Friday.

A CCC rating meant FE Investments was ‘‘currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation.’’

Its financial commitments include paying interest on term deposits, and paying investors money back when their term investments mature.

FE Investments Group’s (FEIG) latest financial statements, published on December 6, showed that at the end of September, just under $23m of term deposits were due to mature in the following six months.

When term deposits reached their maturity dates, investors could choose not to reinvest their money, but FEIG’S directors expected 60 per cent of term deposit investors to continue opting to reinvest their money.

FEIG owns FE Investments, and is listed on Australia’s ASX sharemarket.

The ratings downgrade followed the publication on Thursday of FEIG’S response to a request for more information on its financial position from the ASX, which had asked directors to confirm FEIG’S financial statements gave a ‘‘true and fair’’ view of the financial performance and position of the company.

FEIG’S interim financial statements contained a note from its auditors saying they did not have enough evidence to have confidence in the value of three of FE Investment’s major assets: an $11m loan to Australian company Tomizone, $17m in loans to the developer of two Auckland hotel developments, and $1m of deferred tax losses.

The hotel and Tomizone loans made up a large proportion of the $66m in loans FE

Investments had at the end of September.

The value of these assets was dependent on a number of factors, including the successful completion on time of the hotel developments. One was a 108-room, four-star hotel at 201 Hobson Street. The other a 176-room, four-star hotel at 29 Anzac Avenue.

Interest on the hotel loans was being capitalised, but the amount of interest payable was contractually dependent on the level of profitability of the projects.

If the projects were less profitable for the developer, the interest FEI received could be lower than the interest that had already been added to the loan amounts.

‘‘The risk is that a reduction in project profit could lead to a loss of future interest revenue, or even a reversal of capitalised interest,’’ the directors said.

FEIG’S directors told ASX they confirmed the financial statements were true, fair and met appropriate accounting standards, and they considered FEIG to be a going concern.

The directors said FEIG was working with Tomizone, whose shares on the ASX were currently suspended from trading.

Its financial statements said FEIG was preparing a deal that would see FEI convert $11m of Tomizone’s debts to FEIG into shares in Tomizone, but the deal required regulatory approval, and was dependent on Tomizone being able to raise capital.

Key to the deal was FEIG raising $7m more capital to ensure it had enough capital to continue offering investments to the public under the Reserve Bank’s non-bank deposit taking licence regime.

FEIG directors told the ASX they expected to be able to raise the capital needed.

In its interim financial statements, the directors said they had assumed the Tomizone deal would succeed, and had concluded no specific provision for impairment’’ was required.

But, they said: ‘‘The impact of these plans not being successful has not been quantified and would have a significant impact on the group and could impact its ability to continue to trade as a going concern.’’

The Reserve Bank and Financial Markets Authority have been contacted for comment, as has FEIG, but all had shut down their offices for the Christmas period.

The FMA was investigating FE Investments’ former directors Thatt Kiong Shim and Mel Stewart over the restatement of FE Investment’s financial statements for the 12 months to the end of March 2018, and over transactions with Federal Securities Limited, which the pair co-owned, the company’s interim financial statements said.

‘‘At the time of the report, the matter was still under review,’’ the interim financial statements said.

Shim resigned as a nonexecutive director of FEIG in November ‘‘to pursue other opportunities’’.

Shim and Stewart both ceased to be directors of FE Investments in April.

Campbell Newman, a former Premier of Queensland and Lord Mayor of Brisbane, was appointed chairman of FEIG in September.

FE Investments was one of the finance companies to be given a Crown retail deposit guarantee to help it weather the global financial crisis and the loss of public confidence in finance companies, which saw depositors withdrawing their money as soon as it came to the end of its fixed investment term.

The company’s website said FE Investments was founded in 2003 by Shim, a corporate banker, and Stewart, a specialist in asset-based finance.

‘‘They are the yin and yang of FE Investments, and FE’S services reflect this same philosophy in the two sides of FE’S business – harmony and balance between funds in and funds out,’’ the website said.