05 March 2010

Supporter Damns South Canterbury Finance While Vultures Circle



Kapiti Coast stock broker and long time supporter of South Canterbury Finance (he has invested money in them and advised clients to do so) Chris Lee, who has so far backed the company and its capacity to overcome its troubles, has now damned the company, its management and even its beneficial owner Allan Hubbard.

Allan Hubbard has now made too many mistakes, taken too much poor advice, to have further options. Those mistakes, and others from those around him have cost Hubbard a huge proportion of his wealth. He can no longer be the helmsman. He is 82. ...

In my view Hubbard has not got around him the strength or support that an 82 year-old man requires. He needs advisers with grunt and with capital market expertise. New advisers. Putting in the money will buy time, and not much else, unless a much stronger board takes over, a new long term chief executive is appointed, and the best possible advisers engaged. All of this must happen soon.

Putting in that money is the first step only. At least another $100 million must be added.

More capital is the headline. SCF now needs to add substance, and Allan Hubbard, who has provided it in the past, is no longer likely to be the substance.

His error-rate in recent years is obvious, beginning with his failure to stop the lending errors of his directors and executives, his failure to dismiss them as being the wrong people for the job required, his failure to acquire strong, energetic appropriately-skilled directors with a focus on governance, and his failure to tap into the right advisers. He has been too soft, for too long. Too generous.

I apologise if this seems cruel, tough on those genial directors he had, tough on two ex-Westpac senior managers who chose all the wrong people and projects to drive lending growth, and tough on Neil Paviour-Smith, (head of Forsyth Barr) the young man with a funds management background who must sorely miss his key capital markets analyst, Ross Mear, who resigned three months ago.

The mistakes at SCF have gone far enough. They are still fixable. The delays have become unacceptable. Forsyth Barr has not delivered enough. ...

No other New Zealand businessman has ever put in so much personal money to prop up a company that was making so many almost unbelievable errors. He is unique.
But SCF might not survive another year, if it carries on with this same “headless chook” strategy that has been its hallmark for too long. ...

Allan Hubbard has been the past. He has saved SCF for the present. He MUST now, today, select the right course and people for the future. He cannot be “the future”.


Although Mr Lee has long been critical of some questionable loans made to a former CEO and some former directors, amounting to $20m, secured on Southbury Group shares, and without personal guarantees, and he again complains about these transactions in his latest post, the damnation of the company and its chairman are new from this man. What inferences can be drawn from this message?
  1. South Canterbury Finance's investors support cannot be taken for granted. The company's troubles are so public and significant that many supporters will now sit on the sidelines or not roll over funding without the government deposit guarantee. In particular, the company may find, even before the guarantee expiry that reinvestment rates may drop, putting more liquidity pressure on the company and increasing the risk of another credit rating downgrade.
  2. Commentators including Mr Lee do not have confidence in the company's strategy, direction or management. Like myself, I think Mr Lee is wondering where they are going and wondering if they will strike more delays, failures or losses that could result in another credit downgrade and receivership possibly even before October. More differences of opinion may emerge as to what the company's options are and which options it should select.
  3. Mr Lee's proposals for fixing the company's problems appear to be unrealistic, unlikely, or both. In other words, as above, I have a different opinion than Mr Lee over what the company should do. Mr Lee hopes that friendly vultures such as 'Kerr and his Torchlight Fund to help SCF prepare for the new regulations by downsizing and paring out all the assets that are inappropriate for a bank lookalike' but I would expect that the assets they need rid of are the ones others do not want to take, and the assets others want to take are the ones the company should and would keep unless it is strapped for cash.

Mr Lee also prescribes:

It needs to get the extended Crown guarantee confirmed as soon as the audited accounts are out. (There could be good news with this announcement as bad debt provisioning may have been marginally over-estimated in previous announcements).

The Treasury must respect the additional capital from Hubbard and can show this by promptly granting the extended guarantee.

