Long before finance companies came to their latest grief, investors were sucked in by grand sounding names such as Lombard Finance and Capital & Merchant Finance. These companies later bit the dust. One finance company even chose its name by trawling a London phone book, I'm told.
Many naïve investors fell for the respectable sounding names and flashy advertising – after all anyone can build a fancy website these days.
Listening to some investors tell their tales of woe on TV I realised that some wouldn’t be able to differentiate in size between the one-man-band finance company they were investing in and the likes of AMP. In fact an AMP spokeswoman once mused to me as she peered out the window at Auckland's harbour: "It’s the difference between the Queen Mary and a canoe."
I did a search on Depositrates.co.nz this to see what finance companies are still around. Some, surprise surprise, have impressive names such as Oxford Finance, Mascot Finance, Gold Band Finance and Allied Nationwide.
Only a handful have acceptable Standard & Poors ratings of BBB- or above – and most of those such as UDC Finance, are owned by banks. The Americans have a great phrase for bonds and debentures without an investment grade rating: Junk Bond.
Gold Band's website made me laugh, it said: "Welcome to Gold Band Finance – owned and operated by New Zealanders." Well so were virtually all of the finance companies that have collapsed in the past few years.
Thanks to the government deposit guarantee scheme finance companies are once again attracting money from investors. What many don't realise, as they've not looked beyond the headlines, is that the guarantee runs out in October 2010.
Just out of interest I clicked through to Allied Nationwide's website. The first piece of information on offer was: "Allied Nationwide has a guarantee under the New Zealand Deposit Guarantee Scheme." Immediately below it was an offer of 7.85% per annum for three years, which, ahem, falls outside the deposit guarantee period – although you'd be covered until October next year.
Don't get me wrong, I know very little about Allied Nationwide, and have never read its balance sheet as I have no interest in investing. And the likelihood is that it and the remaining finance companies were more robust than the average.
Gold Band also mentions the guarantee on its home page. The only problem is that the minimum period of time it's accepting money for is two years.
Bonds (AKA debt securities) are also another popular source of fixed income investment. Like finance companies, investors need to be wary of whether the company offering the bond has a good credit rating. With bonds, each bond is rated, not just the company. For example Fonterra's current bond offer is ranked A+ by Standard & Poors. Others may have no rating at all.
Below are some helpful links about Finance Companies.