01 February 2013
FEBRUARY 2013 NEWSLETTER
An evolving recovery - How Global can add value!
Not that we need to be reminded of such but 2013 will mark the fifth anniversary of the World Financial Crisis (WFC ). Now five years on and having negotiated numerous hiccups, obstacles, impediments etc. collective world opinion appears overwhelmingly positive and cautiously optimistic that the worst is behind us.
With the European crisis on the improve, the Chinese economy gradually rebounding and the USA having stepped back from the fiscal cliff, it is not so much that expectations for world growth have soared as that worries about negative scenarios have faded, with widespread world unemployment the main major remaining obstacle to be slowly resolved.
However world financial leaders have warned that all concerned should not be complacent and that the political and business elite do not relax vigilance in the 2013 year and keep the momentum going that has gradually built up throughout the second half of 2012 right through 2013 and beyond with the key growth drivers being correct and timely decisions being made by Eurozone leaders on their ongoing debt crisis, and both USA and Japanese political authorities regarding their respective fiscal issues and stimulus program.
The catalyst for this major paradigm shift in the global economy can be attributed to the willingness of the world’s central banks to implement ongoing “quantitative easing “(Q E), which involves creating or printing money out of thin air and using these funds to buy quality bonds thus pushing down interest rates.
QE is currently being practised on a large scale in the USA, the UK, and Europe and is soon to be introduced into the Japanese economy. In the USA alone it is estimated that $US 1.14 trillion will have been created by the FED by the end of the first quarter 2014.
The central banks concerned buy the government bonds created thus leaving money in the bank accounts of investors who were perhaps going to buy the bonds but were beaten to the punch. With interest rates held at record low levels investors then turn to other more riskier assets such as shares and currencies, such as the NZ dollar, whilst also encouraging some consumers to spend, invest in housing/ new cars etc., and businesses to also hire and invest etc., consequently stimulating economic growth, with an ultimate longer term outcome also being the reduction in high global unemployment rates.
At the same time a minority of companies would rather buy back their own shares instead of spending surplus money on new plant or hire additional staff, believing that the WFC has been deferred rather than overcome or avoided and will delay any proposed growth initiatives until it is perceived safe to do so, whenever that may be.
In theory, as confidence in the private sector to spend increases, the need for such QE stimulus will be withdrawn at some future date, resulting in a very large money retraction exercise which could result in increased inflation and interest rates at some point in time, but for now that is pure speculation according to most economists.
What we do know however is that as a result of QE, globally and locally banks have lots of money but in general remain traditionally cautious and reluctant to lend unless you are a “missionary “customer willing or able to be “completely undressed “as a result of their stringent credit criteria.
Conversely, with commercial banks finding themselves flush with money and having difficulty getting it out, it may result in an easing of lending criteria which could certainly further “ imbalance” our local NZ economy for example on the back of rising house prices,fears expressed by Reserve Bank (RB) governor Graeme Wheeler in his last OCR statement.
Is Q E working?
As anticipated the QE policies being implemented, initially commencing in the USA in 2009 and subsequently progressively elsewhere, have had an almost instant effect on global stock markets with the mere hint of its introduction enough to induce stock market investors to flock to their brokers.
In the USA, buoyed also with ongoing improved company trading results this earnings season, a turn- around in the housing market, improvements in the labour market and increased consumer sentiment, household purchases accounting for about 70 percent of the economy, the S&P 500 has risen to above 1,500 for the first time since December 2007 and is about 4 percent below its all-time high of 1,565 set in October 2007.
At the same time the Dow Jones Industrial Average (DOW) has risen above 14,000 for the first time since October 2007, 1% below its all-time high of 14,164 set in October 2007.
This on- going bull market has flowed through to both the Australian and New Zealand share markets with both also at five-year highs with the latter looking set to push higher as low interest rates and the Christchurch rebuild fuel equity momentum. Last month, for the first time since the WFC devastated retirement savings, super funds returned to their pre-crisis levels helped by the increases in the share market over the past 12 months.
