Replacement Product Disclosure Statement

Transcription

1 Replacement Product Disclosure Statement Replacing Product Disclosure Statement dated 12 October 2016 for the offer of Secured First-Ranking Debenture Stock by Asset Finance Limited This document gives you important information about this investment to help you decide whether you want to invest. There is other useful information about this offer on Asset Finance Limited has prepared this document in accordance with the Financial Markets Conduct Act You can also seek advice from a financial adviser to help you to make an investment decision. Date: 9 November 2017 Page 1 of 27

2 1 KEY INFORMATION SUMMARY WHAT IS THIS? This is an offer of Secured First-Ranking Debenture Stock ("Secured Deposits"). Secured Deposits are debt securities issued by Asset Finance Limited ("Asset Finance"). You give Asset Finance money, and in return Asset Finance promises to pay you interest and repay the money at the end of the term. If Asset Finance runs into financial trouble, you might lose some or all of the money you invested. ABOUT ASSET FINANCE LIMITED Asset Finance (Company number: ) is a medium sized company providing in niche lending markets. Asset Finance has been operating since Asset Finance is in the business of borrowing money from investors, and lending that money to borrowers at a higher rate. Asset Finance relies upon investments from the general public to fund the majority of its loan book. In March 2015, Asset Finance became licensed by the Reserve Bank of New Zealand as a non-bank deposit taker ("NBDT"). KEY TERMS OF THE OFFER Description of Secured Deposits Term of Investment Interest The Secured Deposits are secured debt securities. There are terms ranging from three months to five years available. Interest payable is available on Asset Finance's website and is subject to change without notice. The interest rate will be confirmed to you by or letter following its receipt of the application money. Investors are entitled to choose from a range of payment options. These options include: Monthly Direct Credit Quarterly Direct Credit Quarterly Compounding Offer Dates Early Withdrawal Interest is calculated on a daily basis from the date Asset Finance receives the application money (subject to the clearance of those funds) and will be paid in accordance with the instructions specified in your application. The offer is available now. This is a continuous offer. There is no closing date. Secured Deposits may be withdrawn prior to maturity in limited circumstances. Asset Finance is likely to charge an early withdrawal fee calculated on an adjusted interest rate. We may also repay you early. Please refer to section 2 of this PDS for more information. NO GUARANTEE Asset Finance is solely responsible for repaying you. The offer of Secured Deposits under this PDS and the returns payable thereon are not guaranteed by Asset Finance, the Supervisor, or any other person. HOW YOU CAN GET YOUR MONEY OUT EARLY There are a limited number of circumstances where Asset Finance will consider early repayment at the request of an investor. The circumstances under which early repayment of Secured Deposits may be considered are: Estates or trusts: where Secured Deposits form part of an estate or trust and the trustees wish to distribute the assets of the estate or trust (as the case may be); Hardship: where, due to unforeseen circumstances, an investor's continued investment may give rise to some form of material hardship; or Page 2 of 27

3 Terms of investment: where the terms, upon which the investment was accepted, so provide. Where Asset Finance agrees to accept a request by a holder of Secured Deposits for the investment to be withdrawn prior to maturity for any reason, Asset Finance is likely to charge an early withdrawal fee calculated on an adjusted interest rate. Asset Finance does not intend to quote these Secured Deposits on a market licensed in New Zealand and there is no other established market for trading them. This means you may not be able to sell your Secured Deposits before the end of their term. At the discretion of Asset Finance, Stockholders may transfer their Secured Deposits to a third party in multiples of $500. Asset Finance is of the opinion that there is currently no established market for transferring Secured Deposits. In the event that Asset Finance consents to the transfer of your investment, there are not likely to be any fees or charges payable by you in respect of any such transfer. HOW SECURED DEPOSITS RANK FOR REPAYMENT Asset Finance is prohibited from granting any security interests that rank ahead of, or equally with, the first interest given to Covenant Trustee Services Limited (as Supervisor) for the benefit of Stockholders. On a liquidation of Asset Finance, your rights and claims under the Secured Deposits would rank: AFTER all creditors preferred by law and any permitted prior security interests; EQUALLY with all other Stockholders AHEAD of any lesser ranking secured creditors and all unsecured creditors. Asset Finance is permitted to grant a security interest prior to that given to the Supervisor when acquiring any asset provided that the amount borrowed or raised or owing and secured against that asset does not exceed 2% of Asset Finance's Total Tangible Assets. More information on the ranking of securities upon the event of liquidation of Asset Finance can be found in Section 4 of this PDS on page 14. WHAT ASSETS ARE THESE SECURED DEPOSITS SECURED AGAINST? Under the trust deed, Asset Finance have granted security interest to Covenant Trustee Services Limited as Supervisor, which secures its payment obligations under the Secured Deposits. The security interests are over all present and after-acquired personal property, and over real property and property other than personal property. More information on the ranking of securities upon the event of liquidation of Asset Finance can be found in Section 4 of this PDS on page 14. WHERE YOU CAN FIND ASSET FINANCE'S FINANCIAL INFORMATION The financial position and performance of Asset Finance are essential to an assessment of Asset Finance's ability to meet its obligations under the Secured Deposit. You should also read section 5 of this PDS on page 16. KEY RISKS AFFECTING THIS INVESTMENT Investments in debt securities have risks. A key risk is that Asset Finance does not meet its commitments to repay you or pay you interest (credit risk). Section 6 of the PDS (risks of investing) discusses the main factors that give rise to the risk. You should consider if the credit risk of these debt securities is suitable for you. The interest rate for these Secured Deposits should also reflect the degree of credit risk. In general, higher returns are demanded by investors from businesses with higher risk of defaulting on their commitments. You need to decide whether the offer is fair. Asset Finance considers that the most significant risk factors are: Funding and liquidity risk If a significant number of investors do not reinvest their deposit upon maturity at or around the same time, Asset Finance may not be able to raise enough cash to repay investors. This is of particular significance to Asset Finance as it has a large Page 3 of 27

