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While the banking market in New Zealand was looking to improve in 2011, the devastation caused by two large earthquakes in Christchurch has set projections back. A leading partner comments: "I believe the full economic impact of the two earthquakes is yet to be determined....

While the banking market in New Zealand was looking to improve in 2011, the devastation caused by two large earthquakes in Christchurch has set projections back. A leading partner comments: "I believe the full economic impact of the two earthquakes is yet to be determined. Early estimates suggest it could cost the economy billions and billions of dollars." The result has been a loss of confidence in an already bumpy economic environment.

In general, the banking and finance sector in New Zealand reflected international developments. Tighter margins and less liquidity in the wholesale funding markets has had a natural flow-on effect for New Zealand banks, while other financiers with their generally riskier investments and weaker security positions experience increased pressure and tighter access to funds from both banks and investors.

Restructuring remains a key area of work for firms, with some of the smaller financiers being taken over by those with stronger balance sheets and a couple of significant players failing to survive the economic storm.

The past 12 months saw further non-bank lenders holding still while some investors are making substantial changes to their investments in the hope of a small recovery. "Companies with increased write-downs and smaller than expected recovery rates have been considering whether initial moratorium plans were achievable," comments a highly regarded partner.

The recent vulnerability in the market has created a situation where many corporate borrowers have moved into the bond markets to secure financing as opposed to using traditional bank lending.The country is undergoing a significant period of legal reform in the securities area and the next twelve months will see the introduction of the Financial Markets Authority and a complete rewrite of the Securities Act....

The recent vulnerability in the market has created a situation where many corporate borrowers have moved into the bond markets to secure financing as opposed to using traditional bank lending.

The country is undergoing a significant period of legal reform in the securities area and the next twelve months will see the introduction of the Financial Markets Authority and a complete rewrite of the Securities Act. It is expected that this should streamline disclosure documents and make it more straightforward for companies to raise capital.

The current economic downturn continues to affect the equity capital markets with no significant IPOs succeeding in coming to market so far in 2011.

Global IPO markets though have been reasonably active and this may encourage more domestic companies to look to list on the New Zealand Exchange ahead of state owned enterprise sell downs, should the government be re-elected in the upcoming elections.

In the debt capital markets, one standout transaction had eight local authorities in the Auckland region merge to create a new super-council: Auckland Council. The merged entity faces more than NZ$500 million ($414 million) of debt refinancing, which needs to be dealt with in the next 12 months, as well as major projects to fund. Immediately before the merger, funding was raised by an issue of retail listed secured bonds of NZ$350 million by one of the constituent local authorities, Manukau City Council.

So, despite the economic challenges and the uncertainty prevalent in the wake of the Christchurch earthquakes, one should expect the market to see increasing levels of capital market activity as the year progresses.

"Early in the year the M&A market was shaping up for an active year," says a partner from a leading law firm. This was the verdict before the tragic events in Christchurch, which have created a number of economic challenges for New Zealand....

"Early in the year the M&A market was shaping up for an active year," says a partner from a leading law firm. This was the verdict before the tragic events in Christchurch, which have created a number of economic challenges for New Zealand.

However, optimism still abounds and in the past year the country has seen roughly NZ$5 billion ($4 billion) worth of M&A deals. Historically, it is Australia that has provided most of New Zealand's foreign direct investment, but in the last year over NZ$1 billion of this came from a wider spread of Asian investors.

Partners are hopeful that with soft commodity dynamics in Asia remaining strong an increase in activity, particularly in the food, beverage and agricultural sectors, will be seen throughout the rest of 2011.

Recent stand out M&A deals include the NZ$605 million acquisition of Tegel by Affinity Equity Partners and the acquisition of a majority interest in Scales by Direct Capital. Ongoing interest by private equity firms is expected as they appear to have the funds available and are poised to respond to a need to invest based on capital life cycles.

There are also plenty of assets still up for sale following the dramatic collapse of South Canterbury Finance, among them the company's stake in Dairy Holdings, the country's largest dairy farm company.

The insolvency market has been very quiet compared to the peak that was reached in the previous twelve months. "This market this year has not carried through from the momentum gained," comments a leading partner....

The insolvency market has been very quiet compared to the peak that was reached in the previous twelve months. "This market this year has not carried through from the momentum gained," comments a leading partner. The statistics in the New Zealand courts for both liquidations and bankruptcy confirm this.

The finance and second tier lending market in New Zealand was devastated by the finance company collapses and the fallout from that is only just coming before the courts now. "Restructuring transactions are likely to be driven by capital structure reorganisations as distressed assets, including finance company assets, are liquidated with more enthusiasm," says one peer. The market has seen the restructuring of South Canterbury Finance assets including Dairy Holdings, Helicopters NZ, Scales Corporation and the residual loan books.

"There are still a range of over-leveraged companies that need to undertake balance sheet restructurings, examples in 2010 were Yellow Pages and MediaWorks, and we expect a few more in 2011," says another practitioner.

Last year also saw a trend emerging whereby international companies selling certain New Zealand companies' assets to strategically concentrate on other markets. Examples include Pernod Ricard selling Lindauer to Lion Nathan to focus on its global brands and Suncorp selling New Zealand Guardian Trust.