This comes after its audited financial results for the year to 30 June 2009 were released, and the company's credit rating was downgraded to BB+ and put on Credit Watch in the last month or two.
The company is attempting to negotiate a prior charge secured NZ$75m funding facility from a financial institution, in order to repay notes that are due for payment this weekend, and to raise funds from the public, guaranteed by the NZ Government under the Crown Retail Deposit Guarantee Scheme, but many factors cloud its prospects:
- Its capital adequacy is questionable, it probably needs to raise $250m-$500m in additional capital to be comfortably well capitalised.
- It is privately held and perhaps the owners are reluctant to have their shares greatly diluted.
- It is reliant on the prior charge secured funding facility and the Crown Deposit Guarantee Scheme to raise enough funds to avoid default, should the facility not be obtained, or if the guarantee expires (Oct 2010) and it does not obtain the guarantee extension (Dec 2011), it will probably run out of cash.
- If it is downgraded, it would not be able to get the Crown Retail Deposit Scheme Extension, and it is on credit watch.
- It has substantial questions on its asset quality.
- It has substantial related party exposures that could prove questionable.
I'm expecting it could fail sooner, but let me know your opinion!
4 comments:
Hi David,
Are you able to provide some high level numbers that show SCF running out of cash?
I think you will struggle, as by my reckoning it is fine through to Oct 2010 (to pick that date that you reference) and depending on whether it sells certain assets (dairy farms etc) then way beyond too.
The only issue will be if the new $75m facility is not put in place, but that should be known shortly.
Hi, thanks for your comments and question. I think to give a fair answer to the question of cash and liquidity would require detailed analysis of the company's financial statements and prospectus, and a large number of critical assumptions and estimates. Depending on what assumptions or estimates were used, one could show it would run out of cash or that it would not run out of cash.
However, if SCF has lost the confidence of the market, it is doomed sooner or later. Do you think it has lost the confidence of the market? do you think it will be able to avoid default? Please vote on the poll if you haven't already.
David,
The 1st payment for the U.S. facility is due. Do they have the cash to pay if the $75m facility is not in place?, because as at now the facility is still not formalised.
I think that poor disclosure is a major issue, as it is very difficult to make accurate assumptions of deposit reinvestment and loan repayment levels, which are two key drivers of their liquidity.
If SCF have to start selling their farms, they will be up against a tide of outflows.
SCF do not seem to have grasp the concept of liquid deposits v illiquid loans/farms, which has in fact been downfall of the entire finance sector.
Thanks for your comments. Although it is easy to blame inadequate disclosure here, I don't think that is the real issue. The Financial Reporting Act and the Securities Act both regulate disclosure, requiring standardised information and substantial, perhaps even excessive, amounts of disclosures.
The purpose of the disclosures is to enable investors to make informed investment decisions, i.e. to guage the level of risk and the character of the people involved, and the direction the entity is going.
Liquidity is not particularly easy to measure, and financial institions, to a smaller or a greater extent, typically rely on their ability to re-finance their maturing or demanded liabilities. If they strike trouble, their ability to re-finance their liabilities can evaporate, and liabilities they didn't expect to be called may be called, and standby liquidity facilities can be cancelled, either without cause, or due to 'material adverse change' clauses.
The payment on the notes is due this weekend, and I'm not sure how that works given it isn't a banking day (maybe they're supposed to front up in New York with suitcases of cash?), and I guess the real worry is that their replacement prior charge facility is not in place, and they'll be held over a barrel on the terms of the deal. Apparently the arrangement for the deferral of the payment of the notes required a finance rate of about 100% p.a., so who knows what will happen today? Given there is no announcement yet, one can only wonder if they're being held over a barrel right now?
Anyway, please vote if you haven't already.
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