4 Vulnerability to non payment Capacity to make timely payment number of retiree investors who may discontinue to reinvest in Asset Finance due to other financial needs or lifestyle changes. Loan default risk If a significant number of borrowers defaulted on their obligations at around the same time, there may be insufficient funds to fully repay Asset Finance's investors, or it could trigger a default under its trust deed due to insufficient capital. Computer system risk Asset Finance's operations are administered using a computer system specifically designed for its type of business. If Asset Finance's computer system fails, Asset Finance may be unable to operate, meaning that Secured Deposits may not be repaid in time to investors. Key person risk Of its 20 staff, Asset Finance is particularly reliant upon 4 key people at its head office for its day to day operation. Asset Finance is further reliant upon 2 people for month to month and longer-term operation. The loss of 2 or more key people would have significant impact on its business, and it would urgently need to find replacements for the key staff members lost. This summary does not cover all of the risks of investing in Secured Deposits. You should also read section 6 of this PDS on page 18. WHAT IS ASSET FINANCE'S CREDIT RATING? Asset Finance has a long term counterparty credit rating of B / Outlook Stable. A credit rating is an independent opinion of the capability and willingness of an entity to repay its debts (in other words, its creditworthiness). It is not a guarantee that the financial product being offered is a safe investment. A credit rating should be considered alongside all other relevant information when making an investment decision. Asset Finance has been rated by Standard & Poor's (Australia) Pty Limited ("S&P"). S&P gives ratings from AAA through to CC. A copy of Asset Finance's most recent credit rating report from S&P is available on Asset Finance's website. Strength S&P Scale Approx. Probability of default over five years Extremely Strong AAA 1 in 600 Very Strong AA 1 in 300 Strong A 1 in 150 Adequate BBB 1 in 30 Less Vulnerable BB 1 in 10 More Vulnerable B 1 in 5 Currently Vulnerable CCC 1 in 2 Currently Highly Vulnerable CC 1 in 2 Default D Page 4 of 27

5 TABLE OF CONTENTS Section 1 Key Information Summary page 2 Section 2 Terms of the Offer page 7 Section 3 Asset Finance and what it does page 10 Section 4 Key features of Secured Deposits page 14 Section 5 Asset Finance's financial information page 16 Section 6 Risks of investing page 18 Section 7 Tax page 22 Section 8 Who is involved? page 23 Section 9 How to complain? page 24 Section 10 Where you can find more information page 25 Section 11 How to apply page 25 Section 12 Contact information page 25 Page 5 of 27

6 Letter from the CEO of Asset Finance Asset Finance Limited is a Kiwi-owned finance company that has grown from a small local business in 1997, to a nationwide company now employing over 20 full time staff, with a branch network of 9 offices and 7 agencies, and a total loan book of over $20m. Over the past 10 years we have built a strong foundation of investors, some of whom have entrusted us with their money since we issued our first Prospectus. Most of our investors are ordinary New Zealanders seeking better returns than banks are offering. Many of our investors rely on their investment with us to supplement their income, or to grow their nest egg by compounding their interest. We rely on investments from the general public as the main funding source for our lending business, which is how we generate revenue. Asset Finance is committed to providing short and medium term financial products and services that help New Zealanders and their businesses achieve their goals. We aim to provide a quality service that is affordable, friendly, quick, and personalised to the individual customer. We go the extra mile to make things as simple and convenient as possible for our customers. We're proud to have survived the global financial crisis while providing businesses and individuals across the country with the means to keep going during tough times. During the past 6 years there has been constant change in our industry. Key legislation governing all aspects of our day to day operation has changed, and additional legislation has been introduced. We have relished the opportunity to review our systems and processes and improve our business during this time. I m proud to say the company is stronger now than at any time during our almost 20-year history. The changes have culminated with Asset Finance becoming licensed as a Non-bank deposit taker by the Reserve Bank of New Zealand in March 2015, and the creation of this PDS pursuant to the Financial Markets Conduct Act. Since becoming a Non-bank deposit taker we have experienced continued growth and profitability, reflecting the strong interest margins that are a key component in profitability. Our profitability, experienced front-line staff, strong independent governance on our Board, and strong capital base put us in a good position to take advantage of opportunities that arise. We trust that you will consider taking advantage of the opportunity you have to place your hard-earned money with us on term deposit. If you have any questions, please don t hesitate to contact Asset Finance, or me personally. We are happy to talk with you in plain English about what we do so you can make an informed decision. Paul Elliott Chief Executive Officer Page 6 of 27

