Today South Canterbury Finance reported a huge $154.9m after tax ($211.8m before tax) loss for the 6 months to 31 Dec 2009. This is enough to wipe out the company's ordinary share equity, and some of its preferred share equity. As I predicted, most of this is due to a big write down on the company's property development loans.
This puts the company in breach of its capital adequacy and gearing limit requirements of its trust deed. To keep the company from recievership, Southbury Corporation has transferred ownership of its shares in HelicoptersNZ and Scales Corporation. This causes the company to breach two more requirements of its trust deed, equity exposures and single party exposure limits. The trustee has granted a waiver for these breaches for four months until 30 June 2010.
I expect that the company will shortly be downgraded two or more notches by S&P, as its liquidity position and options, a major concern of the agency, has been going backwards, and it has not moderated its loss experience, instead they have blown out several times over. (I've been wrong before in making predictions about S&P, however!) This would put the government guarantee extension out of reach of the company, and makes it unable to attract new equity or debt funding.
Mr Hubbard has been throwing good money, no, make that good assets, after bad and now he has run out of significant further assets. Now it is up to investors to decide if they want to throw their good money at South Canterbury Finance. I've predicted in the past investors won't do that. This explains the reluctance and smallness of the recent smoke and mirrors 'capital injection' and makes the company's future in grave doubt. The government guarantee will now be shown for what it always was: keeping institutions of questionable solvency going when they should have been shut down or restructured at creditors and shareholder's expense.
Mr Hubbard has thown everything he has into saving this company, in a possibly futile effort. Perhaps taxpayers should be thanking him for mitigating their loss incurred by Dr Cullen. Whether it is good stewardship of his resources is another question.
Milton Friedman's Student Notes From Viner's Economic Theory Class - |Peter Boettke| Irwin Collier at Economics in the Rear-View Mirror continues to provide treasures from the archives. Recently he posted material from Milton ...
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