NZ regulatory changes present opportunity for non-bank lenders

Funds manager Merricks Capital has said that tighter banking regulations in New Zealand will provide opportunities for non-bank lenders to provide capital to farmers.

The Reserve Bank of New Zealand decided last year that, from mid-2020, the country’s big four banks will be required to increase their capital ratios to 16 percent, from the previous minimum of 10.5 percent.

Research published by Rabobank in January warned that this could “result in an interest rate increase” for some farmers and less appetite among banks to lend to riskier sectors and deals, such as those in agriculture.

The change in New Zealand is likely to be “more dramatic” than a similar shift that has already taken place in Australia, Merricks Capital chief operating officer Andrew Torrington told Agri Investor.

“Our experience in Australia is that, five years ago, banks in the commercial real estate sector [accounted for] probably 95 percent of the lending market – today it’s probably more like 80 percent, and APRA thinks it’ll be more than 30 percent non-bank lending in the next few years,” Torrington said.

“Overseas you see a 50-50 split [in some countries], in Europe its 60-40. Agri lending has been a pretty tough market in the last 12 months for farmers and it’s been difficult for them to source capital.

“New Zealand is unique as the regulation changes are so new and agriculture is a major part of their economy. As investors we look at the dislocation between the capital source and how much banks need to reduce their exposure to agri – there’s about NZ$3 billion ($1.9 billion; €1.8 billion) that needs to come out of the NZ banking sector over the next 18 months. And the non-bank lenders, fund managers and investors, will fill that void.”

Merricks Capital launched into the New Zealand market in December 2019 through the NZ$140 million refinance of the Van Leeuwen Group dairy operation.

The Van Leeuwen Group milks more than 10,000 cows across 11 dairy farms covering more than 7,500 hectares of land on New Zealand’s South Island. It produces approximately five million kg of milk solids per annum.

Torrington said the refinancing would provide the group with financial stability to keep developing its robotic farming systems.

Around a third of the funds for that deal came from Merricks’ wholesale Partners Fund, a vehicle that gives investors exposure to senior loans secured to property, agriculture and infrastructure assets in Australia and New Zealand. It has returned 12.7 percent per annum since inception, as of June 30, 2019.