7 2 TERMS OF THE OFFER TERMS OF THE OFFER Description of Secured Deposits Term The Secured Deposits are secured debt securities. There are terms ranging from three months to five years available. Investments will attract a fixed rate of interest the amount of which depends upon the length of term invested. The interest rates received on Secured Deposits are fixed and will not be varied until the end of the relevant term. Interest rates The interest rate is available on Asset Finance's website and is subject to change without notice. The interest rate will be advised by the company prior to investment. Asset Finance sets interest rates based on its own liquidity needs. For terms of longer than 12 months, its interest rates are usually between 1 3% p.a. higher than interest rates offered by major trading banks, with the margin increasing as the investment term increases. Interest payments Investors are entitled to choose from a range of payment options as detailed below: Monthly Direct Credit: If you select Monthly Direct Credit on the application form, the net interest earned on your investment will be direct credited as cleared funds to the bank or financial institution account specified in the application form on a monthly basis; or Quarterly Direct Credit: If you select Quarterly Direct Credit on the application form, the net interest earned on your investment will be direct credited as cleared funds to the bank or financial institution account specified in the application form on a quarterly basis; or Quarterly Compounding: If you select Quarterly Compounding on the application form, the net interest earned on your investment will be automatically reinvested on a quarterly basis. You will then earn interest on interest. Interest is calculated on a daily basis from the date Asset Finance receives the application money (subject to the clearance of those funds) and will be paid in accordance with the instructions specified in your application. If you choose to have interest paid or compounded quarterly, it will be done on the last working day of March, June, September and December. If you choose to have interest paid monthly, it will be done on the last working day of each month. Offer opening and closing dates Ranking of Secured Deposits on liquidation The offer is currently open. This is a continuous offer. There is no closing date. On a liquidation of Asset Finance, your rights and claims under the Secured Deposits: would rank after the Trustee's costs, charges, expenses and liabilities, and all of its remuneration together with interest, and all claims given priority by operation of law and the Trust Deed; would rank equally with all other holders of Secured Deposits, including those who invested pursuant to an earlier or later prospectus and investment statements; and would rank ahead of any lesser ranking secured creditors (at the date of this PDS there are none), and all unsecured creditors. Page 7 of 27

8 Minimum investment amount Early repayment The minimum subscription amount which must be paid by you is $500. However, a higher amount may be required to be eligible for particular account options, terms or rates. Asset Finance relies on committed Secured Deposits to properly plan its business, and for this reason will only agree to early repayment at the request of an investor in limited circumstances. The circumstances under which early repayment may be considered are: Estates or Trusts: where Secured Deposits form part of an estate or trust and the trustees wish to distribute the assets of the estate or trust (as the case may be); Hardship: where, due to unforeseen circumstances, an investor's continued investment may give rise to some form of material hardship; or Terms of investment: where the terms, upon which the investment was accepted, so provide. If Asset Finance agrees to accept a request by a holder of Secured Deposits for the investment to be withdrawn prior to maturity for any reason, Asset Finance is likely to charge an early withdrawal fee calculated on an adjusted interest rate. This calculation will depend on the timing and circumstance of the withdrawal. Asset Finance also has the right to repay investors early. Asset Finance may without the approval of investors, upon giving at least fourteen (14) days notice in writing of its intention to the Trustee and all investors, repay all Secured Deposits (including accrued interest), whether or not due for repayment. At the discretion of Asset Finance, Stockholders may transfer their Secured Deposits to a third party in multiples of $500. Asset Finance is of the opinion that there is currently no established market for transferring Secured Deposits. In the event that Asset Finance consents to the transfer of your investment, there are not likely to be any fees or charges payable by you in respect of any such transfer. TRUST DEED Asset Finance entered into a trust deed with Covenant Trustee Services Limited, as supervisor, on 15 March 2004, which was amended on 1 December 2010, 11 September 2012 and 21 October 2016 in relation to the Secured Deposits. A copy of the trust deed may be obtained from the Disclose register at INTEREST RATE AND COMPARISON Asset Finance sets interest rates based on its own liquidity needs, having reference to current interest rates offered by the five major trading banks and other Non-bank deposit takers. For terms of longer than 12 months, Asset Finance's interest rates are usually between 1 3% p.a. higher than interest rates offered by major trading banks, with the margin increasing as the investment term increases. The diagram below demonstrates the interest rates payable on the Secured Deposits for terms ranging from nine (9) months to five (5) years. The interest rates are compared with the following in relation to each of the terms noted in the diagram below: Banks the average interest rate offered by the five largest New Zealand retail banks. Page 8 of 27

9 Interest rate % p.a. Finance companies other than as noted below, the average interest rate offered by the 7 finance companies listed on interest.co.nz with a credit rating up to BB+, or with no credit rating. Asset Finance the publicly available interest rates it is offering at the date of this document. If multiple rates are offered, Asset Finance has used the highest publicly available rate for investments of $50,000 or less. Rates are as published at 11:55am 30 September 2017 on The five banks whose interest rates Asset Finance has used in the graph below have credit ratings between A+ and AA-. Of the seven finance companies Asset Finance used, five have no credit rating, one has a rating of B and one has a rating of BB. Asset Finance has a rating of B. Asset Finance excluded one finance company from the comparison because they are a registered charity who offers returns significantly lower than their credit rating of B+ suggests they should. They are likely to attract investors who are willing to accept lower returns due to the charitable status of the organisation. 7 Comparison of Interest Rates as at 30 September Asset Finance Banks Finance companies Mths 12 Mths 18 Mths 2 Yrs 3 Yrs 4 Yrs 5 Yrs Investment term Page 9 of 27

