01 March 2010

South Canterbury Finance Reports Huge Losses

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.


Anonymous said...

Hi David,

As you say, nothing unexpected in the results.

However, what is unexpected is the willingness of Alan Hubbard to put in an additional $150m of equity (reviewed for fair price by the crown guys so I am happy to believe the figure is 'real').

If things were truly about to go belly up, then that would represent nothing more than a straight transfer of $150m of wealth from Hubbard to whichever group was last in line to get a payout (bond holders perhaps?)

Given that he is no fool, it seems to me that things are probably okay going forwards?


Shaun said...

It will be interesting to see what the SCF board does from here.

They should not be long term holders of the Scales and Heli NZ shares. If it is a fair price then test the market by selling the shares, so that SCF gets real cash into it's balance sheet.

Otherwise what has changed, everyone knew he had these companies to stand behind SCF, my concern is they could be as quickly removed as they were put into the SCF balance sheet, and the depositors will have no say.

David Hillary said...

Alan, You do need to subtract off from that figure the $26m invested using the proceeds of the convertible note issue, but other than that you are right. The same argument would apply to Mr Hubbard's earlier additional investments in the company, and you do have to ask what Mr Hubbard's motivation is. I suspect he believes he's doing it because it is the 'right' thing to do, and because he doesn't want to let investors in his finance company down. Don't you think the CEO and the Treasury people made him feel good about doing it? I don't think you can ignore the man's character, he seems to be a principled and honest man who doesn't want to let anyone down, and grew wealthy from frugality, honest hard work. He may also believe that this write down is the last, and given its size, and the new CEO, I'm inclined to consider that a reasonable position to hold. S&P and investors might take a different view, however, which would spell the end of the business. Bond holders, by the way, rank equally with debenture holders. He may not be a fool, but it is his wealth to use for what he wants -- he doesn't exactly intend to spend his wealth on loose living and fast cars so what else is wealth good for?

David Hillary said...

I don't share your concern about losing those assets: now that SCF has its hands on those assets, it can't be compelled to give them up, and the directors would be up for breach of they disposed of them for less than fair value. If the past is any guide, SCF is not showing any urgency in doing asset sales, maybe the trustee will give them more time to remedy the breach. I'm not sure if the time is good for SCF to dispose of them (and the Dairy Farms) or not. Now that they have them, unless they need to sell, I guess there is nothing wrong with waiting for favourable terms for a sale. There is only a need to test the market if the investors in SCF doubt the carrying value of the assets. As far as I can tell, investors are more concerned about property development loans and the loss making associates than Helicopters NZ and Scales Corporation. But I could be wrong about this, I guess we have to wait and see how investors and S&P respond to the latest chapter.

What I am concerned about now is what is their strategy for getting more capital and selling off unwanted assets and reducing related party exposures. I'm having a bit of trouble working out what their next step will (or should) be, as I wasn't expecting a 'clear the decks' write down and a 'throw everything you have at the problem including the kitchen sink' approach either. The only things I can foresee is the risks the company now faces as it grapples with its problems.

Anonymous said...

If SCF gets the guarantee extension then it seems to me they should be fine.

All they have to do then is just make sure they stop lending, and hold all the repayments they receive going forwards until such time as liquidity is solid.

Even if there are further losses in the loan book (much less likely with the huge bath they just took already), it is still about liquidity.