Last year Capital+Merchant Finance was given a four star rating by Property
Investment Research (PIR) for its capital secured debenture stock.

And according to financial advisor Vestar the comforting feature with a Capital & Merchant investment "is that each and every Capital Secured funded loan is secured individually by a Lloyds of London Insurance policy."

So why did the company suddenly go into receivership this week?

The company reached its tipping point late last week when its trustee ­
Perpetual Trust ­ learned it had breached general security agreements with
Australian company Fortress Credit Corp.

Tim Downes and Richard Simpson of Grant Thornton have been appointed as receivers.

Investors who keep up with NBR's scorecard of finance companies (last published October 26, 2007) could have seen the warning signs about Capital+Merchant.

Both Capital+Merchant and its subsidiary Numeria Finance (not in receivership) were placed second and third respectively in terms of the highest geared non-bank financial institutions.

According to Capital+Merchant's last published accounts it had $220 million
worth of assets and $208 million worth of liabilities. That left a net worth of $12 million and a gearing ratio of 17.7 times.

That, according to analyst David Chaston, is the unusual thing about Capital+Merchant. Most finance companies have gearing ratios of between 7 and 9 times, he said.

The most common use of the term 'gearing' is to describe the level of a company's debt compared with its equity capital.

The significance of the gearing ratio is that it shows at a glance how encumbered a company is with debt. In the finance sector, a gearing ratio of
9 times would be considered prudent whilst anything over 15 times would be considered risky or 'highly geared'.

Incidentally, according to the NBR scorecard MFS Pacific Finance was the highest geared company at 24.1 times.

Another point of note is how much advertising a company does to attract would be investors.

Capital+Merchant was one of the biggest spenders on advertising amongst finance companies.

Nielsen data showed the company had the second highest media spend in the sector in the year to July 2007, at $4.3 million (based on ratecard
figures).

Its spend increased by 167 per cent on the year before. The only company to spend more on its advertising was Hanover Finance.

And another point of note is that according to Kapiti Coast broker Chris
Lee, Capital+Merchant charged double the brokerage than usual. It paid the
same rate as collapsed company Bridgecorp did.

The 1 per cent brokerage, on top of 14 per cent interest to Fortress, contributed to the company's downfall, he said.