10 3 ASSET FINANCE AND WHAT IT DOES OVERVIEW OF ASSET FINANCE Asset Finance Limited Asset Finance is in the business of borrowing money from investors, and lending that money to borrowers at a higher rate since Asset Finance is a medium sized company providing finance in niche lending markets. It relies upon investments from the general public to fund the majority of Asset Finance's loan book. Asset Finance employs 20 people full time, 9 of whom are based at head office in Whakatane, New Zealand. Head office is where most administrative functions including loan payouts and investment deposits are managed. In addition to head office, it has a small network of Asset Finance branded offices (9) and non-branded lending agencies (7) located throughout New Zealand, mainly in the North Island. The purpose of the branch network is to facilitate new lending and provide better service to existing loan customers. Asset Finance attracts new investors by advertising in printed mediums and online, or by referrals from existing investors. All investment enquiries are directed to a small team at head office. Asset Finance sources loans by advertising in a range of media, with loan enquiries directed to the customer s nearest branch office. Asset Finance's operations and activities Loan approval process The assessment of any loan advance starts with some form of application or proposal. This provides details of the requested loan or facility amount, the borrower, guarantor, the security and the repayments. If the application or proposal is reasonable the next step is to assess the security together with the borrower s income, affordability and cash flow. If the proposal still checks out, credit checks are performed on the customers and the security. Once Asset Finance has all of the information, a decision can be made on whether to approve a loan facility to this customer, and if so, whether the full amount can be approved and under what terms. Approval authority is delegated based on the size of the loan exposure. There are multiple tiers but all loan exposures of $10,000 or more must be approved by two individuals, and Board approval is required for any exposure over 10% of Equity. Many loan enquiries are rejected prior to application, usually due to insufficient security. Of the applications that are submitted to Asset Finance, around 50% are approved. Many applications that are approved are approved for a reduced amount compared to what was originally requested. Any request for a top-up or refinance is treated in a similar fashion, but Asset Finance places more reliance upon repayment history and this history can often be used in lieu of a new credit check. It can also usually re-use existing securities thereby saving costs (e.g. PPSR lodgement costs, caveat or mortgage registration costs, etc) as set out below. Loan Top-Ups and Repeat Customers Loan top-ups are an integral part of Asset Finance's business, and it has simplified processes in place to make the approval of loans to existing and past clients as straightforward as possible. These processes may include any of the following measures as Asset Finance sees fit: Reduced interest rate because it perceives the client as reduced risk due to their payment history; and No updated credit check because it is satisfied the client honours their commitments; and Reliance upon information previously obtained such as bank statements, collateral verification and valuation information; and An establishment fee credit in part to reflect the slightly reduced effort on Asset Finance's part, but mainly as another way of showing it values the client. Page 10 of 27

11 Asset Finance's Loan book The table below shows the types of products Asset Finance lends to borrowers as at 31 March Category Consumer Loan Business Finance Managed by a Third Party Description of category This category consists of loans Asset Finance has provided to an individual for consumer purposes. Typical of Asset Finance's consumer lending is a loan for less than $10,000 for a term of 2-3 years, secured by a car or house. Amounts up to $5,000 can be lent unsecured, but unsecured lending accounts for less than 2% of Asset Finance's total tangible assets. This category is made up of any loan or credit facility Asset Finance has provided for business or investment purposes. Whilst there is a broad range of lending in terms of size and term of loan, a typical business facility would be a loan from $20,000 to $250,000 for a term of up to 5 years secured by machinery and/or land, or a factoring facility of a similar size but secured by the company s accounts receivable and guarantees. This category consists of new or existing loan or credit facilities between a third party and the client which Asset Finance has taken assignment of. While Asset Finance funds the facility, the third party is responsible for performing several aspects of approval assessment and for managing the day to day operation. Security arrangements are in place and the third party is guarantor to each facility. All exposures currently in this category would fall under the Business Facility heading if Asset Finance was managing the facility directly itself. The first table below breaks Asset Finance's loans down to consumer loans, business finance, and loans managed by a third party, showing the average exposure that Asset Finance has to each category of lending and also the average loan term. The second table breaks Asset Finance's loans down to the different types of securities its loans are held over and shows the average exposure that Asset Finance have under each category of security. The third and fourth tables show Asset Finance's loans according to the regions the borrowers reside in, then loans primarily operating in New Zealand and loans primarily operating in Australia. Breakdown of Loan book by product category as at 31 March 2017 Consumer Loans Business Finance Managed by a Third Party Total exposure $7,738,708 $9,955,902 $3.,061,068 % of Total Tangible Assets 29.7% 38.2% 11.8% Average exposure $3,758 $65,071 $85,030 Average exposure of top 10 $183,092 $450,717 $252,782 Weighted average loan term 26.4 months 16.9 months Not applicable Number of loans 2, Breakdown of Loan book by collateral as at 31 March 2017 Car, Truck or Motor Vehicle Home or Land First Charge Home or Land Second Charge Machinery & Equipment Accounts Receivable Unsecured Other Total exposure $5.46 m $4.36 m $4.49 m $1.41 m $3.75 m $0.41 m $0.87 m % of Total Tangible Assets Average exposure Average exposure of top % 16.7% 17.2% 5.4% 14.4% 1.6% 3.4% $3,469 $189,578 $20,037 $54,057 $81,575 $1,214 $54,687 $48,584 $414,479 $252,326 $123,150 $279,955 $3,155 $87,062 Page 11 of 27

12 Some of the security provided for Asset Finance's loans is unique in nature and accordingly carries greater credit risk as the ability to sell the assets may be limited by the size of the market. Asset Finance obtains specialist valuations of unique securities, and these are updated on a periodic basis. Breakdown of Business and Consumer loans by region Both consumer loans and business loans are well represented throughout the country, although Asset Finance has comparatively less consumer activity in the South Island. This geographical spread avoids undue reliance on any particular region of the country. Region Auckland and Northland Waikato and Bay of Plenty Central and Lower North Island South Island Overseas Business Loans $ % loan book $4,088, % $2,396, % $773, % $2,704, % - - Consumer Loans $ % loan book $1,560, % $3,332, % $1,982, % $863, % rd Party Loans $ % loan book $1,597, % $179, % $13, % $411, % $858, % Total $9,963, % $7,738, % $3,061, % Breakdown of Loan book by Jurisdiction New Zealand Australia (NZ $) Total exposure $19,904,718 $858,184 % of Total Tangible Assets 76.4% 3.3% Average exposure $8,874 $171,637 Average exposure of top 10 $477,554 $171,637 All figures are listed in New Zealand dollars. Action taken against defaulting loans The software system Asset Finance uses was developed in New Zealand and tailored to suit Asset Finance's business. After importing bank transactions each business day, the software automatically identifies accounts that are past due one day or more. When payments are missed Asset Finance can send a letter, make a phone call or send a text message. The severity of Asset Finance's action is determined primarily by how far past due an account is and the type of security Asset Finance has. Asset Finance's first and preferred option is always for the client to pay the arrears or enter into a suitable arrangement to pay the arrears over a reasonable timeframe. However, if a client chooses to ignore the problem or is unable to make a suitable payment arrangement, Asset Finance is forced to act upon security it has over any assets pledged as collateral. In the case of motor vehicles or machinery, this action can happen quickly. A typical motor vehicle sale takes from between 2 and 3 months. It can take significantly longer to sell real estate, with the process often taking up to a year. Delays can occur if the property owner can't be served with the required documents, if Asset Finance enters into a payment arrangement that is subsequently not kept or if the property doesn't attract a reasonable sale price at first attempt. Bad Loan Write offs Once all security options have been exhausted, if the client is not paying the loan then the balance is written off as a bad debt. Even once a loan is written off, all hope is not lost. Loans that are written off due to being assessed as having a low likelihood of collection are sent to a debt collection agency for collection. In the financial year ended 31 March 2017 Asset Finance recovered $46,309 of bad debts previously written off (31 March 2016: $36,030) The industry in which Asset Finance operates Asset Finance has been offering fixed term deposits to the public since 2004, and anyone in New Zealand and Australia can invest with the company. Asset Finance is classified as a non-bank deposit taker and is licensed under the Non-bank Page 12 of 27

13 Deposit Takers Act Asset Finance is part of the financial services industry and operate alongside banks and non-bank deposit takers which issue term deposits. Asset Finance's main competition for lending is credit unions and other finance companies. It can't usually compete on price with banks, so the majority of Asset Finance's lending is either to customers that would not currently qualify for bank lending, or is in niches in which banks do not operate or do not target. Some of Asset Finance's customers would qualify for a bank loan but prefer to avoid the complicated process, or feel threatened approaching their bank. Many of Asset Finance's customers use the company for short term bridging financing, then later refinance with a bank. While there are similarities between Asset Finance and a bank, Asset Finance is very different from a bank. A bank makes money by lending a large number of people large amounts and charging a smaller interest margin over a long period. In contrast, Asset Finance makes money by charging a much smaller number of people a higher margin over a shorter period. Keys to generating income Asset Finance's key source of income is the loan receivables and interest rate margins generated by lending money to its borrowers. Asset Finance also generates income from fees and charges for default payments, early termination (for borrowers), and early repayment (for investors). ABOUT ASSET FINANCE'S CEO Paul Elliott is the current Chief Executive Officer (CEO) of Asset Finance. Paul was appointed CEO of Asset Finance in December 2015, having been an independent director of the Company since Paul has been a partner in the Auckland corporate finance firm, Time Capital, since 2010 and previously operated his own corporate advisory business for several years in the sectors of business recovery, performance improvement and governance. Paul undertook a number of assignments as Chief Financial Officer or General Manager guiding several major New Zealand companies through extremely challenging periods in New Zealand, Australia, the UK and mainland Europe. Companies of which he has been CFO include the listed retirement village operator Metlifecare, kiwifruit exporter Zespri, Pacific Retail Group, Pacific Retail Finance and Timberlands. His experience extends across a number of industry sectors, including retail, finance, forestry and timber processing, agriculture and horticulture. Paul presently holds and has held a number of directorships of both privately-held and publicly-listed companies. Page 13 of 27