In recognition that the economic opinions/content expressed in Global View are those of a plagiarizer, the following two links provide a good summary of the current state of Global stock markets and the key “confidence” role they are playing in the evolving recovery from the recent WFC whilst pondering on the one big question that many investors may be grappling with namely “ is it time to take some money off the table “. Click here and click here. http://www.smh.com.au/business/dont-sell-your-stocks-just-yet-20130204-2dtqn.html
Elsewhere in the NZ mix inflation remains well contained and is expected to remain so in the near future having risen slightly in the December quarter from 0.8% - 0.9%, still well below the Reserve Banks medium term inflation target band of 1-3%, for the second quarter in a row, with the CPI also having contracted to 0.2% in the same quarter also below market and Reserve Bank expectations. The OCR remains on hold at its record low rate of 2.5% until at least late 2013 with some projecting a first increase well into 2014.
Our persistently high NZD, according to our RB governor, is “overvalued “. Well despite the fact that it is holding consumer prices artificially low, is “directly suppressing inflation on traded goods” and “ undermining profitability in export and import competing industries” etc. etc. all indicators point to it remaining high for the foreseeable future with absolutely nothing the RB can do to materially suppress it.
It is being held up by the continued offshore money printing of foreign currencies and the resultant rising of offshore share markets along with improving sentiment for such riskier currencies whilst at the same time encouraging consumers to borrow surplus money to purchase assets and get asset prices, such as housing etc., increasing not decreasing and subsequently growth into the respective economies concerned.
For as long as the FED and friends continue this policy it will stay “overvalued” and when, not if, the RBNZ raise the OCR most economists expect it to go even higher into the US 90’s and with our own RBNZ being a very small fish in a large global pond and certainly not themselves trying to increase asset prices and expenditure here in NZ, they will reluctantly have to live with this situation for some time to come. The following link provides on-going detailed NZ economic information across the board for regular reference use throughout 2013. Click here
The USA and NZ housing markets
History tells us that the various ripple effects from the US housing industry, originating in California, were the trigger to the WFC in 2007. Today that same industry, also being driven from the same State, is now a major bright spot of the evolving US economic recovery and expansion and its resultant global flow on effects.
Housing in the US “ has turned from a headwind to a tailwind” for the US economy with recent research confirming that changes in house prices and in real estate wealth, have a much bigger impact on consumer spending than the ups and downs of stock prices and financial wealth.- Haven’t we heard or experienced this phenomenon here in NZ before !!!
In July 2012 Rodney Dickens highlighted the “Vital role a US house building recovery will play “ and its effects on US economic growth, NZ interest rates and for the NZD. The following two links are worth reflecting on the housing situation both then and now.
Click here and click here
The gradual recovery in the NZ housing market began over twelve months ago well ahead of its US counterpart. Initially it was driven by localized shortages of stock in Auckland and then Christchurch with the former , prior to the commencement of the Christchurch rebuild, offering the greatest employment opportunities as the economy recovered. ( research shows that currently Auckland has a housing shortage estimated at 20-30,000 homes ). However the market has now started to move away from the above localised shortages to “warming” across the entire country.
Whilst for some time having experienced relatively low floating interest rates, confidence and increased optimism from economic recovery and improving global markets is now resulting in the reduction in funding costs for NZ banks in long term wholesale markets which is now flowing onto local reduced fixed term interest rates.
The housing sector has now become a housing crisis involving a physical lack of property. Prices are set to rise at a faster pace in 2013 than 2012 simply because demand exceeds supply at current prices. Chinese buyers, initially in Auckland, then in other centres will also contribute to the increase in prices.
Furthermore there is no current evidence that the rise in house prices is being driven by speculative forces, nor by a migration boom as was the case back in 2003, with our current net migration flow being actually negative.
This current situation is now demanding rhetoric from the RBNZ with innuendo that they may attempt to impede the rise in house prices by imposing LVR ( loan to value ratio ) limits to avoid creating conditions that could lead to another “ credit crunch” by preventing the “cashed up” banks/ lenders etc. from lending excessively or imprudently during the current perceived “good times” with the general consensus being, for numerous reasons, that such is just talk for the foreseeable future.
However with QE being engaged worldwide in order to avert economic downturns and promote growth in assets, wealth, household spending and for businesses to hire and invest etc. etc. in support of a global recovery, NZ housing prices, being just one aspect of our own economy and growth orientated recovery, will no doubt remain high until QE is reduced or it ceases.
With the local correction in land prices having run its course during the WFC and with values now moving up again, we are also seeing the re-emergence of some cashed up “ land bankers” looking for strategically located sites with future development potential.
The “removal of roadblocks that are slowing down the process and driving up costs” for such private sector investors being just one subject the government is targeting for their growth strategy in 2013 as outlined in John Key’s recent “state of the nation” speech, with development finance in support of such projects being another area Global are able to assist in. Click here. http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10861392
Don’t let your bank suffocate your business in today’s environment!
Almost all businesses in New Zealand today, whether they are commercial, industrial or rural based will have a banking relationship with one of the big four Australian owned banks that dominate business here in New Zealand.
In recent years, access to alternative competitive, first tier funding has been very limited, if not impossible. There are many good quality businesses and business owners out there, be they commercial or rural based, who have shown they can survive one of the most severe economic downturns in a generation.
However many are finding that their relationship with their existing bank has been damaged to such an extent that it is now suffocating their business or preventing expansion at a time when opportunities and conditions for such have improved and are improving further. This is an area that Global can assist in, as some are still focused on the security behind an exposure, whilst others are more focused on the on-going cash-flows.
Somewhere to go when the traditional Bank says No!
Now in 2013 is the time for these operators to take advantage of the many opportunities that are presenting themselves, to move back into growth mode with specialist cash flow lenders that want to support them by ensuring they have the funds they need to refinance existing facilities, support new initiatives for working capital, acquisition of additional businesses, fixed assets and property etc.
Global Pacific now has available a number of such products, to either be used individually or as a package to enable clients to consolidate or expand their finance portfolios, providing considerable flexibility over current restrictive bank criteria.
Key features of the alternative commercial finance products:-
- Stand alone, first mortgage only products, with or without collateral security requirements. Will allow second mortgages in behind.
- Specialist funding for refinancing, lending for acquisition, property and fixed asset purchase and working capital, for owner occupiers. Need at least two years trading history. Property development funding in select areas only.
- Up to 80% of LVR. With the support of a strong trading business funding of 100% of purchase price may be possible.
- Up to 65% LVR on business acquisitions MBO funding (management buyouts)
- Loan Size from $200,000 - $5.0 m plus
- Interest only for 2– 3 years or P & I options.
- Interest rates 6.0% - 11.0% p.a. (depending on risk profile)
- Application fees 1.0%
- Valuers mortgage recommendation not essential
- Flexible credit history requirements.
- Available for properties/ businesses located nationwide
Types of borrowers that the funding package may suit:-
- Borrowers, with or without existing equity that have been turned down by their Bank that can show evidence of serviceability.
- Self- employed with irregular income with at least two years trading history, not necessarily historically profitable, provided there is a strong story around future profitability.
- Business operators currently leasing but looking to purchase their own premises.
- Those with minor credit history blips.
- Profitable business owners wanting to separate out their homes and personal assets from their business assets but their bank won’t let go of the house even though they don’t really need it
- Business operators effected by the banks tighter serviceability, maximum lending limits, additional covenants, guarantees or cross collateralization criteria.
Commodity prices and new rural finance products
Despite our continued strong dollar our evolving NZ economic recovery remains underpinned by increasing global demand and increasing prices for our key commodity products, being less reliant on the USA and Europe having well and truly now hitched our wagon to the faster growing Asian economies.
Recent rural industry surveys show that the current season is one of a “two speed environment” with most dairy farmers expecting to increase production and spending with the beef and sheep farmers being less optimistic, the latter in particular with prices currently well down on last season.
Our dairy and beef farmers and subsequent commodity prices continue to benefit from the severe drought conditions that are gripping the USA which has led to smaller herds and higher feed costs. As per the link below approx 65% of the continental USA experienced drought last year with little sign of it abating, to any great extent, in the first half of 2013. Click here. http://droughtmonitor.unl.edu/
The lingering effects of the US droughts and elsewhere continue to constrain supply from our competing exporters and coupled with the domestic driven economic recovery activity in China in 2013 and on-going world population growth and growth in the number of people who can afford better nutrition, demand and higher prices for our key commodities are expected to further increase throughout 2013 and beyond.
Our total Commodity Price Index since reaching a low in July 2012 has risen six consecutive months to a 10 month high having risen 8% during that period albeit still 14% below its record high in April 2011.
Dairy products represent approx 45% of the Index. Since dairy also reached a low point in July 2012 the Fonterra Global Dairy Trade auction has increased by approx 30% with Fonterra having revised up its current gate forecast to $5-50 kpms with recent speculation that it will increase further before the end of the season.
Any further upward movements in the NZ $ will have a neutral effect being that it is fully hedged for the rest of the year, which means farm gate prices would be driven by movements in the auction results which despite any recent concerns over contamination continue to rise, which will further help farmers shift their focus towards expansion and growth. Click here. http://www.dairyco.org.uk/market-information/milk-prices-contracts/wholesale-prices/fonterra-auction/
As with the alternative commercial finance products, should a current rural lender say “no” or “ maybe” now in 2013 is the time for rural operators to also take advantage of the many opportunities that are presenting themselves, to move back into growth mode with specialist cash flow lenders that want to support them by ensuring they have the funds they need to refinance existing facilities, support new initiatives for working capital, acquisition of additional businesses, fixed assets and new farm properties etc.
Key features of the new rural finance products
Livestock Trading Finance
The new world of livestock finance is here whereby rural financiers are now focusing on individual “project lending” were they look at each individual lot of trading stock as a project in its own right and as such take security over that line of stock only in the form of a PMSI interest, using a simple short form application form/process.
This product is tailor made to give the flexibility to purchase stock, to take advantage of seasonal opportunities, where the animals are to be fattened and traded/ sold in a short/ medium term period with an option to capitalize the costs and make full repayment upon sale of the stock concerned as per the parameters below;
- Sheep, Beef, and Deer
- Interest rate of 12.95%
- One off application fee of $350-00
- Lend up to 100% of stock being purchased
- No procurement contracts
- No supply agreements required
- No draw down fees
- Up to 18 month facility with ability to roll over
Capital Stock Loans (Stock purchases where the animals are generally retained for breeding and the subsequent off-spring are sold)
- Sheep, Beef, Dairy and Deer
- Facility term up to 36 months
- Can lend up to 80% of stock being purchased
- Security only over stock being purchased
- One off application fee of $350-00
- No procurement contracts
- No supply agreements required
- No draw down fees
- Repayments structured to match on farm cash flows
Fixed Asset Funding
One major advantage of our continued high NZD is the incentive for the importing and purchasing of cheap high quality foreign machinery. This is another area the Global can assist in sourcing the most competitive finance options.
Fixed asset funding will enable a business to refinance or purchase new or upgrade existing fixed assets whilst at the same time releasing valuable equity available to the business and provide cheaper funding to replace an overdraft facility the business may have with their bank, using the fixed assets as stand- alone security.
