Firstfolio to face default on CBA funding if capital raising fails

Following less-than-stellar half-year to December financial results, Firstfolio Ltd risks losing out on its CBA funding if it can't manage to raise capital by June



Independent mortgage provider, Firstfolio Ltd must raise capital by June to avoid defaulting on the terms of its senior debt-funding arrangement.

The company has a $35.3 million senior debt facility with CBA, a $29.3 million loan from a 'director related entity' - and a debt of $64.6 million. It has net assets of $40.9 million.

The group has reported a net profit after tax of $1.8 million for the half year ending December 31, 2012 and revenue was up 5% on the first half of 2012, reaching $38.7 million.

Firstfolio chairman, Eric Dodd, says the results reflect modest revenue growth and stable operating EBITDA under the new accounting method.

“Firstfolio Capital, acquired in November 2011, has delivered a better than expected result, although weakness in the mortgage credit market continues to restrict other parts of the business. The loan book declined to $19.4 billion, reflecting the difficulty in retaining and replenishing the book in the current market. The Australian mortgage market remains subdued and competition intense, affected by persistent economic uncertainty. Industry margins remain under pressure from competitive activity.”

However, the financial report says if Firstfolio breaches its financial covenants as a result of failing to raise capital and the CBA and other debt providers require the repayment of debt on demand, ‘material uncertainty’ will likely exist regarding the ability of the group to continue – and that’s a growing concern.

A Firstfolio spokesperson, who wishes not to be named, says revenue-gathering has been an issue since the middle of last year.

“We announced back in August that we were going to address the issue of the balance sheet and we would like to obviously deliver – but even if the capital were not raised, the challenge would be to clear some maturing debt.”

In a worst-case scenario, the spokesperson says Firstfolio would need to engage in a process of ‘negotiation’ with CBA in order to decide its next step, but says such a process wouldn’t signal ‘the end game’.

Given restrained housing credit markets and following a review of operations, Dodd says the company has been focusing on reducing costs and improving efficiency across the business.

“We have lowered operating costs by 13% on 1H12 in the areas of employee benefits, rent, travel, contractors and advertising.”

He says RBA housing credit (system growth) grew by only a 4.5% annual rate in the six months to December 31, 2012 and claims that, despite some better signs in certain segments of the industry, overall housing credit activity remains weak.

“Operationally, Firstfolio continues to focus on achieving integration benefits from the businesses acquired in recent years, improving efficiency and service delivery, retaining and replenishing the loan book, and strengthening key industry partnerships. Over the remainder of FY13, Firstfolio expects revenue and earnings will continue to be influenced by, among other factors, the level of activity in the Australian housing finance sector and the margins available to mortgage brokers, managers and lenders.”

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