27 March 2010

South Canterbury Finance Could Cost Crown $420m

Time is running out for South Canterbury Finance to come up with a significant capital injection that could relieve concerned investors, placate ratings agency Standard and Poors and reduce the chances of the Crown paying a big claim on its deposit guarantee scheme. Options for capital raising are also running out as investor confidence fades and possible deals fail.

Receivership before 12th Oct 2010, when the current Crown Deposit Guarantee Scheme expires remains a real possibility, especially if the company is not accepted into the extension to the scheme. The company could run out of cash, the company could book further losses putting it in (further) breach of its trust deed, the trustee could run out of patience, or the directors could run out of hope.

I have put together a receivership scenario, based the company's unaudited 31 Dec 2009 balance sheet, adjusted to incorporate the Helicopters NZ and Scales Corporation transaction. I have used the company's full audited and noted 30 June accounts to provide some further breakdown of some asset categories, and the prospectus amendment information about debentures on issue as at 31 Dec 2009, and some other information. This gives a balance sheet that is almost the same as the pro-forma capital, assets and capital ratio as claimed by the company when announcing the Helicopters NZ and Scales Corp transaction. I have then applied some assumptions about the realisation of the assets, receivership costs, and application of the proceeds to the receivership costs, prior charge secured parties, to the debenture holders (or the Crown as guarantor), with no proceeds expected for unsecured creditors, preference shareholders and ordinary shareholders.

Here are the numbers:

As you can see, I'd expect fairly reasonable recovery for debenture holders (or the Crown as guarantor), however it still would be likely to cost the Crown $420m, which is nearly 50% of the amount it has provisioned for its exposure under the scheme. The assumptions include at least mild further decline in Dairy farm values, which would see the Dairy Holdings shares and the South Island Farm Holdings loan being unsaleable and not recoverable respectively, and if this assumption were incorrect, the shortfall would be substantially less [a friend of mine, a lot more informed about the dairy sector told me today it really could go either way, even though he's bullish short term and long term on dairy]. The other significant assumption is for the recoveries from the company's property development loans, and the investment and development properties (I'm assuming the company has acquired these properties through enforcement of security held for property development loans). These figures are roughly consistent with a 50% loss on the first mortgages and 100% loss on second mortgages disclosed in the 30 June 2009 accounts and the 20 Oct 2009 prospectus.

No comments: