Friday, March 29, 2024

Foreign buyers circle dairy debt

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Foreign hedge funds have approached the country’s largest rural lender about buying dairy loans the bank wants off its books.
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|And, It is understood, a large international investment bank has flown in to sound out industry consultants on the potential for buying assets from the big banks, including loans to dairy farmers.

The international interest comes as the Australian-owned banks review their New Zealand operations in light of proposals from the Reserve Bank to significantly increase the amount of capital they must hold against their loans.

In a statement an ANZ spokeswoman confirmed the approaches but said they had gone no further.

“While we understand there have been some overseas hedge funds that have been approaching NZ banks including the ANZ we have chosen not to pursue that path.

“In short, we don’t have a divestment plan for our dairy book,” she said.

It is understood at least two American and European hedge funds came here in March or April this year.

A source who spoke to those investors said talks were held with other banks and discussions continued until the middle of this year.

The starting point for the size of loan portfolios the funds are interested in is a billion dollars.

“They do not deal in small numbers.”

The ANZ has made no secret of its desire to trim back its exposure to dairy farmers.

In April it wrote to its rural clients warning them of the potential for increased borrowing costs as a result of the pending increases in bank capital and urged them to reduce debt where possible.

The source said the banks are in a quandary about what to do with their unwanted dairy loans.

Because sales of dairy farms are at a standstill the banks are reluctant to force farmers to sell because of the potential to trigger a sharp fall in farm prices and put the loans they want to keep at risk too.  

Bundling up the loans and selling them avoids a run on land values.

However, the source said the Australian parents of the banks are nervous about the reputational consequences of handing over the loans to hedge fund buyers and told their NZ subsidiaries to shelve the idea for now.

“Given what has happened in Australia with the banking Royal Commission the banks selling off a bad part of their book to a vulture fund … was too much for the brand of the banks.”

A local director of one of the Australian-owned lenders said there is no telling what a hedge fund buyer would do once they got hold of the loans.

“Reputationally, is it better to be easing back on our exposure to some of these loans … the party that buys those loans, all they want to do is to make a profit on what they have bought and god knows what they will do to get it.” 

Meanwhile. a banking consultant has told of representatives from a large international investment bank visiting his Auckland office last month to discuss buying opportunities that could arise from the Reserve Bank’s proposals.

“They wanted to know what sectors we thought would be first cab off the rank to be gotten rid of and we did say dairy, construction and small to medium enterprises.”

The consultant said they needed to spend $500m to make any deal worthwhile.

“There would be a lot of work involved and it needs to be of enough size.”

Asked how an investment bank buyer might manage dairy farm loans he said “If things were good then you might be happy to buy those loans and roll them over on a normal term … but if you have tough times in the industry where you get any sort of default and you are down to interest only then you might want to exit it a bit quicker.”

KPMG’s head of banking and finance John Kensington said he is not surprised the banks are talking to investors.

“You are going to see some preliminary work now fleshing out ideas of what could happen and then when what is going to happen is announced then that work will be either sped up or if the Reserve Bank announces something a little bit more lenient then a slightly more slowed down process.”

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