Liquidity Options All Tapped Out at South Canterbury Finance

The new Investment Statement and Memorandum of Amendment to the prospectus of South Canterbury Finance show that its liquidity position and options have continued to deteriorate during the period from 30 June 2009, to 20 Oct 2009 to 10 Feb 2010. The company's liquidity position is graphed below:


Note: I could not find a 'readily realisable investments' figure for 30 June 2009, so I have put this as zero. The company, has, however disclosed:

Subsequent to 30 June 2009, the Company has sought to mitigate this risk by reducing the portfolio of securities and investments that it holds by realising in excess of $136 million of its investments.

So if we take the $12m remaining 'readily realisable investments' and assume that the realisations mentioned above came from 'readily realisable investments' then the figure as at 30 June 2009 could be as high as $148m, although probably $74m of this came from South Island Farm Holdings Limited. So the figure could be something like $74m as at 30 June 2009.

Given that the company had over $400m in cash on June 2008, this shows that the company's liquidity position and options have reduced remarkably, and it is presently running near the bottom of the tank.


What's happening?

• The company has used almost all of its prior charge security allowance of 7.5% of total assets, leaving it unable to gain more liquidity from this source.
• The company has been realising its readily realisable investments, which is a good thing but this source of cash is running out too.
• The company has been paying off the US notes, and still has US$17.5m outstanding principal to pay off in the next 2 months.
• The company has had some cash ($26m) from Southbury Corporation raised via the convertible note it issued, guaranteed by SCF, secured by prior charge.
• The company has been raising funds from debenture holders, who rely on the government guarantee. This will cause cash flow problems around the expiry of the current guarantee.
• The company has been selling some assets such as shares in PGC and the ordinary shares in South Island Farm Holdings Limited, for cash.
• Overall it appears that the company has not reduced its loan book significantly in the last 7 and a bit months.

Where does this leave the company?

1. "Our immediate concern is that South Canterbury Finance maintain higher liquidity, leading up to its recapitalisation plans; its failure to do so would likely to lead to the company being downgraded," S&P said see South Canterbury Finance BB+ rating affirmed i.e. the company is on track for a credit rating downgrade.
2. The company's availability liquidity levels and options are reducing at the same time as it is building up a wall of liabilities maturing in Oct 2010 when the current guarantee scheme expires. This is a risky approach, but one that it has adopted due to lack of other options, absent a large capital raising to date. The longer it takes to raise significant amounts of capital, the more difficult it is to raise capital, retain its credit rating, and re-finance its debts.

Source data for the graph, from the 20 Oct 2009 prospectus and the doocuments mentioned above: