Interests set to merge

Heartland New Zealand is planning to amalgamate all of its businesses, including its senior finance unit and Harmoney investment to simplify its corporate structure. The listed bank has signalled plans to return up to $100 million to shareholders. The company came about through Canterbury and Southern Cross building societies merging with Marac Finance 2011, and the-then “corporatisation” of Heartland Building Society and a number of acquisitions. The complicated structure has meant – among other matters – that wholly owned subsidiary Heartland Bank must have a separate board from its NZX-listed parent company. Heartland NZ wants to bring all of its operations under one umbrella by merging the companies and changing the listed parent’s name to Heartland Bank. The idea is to create a single entity for its Australian reverse-mortgage business Heartland Seniors Finance, Marac Insurance, its 10 per cent holding in peer-to-peer (P2P) lender Harmoney and 11 per cent stake in marketing business Ora HQ. The capital return also depends on any acquisitions. Heartland has expressed interest in Motor Trade Finances (MTF). In a statement to the NZX last month, Heartland NZ says it may pay $1.50 a share for a 10-20 per cent stake in the Dunedin-based company, which specialises in motor-vehicle finance. It is also keen in a full takeover of MTF. The company plans to raise $50m with the possibility of $25m more in oversubscriptions through a tier-two capital instrument to bolster its balance sheet and make its capital structure more in line with that of other Kiwi registered banks. This will result in it having more cash on its books than required by the Reserve Bank. It plans to return excess capital to shareholders via a share buyback. Pending the capital raise’s success, it will seek shareholder approval at its annual meeting, but says the range will be from $58-$100m.

GREENSLADE’S STATEMENT TO NZX

In his statement to the NZX issued on November 6, Jeff Greenslade, managing director, describes Heartland NZ’s current structure as “overly complex” for a business of its size. “We have therefore reviewed the group structure with a view towards implementing a more efficient structure that the group can best achieve its objectives and provides transparency for its stakeholders,” he says. “As a result of the amalgamation, all of Heartland’s businesses sitting outside Heartland Bank will be brought into the banking group. “The Reserve Bank of New Zealand [RBNZ] is not required to consent to the amalgamation. However, we have notified it and are awaiting a formal response. Fitch has recently affirmed Heartland Bank’s long-term credit rating of BBB [outlook stable] and we do not believe the amalgamation will affect that. “No shareholder approvals are required to effect the amalgamation. However, shareholders will be asked to vote on the appointment of directors to the new board of the continuing company, which will be comprised of existing directors of Heartland and Heartland Bank, and to amend its constitution to reflect the amalgamation at the upcoming annual meeting.” Heartland advised the market on August 18 of its intention for Heartland Bank to issue a tier-two regulatory capital instrument during the financial year as part of its capital management strategy – subject to market conditions remaining favourable. Its current intention is for the continuing company to proceed with the issue in April 2016. Greenslade explains: “At this stage, the indicative issue amount is $50 million with up to $25m of oversubscriptions. An issue of tier-two capital would improve the company’s capital efficiency through diversification of the sources and types of capital funding, and would mean its capital structure is more closely aligned with other NZ- registered banks.” In its August, Heartland noted such as capital issue could – in the absence of any other use – allow it to return excess capital to shareholders by way of a share buyback. He confirms that – following the amalgamation and tier-two capital issue, the company will hold levels of regulatory capital in excess of that required by RBNZ and in of Heartland’s own internal capital requirement. “While Heartland remains interested in acquiring MTF, there is currently insufficient certainty as to whether an acquisition will proceed,” says Greenslade. “In the absence of any other imminent value-creating investment opportunity, the board’s current view is the most appropriate use of the company’s excess capital is to return it to shareholders. “The exact amount would depend on the extent of oversubscriptions that may be received under the capital issue, and business and economic factors present at the time the capital return was conducted. Accordingly, Heartland will seek shareholder approval at the annual meeting to return an amount of capital within a range of not less than $58m and not more than $100m. “However, circumstances may arise whereby the return of capital may not proceed even if approved. In summary, this would be if the capital issue did not proceed or complete successfully, or if the board identified an investment requirement or opportunity prior to the return of capital being undertaken, including an acquisition of MTF, which leads the board to consider that a return of capital is no longer the most appropriate use of the continuing company’s excess capital.” Heartland intends to conduct the return of capital by way of a court-approved scheme of arrangement under which a proportion of each shareholder’s shares would be cancelled and given a cash payment in return for the cancellation of those shares. “The board has determined this would be the preferred method due to the certainty of timing and quantum of return, which it would afford over other mechanisms,” explains Greenslade. “In addition, the arrangement would be fair to all shareholders as it would ensure capital is returned on a pro-rata basis leaving the relative voting and distribution rights of all shareholders unaffected – subject only to rounding.” Heartland will shortly file a high court application seeking initial orders that, if granted, will allow the arrangement to be voted on at the annual meeting on December 11.

STATEMENT MADE BY FITCH RATINGS

A second statement issued by Heartland NZ on November advises that Fitch Ratings has confirmed the proposed amalgamation will not impact on Heartland Bank’s current credit rating. Its statement says Heartland NZ’s potential capital management strategies may weaken its view of the company’s capitalisation – although capital is likely to remain a strength of the bank’s current rating level. “Heartland Bank accounted for 83 per cent and 78 per cent of Heartland New Zealand’s total assets and total equity respectively at financial year end of June 30, 2015 [FY15],” says Fitch Ratings. “The main additions to the bank’s balance sheet following the amalgamation will be Heartland New Zealand’s Australian-based home-equity release [HER] mortgage business and a small insurance company. “These businesses will provide some additional asset and revenue diversification by region and product to the bank’s current business profile. We believe these additional risks are manageable as the HER and insurance businesses accounted for 15 per cent of Heartland New Zealand’s total assets at the end FY15. “Heartland Bank plans to issue tier-two capital in FY16, a portion of which may be used to buyback ordinary equity if an adequate acquisition opportunity does not arise. We expect both scenarios to weaken the bank’s capital mix, which could change our opinion of Heartland Bank’s currently strong capital position. However, capital is not a constraining factor to the bank’s ratings unless the total capital ratio deteriorates close to its current internal limits. “The amalgamation will remove complexity and should reduce operating expenses, supporting profitability. Fitch does not expect a material change in Heartland Bank’s funding and liquidity structure as a result of the amalgamation.”