29 November 2009

Credit Rating Countdown and Poll

Most likely the next news about South Canterbury Finance will be the resolution of the CreditWatch, which is likely to result in another downgrade, although there is also a chance its present BB+ rating, with negative outlook, will be affirmed. Since I have already had my say on SCF's credit rating (see South Canterbury Finance Credit Rating Timeline, and What Credit Rating for a Financial Institution that ran out of Cash Last Week)
I now open the floor for readers to vote on my poll, and to add any comments about the matter.

27 November 2009

South Canterbury Finance CEO Lachie McLeod 'required to take risks that were not appropriate'

With the news yesterday that South Canterbury Finance CEO Lachie McLeod has resigned, today some comments are emerging about the reasons why he's leaving, but also some of the factors that contributed to SCF's agressive expansion strategy under his leadership that have lead to heavy losses and a change of strategy toward retrenchment today.

Chris Lee, a Kapiti Coast based financial adviser who had put client funds into SCF, is quoted as saying:

26 November 2009

Free Market Mojo interviews Professor Steven G. Horwitz on banking, financial crisis

Free Market Mojo is proud to present an interview with Professor Steven G. Horwitz, the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY.

He discusses the financial crisis, and also monetary reform. Like myself, Professor Steven Horwitz is a free banker and supports the restoration of the gold coin standard.

See http://freemarketmojo.wordpress.com/2009/11/03/an-interview-with-steven-g-horwitz/

24 November 2009

Updated: What Credit Rating for a Financial Institution tht ran out of Cash?

I have updated the post:
What Credit Rating for a Financial Institution that ran out of Cash Last Week?
It now includes a full analysis and discussion of S&P's statements and the issues they identified and how SCF has resolved, or failed to resolve them. Of the 9 issues identified, SCF appears to fail 5, pass or possibly pass 3 and have one unclear result.

15 November 2009

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.

14 November 2009

Seven Ugly Gaunt Cows That Could Swallow South Canterbury Finance

See also:

Fonterra Payout Increase Buys Time for South Canterbury Finance

Share Market to South Canterbury Finance: Not Interested!


Pharaoh said to Joseph, “In my dream I was standing on the bank of the Nile, when out of the river there came up seven cows, fat and sleek, and they grazed among the reeds. After them, seven other cows came up—scrawny and very ugly and lean. I had never seen such ugly cows in all the land of Egypt. The lean, ugly cows ate up the seven fat cows that came up first. But even after they ate them, no one could tell that they had done so; they looked just as ugly as before. Then I woke up." ...
Then Joseph said to Pharaoh, “The seven good cows are seven years ... The seven lean, ugly cows that came up afterward are seven years ... Seven years of great abundance are coming throughout the land of Egypt, but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe. (Genesis 41, NIV)

The good times in an industry don't last forever, and South Canterbury Finance would do well, or would have done well, to hear and heed the dream of Pharaoh, and not stake its survival on the fortunes of fat dairy cows.

12 November 2009

A bad omen for South Canterbury Finance IPO

See also: Sharemarket to South Canterbury Finance: Not interested! and
Hubbard flags modest capital raising for South Canterbury Finance




From The IPO window shuts, by DAVID HARGREAVES - BusinessDay

... It's my view that a hell of a lot of, particularly private equity-owned businesses, were being targeted for sale in the first half of next year. A big motivation for this will have been the fact that many struggling businesses face renewing their banking facilities from June 2010 onward.

The logic flows that if the private equity people could flick businesses on for nice profits in the first half of next year they could then look at buying some seriously distressed assets in the second half.

But if they can't of course offload their businesses in the first six months of the year, all of that falls down. And the distressed businesses don't have many ready buyers.

From were I'm standing 2010 is not looking anything like as bright as many people are expecting.

Most of what the article covers appears to include South Canterbury Finance, including:

  1. distress
  2. planned early 2010 IPO/float
  3. Debt terms changing in second half of 2010 (Oct 2010 crown guarantee expiry)
  4. No growth opportunity left, they're in retrenchment mode
  5. Significant risk of underperformance and lack of appetite for the shares, i.e. the IPO door could slam shut in SCF's face.

09 November 2009

South Canterbury Finance Credit Rating Timeline

UPDATED 20 August 2010: This post will be updated as new information comes through, but here is a summary of the Credit Rating with Standard and Poors last year and this year, with links to the stories.

See also: What Credit Rating of a Financial Institution that ran out of Cash Last Week?