14 4 KEY FEATURES OF SECURED DEPOSITS RANKING AND SECURITY The Secured Deposits are secured by a security interest which Asset Finance has granted under the terms of the trust deed over all of Asset Finance's assets to Covenant Trustee Services Limited as supervisor ("Debenture Trust Deed"). Except for prior security interests totalling no more than 2% of total tangible assets, the Debenture Trust Deed prohibits us from granting any security interests that rank ahead of, or equally with, the first interest given to Covenant Trustee Services Limited for the benefit of Stockholders under the trust deed in relation to Secured Deposits. As at the date of this PDS, there were no outstanding prior security interests that had been granted by us. The only interests that rank ahead of the first interest given to Covenant Trustee Services Limited are those given preference by law such as PAYE and RWT. The secured debenture stock deposits totalling $20,646,903 as at 31 March 2017 are secured by security interest in favour of Covenant Trustee Services Limited over all of Asset Finance's present and after acquired personal property, and rank ahead of the other secured liabilities (other than permitted prior security interests and claims given preference by law, such as outstanding taxes and payments to employees). The total value of Asset Finance's assets that are subject to the security interest in favour of Covenant Trustee Services Limited is $26,290,831 as at 31 March Asset Finance is permitted under the Debenture Trust Deed to create security interests over its assets which rank in priority to the security interests granted in favour of Covenant Trustee Services Limited under the Debenture Trust Deed to secure any borrowing or money owed in purchasing or acquiring assets, provided that the amount secured by all prior ranking security interests does not exceed 2% of Asset Finance's total tangible assets. The diagram below illustrates the ranking of the Secured Deposits on Asset Finance's liquidation and is based on $20,646,903 of Secured Deposits being in issue, being the number of Secured Deposits issued by Asset Finance as at 31 March Higher ranking/earlier priority Ranking on liquidation of Asset Finance Liabilities that rank in priority to the Secured Deposits Examples Creditors preferred by law and any permitted prior ranking security interests Indicative amount as at 31 March 2017 $529,414 Liabilities that rank equally with the Secured Deposits Secured Deposits, including the accrued interest $20,646,903 Liabilities that rank below the Secured Deposits Lesser ranking secured creditors and unsecured creditors $251,181 Lower ranking/later priority Equity Distribution of surplus assets $5,392,747 Page 14 of 27

15 GUARANTEES Asset Finance is solely responsible for repaying you. The offer of Secured Deposits under this PDS and the returns payable thereon are not guaranteed by Asset Finance, the Supervisor, or any other person. Page 15 of 27

16 5 ASSET FINANCE'S FINANCIAL INFORMATION Asset Finance is required by law and its trust deed to meet certain financial requirements. This table shows how Asset Finance is currently meeting those requirements. These are minimum requirements. Meeting them does not mean that Asset Finance is safe. The section on specific risks relating to Asset Finance's creditworthiness sets out risk factors that could cause its financial position to deteriorate. The offer register provides a breakdown of how the figures in this table are calculated, as well as full financial statements. KEY RATIOS Key Ratio 31/3/ /3/ /3/2015 Capital ratio 14.06% 14.10% 13.12% Minimum capital ratio (under the trust deed) 8% 8% 8% Minimum capital ratio (under the 2010 regulations)* 8% 8% 8% The capital ratio is a measure of the extent to which Asset Finance is able to absorb losses without becoming insolvent. The lower the capital ratio, the fewer financial assets Asset Finance has to absorb unexpected losses arising out of its business activities. Aggregate exposures to related parties 0% 0% 6.96% Maximum limit to aggregate exposures to related parties 15% 15% 15% (under the trust deed) Maximum limit to aggregate exposures to related parties (under the 2010 regulations)* 15% 15% 15% Related party exposures are financial exposures that Asset Finance has to related parties. A related party is an entity that is related to Asset Finance through common control or some other connection that may give the party influence over Asset Finance (or Asset Finance over the related party). These related parties include directors of Asset Finance. Liquidity calculated in accordance with the quantitative liquidity requirements under the trust deed April: $4,787,107 May: $4,686,840 June: $4,651,311 April: $4,612,695 May: $4,464,993 June: $4,454,879 April: $4,312,869 May: $4,086,790 June: $3,690,414 Minimum liquidity requirements Asset Finance's projected Liquidity Position must be positive for required under the trust deed each of the first 3 months of each of its monthly Liquidity Report. Liquidity requirements help to ensure that Asset Finance has sufficient realisable assets on hand to pay its debts as they become due in the ordinary course of business. Failure to comply with liquidity requirements may mean that Asset Finance is unable to repay investors on time, and may indicate other financial problems in its business. Page 16 of 27

17 SELECTED FINANCIAL INFORMATION Period Year to 31/3/2017 Year to 31/3/2016 Year to 31/3/2015 Total assets as $26,820,245 $26,442,311 $23,638,963 determined in accordance with GAAP Total liabilities as $21,427,498 $21,398,118 $19,332,741 determined in accordance with GAAP Net Profit after Tax as $993,670 $1,383,088 $1,517,832 determined in accordance with GAAP Net Cash Flows from ($375,857) $1,919,246 $1,613,042 Operating Activities as determined in accordance with GAAP Cash and cash $4,781,027 $6,722,264 $4,131,371 equivalents as determined in accordance with GAAP Capital as calculated in accordance with the 2010 regulations* $4,624,023 $4,533,895 $3,888,997 *"the 2010 regulations" means the Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations OTHER LIMITATIONS, RESTRICTIONS AND PROHIBITIONS Financial restrictions The Debenture Trust Deed with Covenant Trustee Services Limited requires that Asset Finance do not: where the Total Tangible Assets are less than $10,000,000, permit the Total Liabilities to exceed 85% of the Total Tangible Assets; where the Total Tangible Assets are $10,000,000 or more but less than $20,000,000, permit the Total Liabilities to exceed 87% of the Total Tangible Assets; where the Total Tangible Assets are $20,000,000 or more, permit the Total Liabilities to exceed 90% of the Total Tangible Assets; and borrow on the security of a security interest that ranks in priority to that granted to Covenant Trustee Services Limited under the Debenture Trust Deed that exceeds 2% of the value of Asset Finance's total tangible assets. Allow the Capital Ratio to be less than 10%. The Capital Ratio is the ratio, expressed as a percentage, of the Company s capital to an amount representing the degree of risk to which the Company is exposed. Other restrictions For further details regarding other limitations, restrictions and prohibitions on Asset Finance, refer to the Trust Deed on the offer register at Page 17 of 27

