South Canterbury Finance: New Losses Reported

See also Seven Ugly Gaunt Cows That Could Swallow South Canterbury Finance

In the last week some more stories have been reported in the news media where South Canterbury Finance, who in its 20th October 2009 registered prospectus, stated that it had not made any lending loss provisions since 30 June 2009 (p 5), has placed borrowers into receivership.

Any more losses will put SCF in breach of its capital adequacy requirements in its trust deed (see p 23 of the prospectus), unless the company can book profits from other sources to offset the losses. The lack of provisioning calls into question whether the accounts of SCF, after 30 June 2009, are true and fair, and whether SCF is engaging in accounting trickery to avoid breaching its trust deed and to keep the trustee off its back.


However, stories of SCF losses have been emerging since 9 days after it registered its prospectus:

1. On 29th Oct 2009, it was reported 'South Canterbury Finance is the third-biggest PGC shareholder with just over 4 per cent, preserving its previous more than 4 per cent stake by taking part in the rights issue.' On 30th June 2009 the shares in PGC closed at $2.03, today they are about $0.48, and the rights were not of significant value. This translates to about $6.4m in losses for South Canterbury Finance on this shareholding.
   
2. On Friday November 13th, the front page story in the National Business Review (paper edition) provided a story about South Canterbury Finance subsidiary Face Finance repossessing three helicopters of Auckland company Heliflight (a fourth was crashed damaged). Helicopters aren't cheap, and although these helicopters, used for pilot training are probably at the cheaper end of the market, they could cost about $300k each. 'Mr McKay [Heliflight Managing Director] told NBR he decided to sell Heliflight as a going concern in July after his wife fell sick. He said he had a deal on the table but Face Finance "hijacked" the process and proceeded to try to sell the Whitireia contract and the helicopters to another buyer. That never eventuated.'
   
3. Today's Sunday Star Times (15 November), has an article by Greg Ninness titled Kiwi pubs hard hit by the recession, where it was reported:
   
   Meanwhile, problems in the hospitality sector have highlighted the riskier lending practices of South Canterbury Finance. Although SCF likes to promote itself as being mainly involved in so-called heartland industries such as farming, recent collapses have exposed the company as a significant player in the bar and pub business, which is regarded as high-risk even in good times.
   As well as being the major secured lender for the Lenin, Minus 5 and O'Carroll's bars which went into receivership last week, SCF was the major financier of the Cargo restaurant and bar chain which was tipped into receivership in July. The company operated 12 outlets around the country, including the Boiler Room and Minus 5 in Queenstown and Merivale Ale House in Christchurch. The receivers' report shows the company had debts of $10.1m, with $7.8m owed to SCF.
   
   

So, it appears that, SCF although it has stopped making provisions for bad loans, hasn't stopped experiencing bad loans. With receiverships in early November, one has to ask why there were no provisions in July, August, September or October before the 20th?

As the article above states, it also gives some indication of the risk level of SCF's loan book, in funding loans 'regarded as high-risk even in good times.' That's what SCF is: a financier that makes loans to more risky borrowers on lesser security than mainstream lenders do.

There are plenty of losses left from this recession, and SCF needs only $1.7m more to breach its trust deed capital adequacy requirements on its $1 600m loan book (i.e. about 0.1% of assets). How much longer can SCF defy gravity?