If the business owns land and buildings as well as specific fixed assets such as plant and machinery, the bank may have such assets cross collateralized, whether they have any specific charge over them or not, making it difficult to expand the business, raise additional working capital or purchase new or upgrade existing fixed assets.
Such specific asset financing provides the ability to borrow against the assets being purchased, or refinanced, without the requirement to leverage off land and building assets, be they business or private, and without eating into working capital.
Financing in this manner allows the freedom to upgrade equipment to remain competitive with improved technologies as well as reducing ongoing operating costs related to inefficient assets. This can also allow you to grow the business with a lesser equity injection, including:
- the ability to structure repayments to the cash flow over the life of the equipment
- no requirements to have any property assets tied into transactions related to business assets.
- having payments structured to suit business cash flow. For example, seasonal payments, interest only periods, balloon payments – all in relation to what is being financed, and the cash flow patterns of the business.
Key feature of the fixed asset product;
- Stand- alone product – No collateral security required
- Will lend on cars, trucks, diggers, excavators, tractors, harvesters, balers, aircraft, buses, CNC, machines/lathes, printing equipment or generic manufacturing equipment
- Load size $50,000 - $10.0m
- Terms interest only or P & I options for 10 years
- Interest rate 7% - 11% (depending on risk profile)
- Finance fees 0.25% - 1.0%
- Clean credit required
- Valuations not always required
Financing or refinancing, of up to 100% can be provided for these types of assets, dependant on the strength of the individual business, although the expectation is generally for a 20-30% deposit for individual asset purchases.
For businesses with a substantial asset financing requirement i.e. fleets, or large asset holdings, facilities can be provided giving pre-approved limits allowing the freedom to purchase assets under specific guidelines. This may be through leverage off a pool of assets to allow 100% financing, or through a set deposit requirement for each individual transaction, with both options proving surety with regard to funding lines, and the ability to purchase assets as and when needed.
Equity/ JV opportunity- High quality vertically integrated Infant Formula business.
This is a start- up business involving a vertically integrated and environmentally ethical business model. It includes existing specialized farming properties, construction, formulating, processing and the marketing of premium Infant Formula through already established distribution channels into the vast Chinese and Asian markets.
The business model has been extensively independently researched and critiqued by Deloitte’s with a full existing and experienced NZ management/ construction/ distribution team available who will develop a trusted world-class premium brand which will be recognized as “the purest and freshest Infant Formula on the planet”.
The project will return a positive cash-flow after 2 months and a multi million dollar EBITDA profit in less than 2 years. There is substantial investment interest already raised and Global is seeking the residual of investment to commence the project immediately with a minimum investment parcel of $500,000-00.
“ Are you ready to hear about and invest in a little-big idea “- we have the team available that can do it ! Click here. http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10862893
This opportunity is aimed solely at persons who confirm that they fall within one of the exceptions set out in section 3 (2) of the Securities Act 1978, and Global will not accept unsolicited applications.
As always to obtain funding it’s a case of knowing where to go, the criteria each funder is looking for and a proper presentation being the key essentials to success.
In today’s market if we at Global cannot source funding for a particular deal, whatever the type or risk profile, then nobody can.
Should you or any of your clients or colleagues require finance of any type albeit, residential, commercial, industrial, business, asset finance, development funding, rural or finance of any description, or should you be interested in participating as an investor in the above Infant Formula project, please call me any time on my mobile 021676772, or contact me via email.
Global Pacific Corporation Ltd
Financiers and Merchant Bankers
Level 3 40 - 42 Eden Crescent
Web site www.globalpacific.co.nz
Global View: is an email newsletter reporting on the New Zealand Economy with a bias towards how it affects the property and business finance markets. It is a regular commentary delivered to you by email every month.
Disclaimer: Please note that all opinions and statements expressed in this email are indicative of our opinion only. Both the author and Global Pacific Corporation Limited issue no invitation to rely on the information contained in this email and intend by this statement to exclude liability for any such opinion and statement.