Bluestone Group executive chairman Alistair Jeffery declared that the company was in good health, despite the disclosure in its 2008 financial report, published yesterday, that it is in breach of covenants applying to a warehouse facility provided by Westpac.The financial report says Bluestone is currently in discussions with Westpac to agree to a longer term standstill agreement.The accounts include a contingent liability for the cash payable on the Westpac liability. The directors' report says: "The directors do not believe this liability would impact the going concern of the group."Bluestone wrote its last loan in July. At June 30 there were $478 million of mortgages that remained funded through warehouse lines with Barclays Bank and Westpac.Bluestone has a standstill agreement with Barclays. The warehouse is being managed in a run-off. The company is within the covenants that were agreed for the standstill.Bluestone has a working capital facility with BOS International and is compliant with all covenants.Jeffery said: "In a market like this it is easy to breach a covenant. There are dozens of things that control the mix of business that goes into the warehouse."One standard condition is that a loan can't stay in the warehouse more than 364 days."For the past seven years we have been a loan originator. That has been taken out and we have been able to get our cost base down and shift the business strategy."The company reported a net profit of $3.9 million for the year to June 30, up from $342,066 in 2007. Net interest income was $48.5 million and fee and commission income was $12 million.Bluestone chief executive Peter McGuinness said the contribution from interest income would decline in the current year, while the group was planning on a big increase in fee income.Bluestone's new direction is third-party mortgage servicing and loan portfolio acquisition. It formed a business called Bluestone Servicing at the end of 2007 and Bluestone Capital Management in August.So far it has completed two transactions. In September the New Zealand mortgage manager Foundation Mortgage Securities outsourced the servicing of its residential mortgage portfolio to Bluestone Servicing. The Foundation business is an ongoing operation.In August Bluestone bought a $130 million mortgage portfolio from the receiver of Provincial Finance, another New Zealand group, from the company's receiver PricewaterhouseCoopers. The acquisition was made with an unnamed hedge fund.Jeffery said there were more deals in the pipeline. He is convinced there are opportunities for Bluestone Servicing and Bluestone Capital Management in Europe and in January will relocate to Cambridge, England, to look for deals.Jeffery said the group had not given up on origination and was ready to get back into the market when funding conditions allowed.He said the group had learned a number of lessons about distribution efficiency and about funding that it hoped to apply.