As late as June 2009 SCF was successful at issuing $125m of 3 year bonds (the offer was fully over-subscribed). However, since June 2009, it is all down hill for SCF:



2nd July 2009 Comments from S&P reported saying that SCF's BBB- rating is partly based on support from Allan Hubbard

7th July 2009 SCF rating outlook lowered to negative on weaker [credit] profile

13th August 2009 Marac, South Canterbury Finance lose investment grade ratings at S&P
Both South Island finance companies were cut to BB+, a junk rating, from BBB-, the lowest investment level.

16 Sep 2009 South Canterbury Finance, the finance company owned by Allan Hubbard, halted allotments under its debenture programme and plans to issue a new prospectus pending its capital review and the extension of the Deposit Guarantee Scheme.

21st September 2009 South Canterbury Finance Ltd had its credit rating placed on Creditwatch Negative by Standard & Poor’s, which said the finance company’s risk profile has deteriorated since the rating was cut to speculative grade last month.
“Our concerns center on increasing pressure on liquidity; still-weak asset quality; and governance matters including, but not limited to, related party exposures,” said S&P credit analyst Derryl D’silva, in a statement emailed to BusinessWire.

20 Oct 2009 South Canterbury Finance (SCF) has registered a new prospectus for the issue of debenture stocks and deposit. In the prospectus the company states:
In the Company’s view, Standard & Poor’s considered that the United States private placement investors were continuing to review their funding support for the Company, and that if they decided to require repayment of the facility, that would, potentially, significantly exacerbate liquidity concerns and cause a downward revision of the Company’s rating by multiple notches, potentially into the ‘B’ rating category. [emphasis added]
25 Oct 2009 South Canterbury Finance runs short of cash and misses a US$45m payment to US note holders. The noteholders, however, do not call a default, as this would only result in the realisation of losses they might avoid by forebearing.

29 Oct 2009 South Canterbury Finance granted a prior charge secured NZ$75m funding facility, and fully draws it down, and uses it to pay the US$45m notes that were due 4 days earlier.

24 Dec 2009 BB+ Rating Affirmed

02 March 2010

South Canterbury downgraded to BB; may be cut below guarantee threshold within 3 months

See also my post

South Canterbury Finance Downgraded to BB, Watch Negative

6 May 2010

S&P maintained its BB (credit watch negative) rating on South Canterbury Finance’s long term debt

28th May 2010

S&P downgrades SCF's long term rating to B+ and short term rating to B.

22 June 2010 S&P downgrades SCF long term rating two notches to B- and short term 4 notches to C, and puts on Credit Watch Negative.

20 August 2010, S&P downgrades SCF's long term rating two notches to CC. (The short term rating cannot be downgraded anymore other than to D for default.)

Fonterra Payout Increase Buys Time for South Canterbury Finance

With the news today that the Fonterra milk payout has been increased from $5.10 to $6.05 will my prediction of doom and gloom for dairy farm prices and dairy farm owners and financiers be proved wrong?

06 November 2009

Deposit insurance, moral hazard and undercapitalised banks

By Dr Rod Carr, then RBNZ deputy govenor, in 2001, Banking on Capital Punishment
The arguments against deposit insurance (whether explicit or implicit) are well rehearsed. Depositors and banks take more risk (incur moral hazard). Banks make more risky loans, which crowd out safe loans. Small scale and inefficient banks are protected. Regulatory capture and regulatory forbearance increase the loss given default. Credible deposit insurance may reduce the probability of bank runs as a cause of bank failure and increase the political acceptability of failing insolvent banks, but it does so at the risk of increasing the probability of failure, risks increasing losses given failure and appears to increase fragmentation and inefficiency in the intermediation process. Increased competition may be associated with more participants and industry profitability may be reduced. However, it is more likely that profits are reduced because costs are higher than because fees and margins are lower. A less profitable banking industry may simply reflect a less efficient one.

03 November 2009

More evidence NZ Big Banks had Ample Funding During the Crisis

As I have previously argued in:

Stuart Nash MP - Financial Alarmist (on the Crown Retail Deposit Guarantee Scheme)
Turning On a Dime: Crown Retail Deposit Guarantee Scheme
Old-style firms favoured in guarantee rejig
NZ Banks Among World's Safest
Proof NZ banks didn't need the government guarantee
Credit crunch? What credit crunch?
What financial crisis? NZ banks doing fine without Crown guarantee
David Bennett & National Party from another planet

The NZ big banks, although heavily reliant on offshore wholesale funding, had and still have ample sources of funding and liquidity, even at the height of the financial crisis when offshore commercial paper markets were supposedly closed.

Hubbard flags modest capital raising for SCF

On Saturday the Timaru Herald reported on an interview with Allan Hubbard about his plans for recapitalising South Canterbury Finance. The article gives some insight into the thinking at SCF, and the likely strategy for recapitalising and restructuring SCF.