However, it is questionable whether either of these points should or will happen. The legislation specifies the criteria for the extension and although the Minister of Finance could grant them the extension now, he will probably want to wait until a short time before the existing guarantee expires before making decisions about the extension applications. It is not in the public interest to grant special favours to particular institutions, especially when Parliament has considered the issue and passed legislation about the criteria that it considers consistent with the public interest. Note that the legislation suggests the public interest not as a grounds for granting the guaranteess, but for not granting them (i.e. if the minister thinks it is not in the public interest to grant the guarantee to a particular institution, he can legally refuse them a guarantee, but if he thinks it is in the public interest to grant a guarantee to an institution that does not meet the criteria, he can't do so under that legislation). It is also possible that the guarantee could be withdrawn (for new deposits) if the company is subsequently downgraded below BB. Regarding the audited accounts, although there are big write downs in the unaudited accounts, they do not seem at all unreasonable, and the auditor may find other parts of the company's assets that should have greater provisions.

In another story, PGC's Torchlight Credit fund has announced it is willing to extend the $75m prior charge secured credit facility it granted the company in October, and offer the company further liquidity support by buying assets from it. This is likely to mean that this friendly vulture is considering buying senior tranches of SCF's loan book, leaving SCF with the highest risk tranches. This is how the company can turn first ranking positions into second ranking positions and get some cash in the door and keep the show on the road a little longer. Whether it will be advantageous to the SCF and its guarantor would be a different question.

5 comments:

Shaun said...

Chris Lee is finally stating what he would have known all along, in fact he should have been far more vocal and critical of Alan Hubbard and the management/advisory team earlier.
Is he is now trying to protect his funds under management as his clients are probably sticking it to him for investing in SCF.

Whilst it is good to see Alan Hubbard do what he said he would and stand by SCF (the real shame is the other players in the same industry headed to the hills.)
This does not constitute a reason why the tax payer should extend the guarantee scheme to bail out these loans.

Anonymous said...

David,

If SCF falls over before Oct 2010, what is your understanding of the position of deposits with maturity beyond the current guarantee period?

Will the government have to pay out on them?

On Chris Lee - isn't it astounding how he holds himself as an expert in finance companies (and still does) but could not have been more wrong?

David Hillary said...

Anon, debentures and bonds are secured and rank equally under the trust deed, and enjoy the benefits of the government guarantee on the same basis too. Debentures and bonds due after the guarantee can become repayable on demand if the company breaches its trust deed. For example, if SCF went into receivership today, the receivership would cover all the bonds and debentures constituted under the trust deed regardless of original maturity, and the company would be in payment default on those securities, and the government guarantee would apply. So, investors who thought SCF would fail soon and the NZ government would not fail could invest in the long dated bonds, expecting to buy at a discount and recover full value soon.

David Hillary said...

Anon, re Chris Lee claims to be in close contact with major financial institutions that he advises clients to invest in, and to be a very experienced finance professional, and an expert on finance companies. He also claims to have over a billion dollars under his company's advice. He also has a fairly public relationship with SCF. So, investors should have high expectations of him, right? I guess this means he was always running a substantial risk of disappointing investors should he miss some signs of trouble.

In the case of SCF, Mr Lee has seen public signs of trouble and expressed confidence in their future prospects. Since that time SCF has seen more public and serious signs of trouble, and now expressed lack of confidence in the company's future prospects. I think it is fair to say that investors were lead to believe that Mr Lee would have some indication of problems before they became public, and that he would be able to provide reliable advice on the level of trouble and prospects of the company. So how can they not be disappointed?

Anonymous said...

chris lee annoys me and always has!
he's always been a lightweight who has built a brand on being a media commentator during the " crash" and has mined an aura of knowledge... when in fact he has put clients into provincial finance and other failed finance co's.across the last few years.
his acumen is not much better than the everyday spruikers out there and now he's preparing to " save his brand " by trying to throw the baby out with the bathwater with his ramblings about SCF.
kapiti coast financial adviser..that's where he should be at all times and stay off the national scene and stick to his knitting!
and for what it's worth i think SCF will pull through...if not, look out for chinese lettering on some of those Southbury canterbury dairy farms!!