24 March 2010

A Possible Way Forward for South Canterbury Finance

Today is was reported that South Canterbury Finance is considering splitting itself into a good institution and a bad institution, as a way of complying with new regulations that limit, for example, related party exposures. This solution could enable a good version of South Canterbury Finance, I'll call it SCF2, to raise capital and continue as a going concern. The old SCF, I would expect, could be wound up over a number of years.

Here is how I think this could work. SCF would form a new subsidiary (SCF2), and transfer all assets except:
  1. Shares in associate companies (e.g. Dairy Holdings and Commtest Instruments)
  2. Investments in equities
  3. The subordinated advance to South Island Farm Holdings Limited
  4. All the property development loans
  5. All impaired and past due assets
  6. Helicopters NZ ordinary and preferred shares, and Helicopters owned by SCF and leased to Helicopters NZ under operating leases.
  7. Scales corporation shares
  8. Loans to related parties
SCF2 would then issue new shares to PGC or other investors, get an investment credit rating from S&P, the existing and extended crown deposit guarantee and do a bond issue and issue debentures to pay SCF, which in turn can pay off its debentures and other obligations maturing before the existing crown deposit guarantee expires.

SCF would then be left with questionable and related party loans, and non-finance businesses and investments, and its perpetual preference shares and bonds maturing in the next few years. It would not qualify for the extended crown deposit guarantee, and could therefore propose a debt restructuring plan to, for example, exchange its bonds and other debt of the same rank in part for shares in Helicopters NZ and Scales Corporation. Preference shares would probably be wiped out, and bondholders would probably take some losses too. Alternatively, SCF could be placed into receivership, and the receiver could spin off Helicopters NZ and Scales Corporation, and do trade sales for the other businesses or shares in associate companies.

The only possible snags to this solution are:
  1. Would it be fair or prejudicial to SCF bondholders and other creditors of equal rank with investments maturing after the existing guarantee expires? Would the trustee approve it? The trustee could be exposed to litigation from bondholders who would otherwise be made whole by the crown and who would be prejudiced by being left financing the undesirable assets in breach of the trust deed the trustee is supposed to enforce compliance with to protect them.
  2. Do they have enough time?

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