Bluestone Group is reaping more profits as an arrears servicer than during its heyday as a non-conforming mortgage lender, after reinventing its business to survive the credit crisis.
While many non-conforming peers shut shop or scaled back as securitization markets froze, Bluestone has repositioned itself as their borrowers are squeezed.
It also seeks to profit from arrears recovery on debt parcels, partnering with a United States based hedge fund to finance these purchases.
Bluestone reported a 56 per cent lift in net profit to $6.1 million for the year to June driven by the first full year benefits of changing to a business model with lower capital requirements and a better cost-to-income ratio.
Earnings before interest and tax rose by 18 per cent to $15.5 million, but higher funding costs meant pretax profit lifted 7 per cent to $9.1 million.
Founder and executive director Alistair Jeffery said the business would continue to diversify.
“This was the most atrocious year in finance and Bluestone had relied heavily on capital markets. But we’ve navigated through with strong performance, which [backs] our decision to transform the business.”
From a previous reliance on mortgages, Bluestone now derives 36 per cent of income from its arrears servicing business and 12 per cent from its capital management arm – which acquires and collects on poorly performing secured consumer finance portfolios.
Mr Jeffery said Bluestone was in discussions with potential investors at a group level to help with the new strategy. “We want to be more internationally focused and if we make a success of Europe, Asia is also of great interest,” he said.
Bluestone was established as a local non-conforming mortgage lender in 2000, expanding into New Zealand in 2003 and the United Kingdom this year.
Various institutions have been stakeholders – including ABN Amro, which took a 40 per cent stake in 2005, but sold down in following years while Bank of Scotland [HBOS] took a 15 per cent stake in March 2008.
Mr Jeffery and management hold around 50 per cent and said a new stakeholder could either be a controlling or significant minority investor.
While Bluestone’s $2 billion mortgage book remains in hibernation, it is cautiously optimistic on the recent easing in securitization markets.
Mr Jeffery said Bluestone had been exploring the potential to be active once again in securitization, but remained wary. “About 18 months is a reasonable guess in terms of those markets recovering, and we think investors will expect far more equity by originators of the loans,” he said.
Historically issuers have had little or no equity in their own deals, but Mr Jeffery suggested around 5 per cent of the value of bonds issued might be the new expectation.
“Structures will be far less complex and the underlying loans [mortgages] far more conservative.”
While non-conforming players have suffered high double-digit losses on their loan portfolios, Bluestone’s loan losses have been less than 1 per cent of the balance of loans originated since 2000.