18 6 RISKS OF INVESTING GENERAL RISKS Your investment is subject to the risk that Asset Finance becomes insolvent and as a result cannot repay your investment or the interest it has earned. Additional risk is that should you wish to sell your investment prior to its maturity you are unable to find a buyer or realise the amount you paid for the deposit. There is no established market available to trade such investments. In addition to the general risks associated with any investment securities of this nature, there are numerous factors relevant to the Secured Deposits and to Asset Finance, which may impact on the Secured Deposits. Details of these specific risks are provided in the section below. SPECIFIC RISKS RELATING TO ASSET FINANCE'S CREDITWORTHINESS Funding and Liquidity Risk The typical investor in Asset Finance Secured Deposits is likely to be retired. The average amount invested in Asset Finance is approximately $30,000 but investments range from small amounts of several hundred dollars to almost a million dollars. Description of Circumstance Liquidity risk is the risk that Asset Finance is not able to raise enough cash to repay investors upon maturity, particularly where a significant number of investors do not reinvest their deposit upon maturity. Why circumstance is of significance A significant number of Asset Finance investors are retirees who may discontinue to reinvest in Asset Finance upon maturity due to personal financial situation, other financial commitments, significant lifestyle changes or death. If this group of investors were to cease investing with Asset Finance it would find lending severely constrained. Any reduction in lending affects Asset Finance s profitability. Moreover, if investors do not reinvest upon maturity, and if a significant number of them mature around the same time, Asset Finance may not have sufficient cash on hand to pay them all or to pay interest and other returns due to investors. Likelihood of Impact Asset Finance has enjoyed high rates of reinvestment in the past and have a spread across all regions in New Zealand and some from overseas. It also take care to match deposit maturity dates with lending terms so that it can avoid spikes in maturing deposits. A large proportion of investors choose to reinvest on the maturity of their existing stock. In the year to 31 March 2017 the rate of reinvestment was 69.8%. Asset Finance's investor base is fairly well diversified geographically, although it has more investors from the Bay of Plenty and Waikato regions which is traditional to Asset Finance and not surprising given the Company s origins. The five largest individual investments in Asset Finance as at 31 March 2017 are as follows: Amount invested $1,039,104 $489,562 $395,390 $356,210 $355,019 Percentage of all investments $2,635, Page 18 of 27

19 Geographically, the spread of investors as at 31 March 2017 was as follows: Region Amount Percentage Auckland and Northland Waikato Bay of Plenty Central and Lower North Island South Island Overseas $6,524,789 $4,092,051 $3,254,983 $2,263,286 $1,589,507 $2,922, Total 20,646, Therefore, Asset Finance considers the likelihood of a liquidity risk is currently low. Nature of Impact Asset Finance would have less money to lend and would face offering higher rates to new investors to attract funds. Potential Magnitude of Impact Asset Finance considers that the impact of a severe fall in the number of investors and amount of investment in Secured Deposits will be significant but the effect would be felt in its ability to lend rather than to repay Secured Deposits as they mature. Asset Finance also seeks longer term deposits (the average term being in excess of three years) and by monitoring investments closely it can see any pattern in falling investments very early. Asset Finance also actively manages its liquidity risk by adhering to its Risk Management Policy. This is reported on and discussed at every Board meeting, considering the level of accounts maturing across months ahead and the alignment of maturing loans and the cash flows relating to those activities. Loan default risk The Asset Finance mix of borrowers, in terms of both geographical spread and type (consumer, business), and amounts borrowed also vary greatly, from a few hundred dollars to several hundred thousand dollars. The mix of consumer loans, business loans and 3 rd party lending is shown in the table on page 11. For consumer loans up to $5,000 Asset Finance may lend on an unsecured basis. For larger loans, whether consumer or business, security will be required. Typically, this will be real estate but also includes motor vehicles and business assets. The table on page 11 shows the make-up of the loan book according to the type of security held. Business loans carry more risk to Asset Finance, in that there are fewer loans for mostly large amounts, the average loan balance being in excess of $78,000. However, all are secured, and its credit policy and management are such that care is taken to mitigate potential losses. Asset Finance operates in a competitive landscape, with a number of companies offering similar loan products. Borrowers very often choose to borrow from Asset Finance again and again, demonstrating that very often after shopping around and comparing interest rates and fees they stay with the lender they have grown to have confidence in. Asset Finance's rates and fees are comparable to most other companies. A risk is that one or more competitors reduce their charges significantly. Although Asset Finance does not see large reductions as being likely it would need to respond and potentially reduce Asset Finance's rates to remain competitive. Some of Asset Finance's competitors also seek funding from the public in the way that Asset Finance does, often offering shorter term arrangements. Asset Finance tends to seek longer term investments in order to best manage funding requirements with a balance of affordability and sustainability. That is, Asset Finance and its investors tend to prefer the security of medium to longer term deposits and certainty as to rates. Description of Circumstance Borrower risk is where borrowers are unable to meet their repayment obligations and where Asset Finance holds security that proves inadequate. Page 19 of 27

