Finance Company debenture interest rates are creeping up, but it's not yet winning back spooked investors.
Among 16 of the largest and best known finance companies, the average rate was 1.94 percentage points more than the banks on Feburary 15.
That compares to 1.6 at the start of last year before collapses of Bridgecorp (July), Geneva (October) and Capital & Merchant (November).
Compared to the best bank two-year rate, offered by ultra-safe AAA rated Raboplus, the margin was just 1.49 points.
This equates to about $150 a year before tax on a $10,000 investment, a small reward for increased capital risk.
But in the finance company industry, a tale of two sectors has emerged. At the quality end, analyst John Kidd from McDouall Stuart said, companies like South Canterbury Finance, UDC and Marac had kept the confidence of investors and their margins over the big banks increased only slightly - although even this group is feeling the pressure.
Last week South Canterbury, rated BBB- by Standard & Poor's, raised two-year rates to 1 per cent. Dominion Finance raised rates to 10.65 percent.
Those not yet in the 10% club - like Lombard, Marac, Speirs and Orange Finance - are not doing right by investors, South Canterbury Finance chief executive Lachie McLeod said. "A margin of 2-3% over the banks is how it should be."
As the only ones with ready money to lend, the quality finance companies were also getting the choice of deals, Kidd said. And they were due to start announcing results which would show healthy profits growth and reduced risk.
At the other end, firms like Asset Finance and Instant Finance have been forced to hike their rates as investors remain nervous.
Asset Finance is now paying a margin of 4.25 points over the average big bank and Instant Finance is paying a margin of 3.25 points.
Between the two camps, a few large finance companies like Hanover, which this week revealed debenture rollover rates were down to around 40 per cent and earlier in the month hiked its two-year rate to more than 10 per cent, appear caught in a grey area, Kidd said, with the public as yet undecided in which camp they belong.
Brian Jolliffe, chief executive of S&P BBB-rated Marac, said: "Yes, rates have moved up, but the spread has got wider.
The market is starting to clearly differentiate between the high quality players and the rest, which is influencing debenture funding."
He added that credit ratings from reputed international ratings agencies appear to be guiding the market.
Marac's reinvestment rates are around its historic norms of 65-75 per cent but Jolliffe warned life at the bottom would get harder so the spread between the rates offered to investors by the best and worst finance companies would continue to widen.
Just how far finance company rates should rise is a hard call. Although it is not a perfect comparison, the high yields on finance company preference shares and bonds listed on the NZDX debt market show how nervous the market remains on finance companies.
PGG Wrightson, for example, is yielding 10%, while St Lawrence is yielding 14.5%, Dominion Finance 12.8 per cent, and South Canterbury 10.3 per cent.
Spiers Group bonds, which pays a coupon of 13.16 per cent, are trading at 60 per cent of face value. Strategic Finance perpetual preference shares, which pay interest of 10.96 per cent, are selling for 70 per cent of face value.
But for many financial planners, even huge hikes in rates wouldn't tempt them to risk clients' cash.
"Rates would have to go up a damn sight more than they have to become good value," Colin Austin, of Decisionmakers on Auckland's North Shore, said. "These are no longer a fixed interest investment, but a speculative investment, so they have to pay equity-like returns."
The trouble is, he says, transparency remains so poor that it is virtually impossible to say what rates they should be paying investors.
Deborah Carlyon, from Stuart + Carlyon in Auckland, said there were too many other higher quality, better-yielding investment alternatives available.
Yields of 9%, 10% and over can be had by buying the listed bonds and preference shares from the likes of Auckland International Airport, Rabobank, GPG, Infratil, Port of Tauranga and BNZ on the NZDX, which can be sold at any time by holders.
Other investments like the $2 billion Kiwi Income Property Trust effectively has a 12% gross dividend yield under the new PIE regime.
Kerry Finnegan from Strategic Finance believes companies like his will have to rely much less on the public, and much more on institutional lenders and listed bonds.
"I think we're moving away from the old debenture product and looking for new and innovative ways to raise capital. The challenge for us is to get as many avenues of funds as we can."
Strategic, although it remained able to manage its loans and debts, was shrinking. "[Cash] has slipped by about $40m and that reflects the amount of money we've had to repay to debenture holders," he said.
McLeod, who reports rollover rates of 65-70 per cent, agrees only companies with such diversified funding lines will continue to grow, particularly as banks appear to be planning big listed bond issues paying over 10%.
As part of that funding mix, South Canterbury - rated BBB- by S&P - is in the process of completing a $US100m private placement to institutional investors in America.
For Kidd, the emerging tale of two sectors is the beginning of an end game for many finance companies. News flow would remain bad with the painful wind-up of failed finance companies likely to drag on for months, he said.
Only Equitable and New Zealand Finance, both quality companies, had been able to negotiate new funding lines in the past six months, he said, and with the industry still relying on the public for 80% of its funding, many more such facilities were needed.
The funding end-game means many finance companies disappear, many going private, Kidd said, although he wouldn't rule out further collapses. Before that happens, many finance companies will have to push rates up further.