Memo tells of DFC moves

Press, 2 November 1989, Page 3

Memo tells of DFC moves

By

PATTRICK SMELLIE

in Wellington

DFC New Zealand, Ltd, was reassuring international investors about its financial position at the same time as the Reserve Bank was seriously questioning it, it was revealed yesterday.

A memorandum leaked to a Wellington newspaper and published yesterday showed DFC telling foreign financiers in early August that its position had stabilised and that it had the support of its shareholders to return to profitability. At the same time, DFC was sitting on a letter, written in late July, from the prudential supervision section of the Reserve Bank, questioning its provisioning for bad debts. The DFC memorandum was prepared about the same time, and released internationally in early August. It was cited in news media comment last month by a United States credit rating agency, Standard and Poors, as one of the factors that gave the impression that DFC was well-supported by its 80 per cent shareholder, the National Provident Fund. It was the NPF’s refusal to bail out DFC after a more critical evaluation of its bad-debt provisions in September which led to the merchant bank’s collapse and the appointment of statutory managers. A spokeswoman for DFC yesterday said that the August memorandum had been believed to be correct at the time of its release. It also became clear yesterday that what the Reserve Bank had previously described as a “final demand” for an independent audit of DFC’s books was not given formally in writing.

A Reserve Bank official, Mr Geoff Mortlock, said the matter had been raised at a meeting with DFC senior management on August 14. A telephone request had been made later in the month to the acting chief

executive, Mr Keith Sutton, to have an independent audit carried out. The lack of a written instruction had been due to the extreme commercial sensitivity of the issue, Mr Mortlock said. The former chairman of DFC, Mr John Perham, told;“The Press” yesterday that he knew of no formal request from the Reserve Bank to carry out an independent audit. In the event, the audit of loan loss provisions which brought on the collapse was conducted by a team of DFC management. This had been a substantially different team from that which conducted the provisioning for the annual accounts to March 31, 1989, he said. There had been complete realignment of senior management in June, following the departure of the former chief executive, Mr Murray Smith, and the death of DFC’s manager (corporate lending), Mr Peter Ferguson. The fact that many of those involved in the review had never seen the loans in question before meant they had tended to take a much more critical view of them, said Mr Perham. He acknowledged it was difficult for outside observers to appreciate how DFC’s position could be claimed to be stronger one month and wiped out the next.

The “new manager mentality” of those taking on new roles had been an important factor in the more damning assessment made in the most recent loan book review.

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