How the OIO made ANZ dodge HNA's bullet

ANZ tried to sell UDC to HNA, but OIO documents reveal just how risky that deal would have been for UDC customers and depositors. Photo: Lynn Grieveson

Newsroom Business Editor Nikki Mandow has taken a detailed look at the Overseas Investment Office's decision to block the takeover of ANZ's UDC by China's HNA. She found ANZ and UDC customers and funders dodged a huge bullet, thanks to the OIO's due diligence. One question stands out: why went wrong with ANZ's own due diligence?

Why did the ANZ Bank try to sell UDC Finance (and its portfolio of mostly small investors and SME borrowers) to a Chinese group with a junk bond credit rating, murky ownership, a history of questionable related party transactions, and which was being questioned by regulatory authorities in at least four jurisdictions, including the US?

It took a year for the ANZ’s deal with China’s HNA Group over the sale of UDC Finance to fail. And it took a regulatory body to pull the plug, not the parties themselves.

And even then, when the Overseas Investment Office released its decision in December last year declining the application by TIP-HNA NZ Holdings to buy iconic New Zealand finance company UDC from the ANZ Bank, the announcement was muted.

If only they had known what they had been saved from, UDC investors and borrowers would have been justified in shouting their relief from the rooftops.

The OIO said the ownership structure of the Chinese buyer was too opaque to be able to tell whether the purchaser met the all-important “good character” tests. The application was declined.

And there the matter largely rested.

But a good look at the OIO’s full decision, released to Newsroom this week under the Official Information Act, paints a far more worrying picture. TIP-HNA New Zealand Holdings wasn’t just a company with a murky ownership structure - though it certainly was that.

It was also part of the now-notorious Chinese HNA Group, which has such high debt levels and pressing liquidity and credit problems that it is being questioned by financial regulatory authorities in China, Hong Kong, the US and Germany.

HNA shareholders also have a history of so-called “nominal value related party transactions” - when assets pass between different owners, but almost no money changes hands. These are rarely a sign of good financial management.

And during the year ANZ was waiting for Overseas Investment Office approval for the deal, rating agency Standard & Poor’s downgraded HNA Group’s rating to “B”. This is effectively a “junk” rating, indicating a company faces major ongoing uncertainties about its ability to meet its financial commitments.

And this was the company that New Zealand’s largest bank wanted to sell one of our biggest finance companies to.

It might not be too far-fetched to call UDC an iconic Kiwi business. As of the end of 2017, it had a loan book worth $3 billion. For almost 80 years it has taken money from investors (large and small) and lent it out to individuals and small or medium-sized businesses. Want to borrow money to buy a car, a truck or even a small plane for your business? UDC can help.

ANZ was potentially damaging all stakeholders by selling UDC to such a unreliable overseas company, says NZ Shareholders’ Association CEO Michael Midgley. If HNA had ended up owning UDC and then gone bust, New Zealand retail investors or borrowers could have seen their money disappear into an opaque Chinese entity - perhaps for ever.

“It’s disappointing that the ANZ Bank didn’t do more due diligence,” Midgley says. “From our point of view, it’s not just the lenders that were seriously at risk if this deal went ahead, but the borrowers too.”

Midgley says he was at one of the meetings where ANZ was explaining the TIP-HNA deal to depositors, who needed to vote on the deal. Although the bank offered them the option to transfer their funds to ANZ, he believes most people at the meeting didn't understand the risks and wouldn't have moved their money away from HNA.

"The fact the business was still going to be branded as UDC was enough for many of them, even though the brand was potentially about to be damaged. Even though they risked having their deposits invested in a company they didn't know the owner of. My understanding of that meeting was that over 60 percent had no immediate intention of transferring their funds. People need to understand these transactions and their understanding was very limited."

Massey University senior banking lecturer David Tripe says the deteriorating credit rating of both UDC and HNA over the year the deal was on the cards was a pretty good indication (for ANZ as much as for investors) it was regarded as risky. Tripe says he knows managed and superannuation funds who moved their money out of UDC over the period, even if smaller investors didn't.

"I'm happy that the purchaser was not allowed to proceed, as [the OIO report] raises serious questions about the availability of any parent support for the UDC operations," Tripe says.

While the OIO decision was undoubtedly the right one, and the report thorough, there are also questions around why the office chose to focus in its decision on the fact that “credible, reliable, accurate and timely information has not been provided on the ownership interests relevant to these applications”, rather that some of the more concerning aspects of the deal revealed in the report.

It's like telling investors the company has a nasty cough when actually it's riddled with cancer.

The Overseas Investment Office’s Lisa Barrett says that while it has the mandate to look at aspects like whether potential owners have good business acumen and experience, it can’t do that if it doesn’t know who those owners are.

“If we are unable to determine the individuals who own and control the relevant overseas person (eg company), we cannot proceed to consider the criteria for consent.”

And so to the most critical question: Why didn't ANZ abandon the sale when it became clear it was not in the best interest of UDC or its stakeholders? ANZ refused to comment “given the matter is now closed”. But once it had decided it wanted to sell UDC “to simplify the bank and improve capital efficiency” it's possible it just didn’t have many other options. The $660 million offer from TIP-HNA was certainly the best deal on the table - and maybe it was just too good to let go.

Ironically, ANZ is now looking at listing UDC Finance, and the failed sale process hasn’t improved its prospects. Although UDC lending was up 13 percent to $2.9 billion in the year to September 30 2017, and net profit after tax was a record $61.6 million, debenture funding (debt backed not by physical assets but by the creditworthiness of the issuer) fell 35 percent, with ANZ needing to increase its level of funding.

And Standard & Poor’s placed UDC on credit watch negative when ANZ announced that it wanted to sell. That means the rating agency is thinking about whether to lower the finance company’s present BBB rating. Which isn't a great look.