20 Why circumstance is of significance Asset Finance has a broad mix of borrowers, representing its lending to consumer and business borrowers. The ten largest borrowers account for $4.8 million of loans, being 23.0% of the loan book and 18.3% of Total Tangible Assets. If they, or a large number of smaller but significant loans were to fail and security was inadequate to cover losses the impact would be significant in their effect on profitability. Likelihood of Impact Asset Finance monitors the performance of loans closely, reporting at each Board meeting those in arrears and the actions being taken to manage the accounts and recover through security if necessary. Asset Finance's lending is spread across New Zealand and in a number of industries. It lends to a broad range of borrowers in respect of age, occupation and reasons for borrowing. The ten largest borrowers in Asset Finance are as at 30 September 2017 as follows: Total exposure $2,410,359 $664,927 $526,879 $445,641 $442,740 $436,316 $357,372 $348,659 $338,340 $320,158 Percentage of Total Tangible Assets $6,291, The table above includes a loan of $2.4 million, which is secured by way of first mortgage over land. As the loan potentially could exceed 10% of Total Tangible Assets, the consent of the Trust Supervisor was obtained prior to it being made. Asset Finance considers the likelihood of a loan default risk is currently medium. Nature of Impact Asset Finance would face losses through loan defaults and inadequate security and have less money to lend and with which to repay deposits. Potential Magnitude of Impact Asset Finance considers the impact of a number of Asset Finance's largest loans to default to be significant. The effect is likely to be on Asset Finance's ability to lend but could also affect Asset Finance's ability to repay investors. To mitigate the potential for large losses Asset Finance exercises close management over loans falling into arrears, including formally reporting their status at Board meetings, and where it becomes necessary it moves quickly to recover those loans and contain losses through security. Operational risk Computer Systems Asset Finance's operations are administered using a computer system specifically designed for its type of business. The system also manages the investor information that it holds as well as being the core data collection system for financial information excluding payroll, which has a separate standalone system. Description of circumstance This is where Asset Finance's computer network or the applications it uses to administer lending, deposit taking and accounting fail. Why the circumstance is of significance Without the computer systems functioning, Asset Finance is unable to operate, no loans could be made, and deposits would be unable to be repaid. Page 20 of 27

21 Likelihood of Impact Asset Finance's computer systems and applications are protected by appropriate service plans which hold the primary objective of restoring service as quickly as possible. The loan system, payroll and other applications are backed up daily, with backups stored offsite. The systems are considered robust and are fully supported by appropriate service plans. Should computer systems or applications fail, or there is a physical event that damages Asset Finance's IT network, Asset Finance can expect to restore capability within two days by operating from an alternative site if necessary and with backups that have been made daily. The robustness and capability of the computer systems and applications Asset Finance uses are part of regular reporting to the Board in order to help management of the risk. Therefore, Asset Finance considers the likelihood of a computer systems risk is currently low. Nature of Impact Asset Finance would be unable to operate until systems were restored or replacement systems were available and operating. Potential magnitude of Impact The impact would be significant as business cannot be conducted without the computer systems, this would result in it being unable to administer payments to investors, employees and suppliers or to monitor loan performance. This impact is mitigated by way of a disaster recovery plan that includes daily backups offsite and service plans which allow for Asset Finance to operate from alternative site within two days should that prove necessary. Key staff Description of Circumstance This is where one or more key staff leave with no or very short notice. There are 4 key people in Asset Finance's head office from a day to day perspective. Whilst knowledge transfer is an ongoing and essential part of Asset Finance's risk management, the loss of any of these people would place strain on existing resources until further knowledge transfer occurred. This is mitigated by Asset Finance's ensuring that continual upskilling of staff is maintained. Two other staff members have significant responsibility from a month to month, business development and strategic perspective. Asset Finance has already commenced a sharing of knowledge through a recent addition to the team. Further support is available at Board level should the need arise. Why circumstance is of significance Asset Finance relies greatly on the industry knowledge and skills held by its key people, without which the Asset Finance s operations would be severely limited. Likelihood of Impact Asset Finance considers that having its head office in Whakatane is further protection against staff loss. Unlike some of New Zealand s major cities, the town has comparatively less employment and appears to have a strong sense of belonging and staff retention. Therefore, Asset Finance considers the likelihood of a key staff risk is currently low. Nature of Impact There would be a lack of knowledge amongst staff on how to properly asses, process loans and adequately administer them. Potential Magnitude of Impact The impact would be that significant pressure is placed on remaining staff to undertake increased workloads whilst the skills gap created by staff leaving were filled. Although Asset Finance has a small team, there is continuous skills transfer taking place and so reducing the impact to the extent possible. Further, within the Board there is strong knowledge of the business and its operations to assist if necessary. Page 21 of 27