13 March 2010

Stretegic Receivership Ends SCF Lifeline Rumour

Yesterday Perpetual Trustee placed Strategic Finance into receivership, after rejecting 'several debt-for-equity and/or restructuring offers from [unnamed] companies'. Among the rumours of these possible deals was a deal to recapitalise South Canterbury Finance promoted by Kapati Coast stockbroker Chris Lee:
Its [Stretegic Finance's] best prospect is that SCF swaps their shares and options for Strategic debentures bonds and perpetual notes.
This could have been the expected mystery source of new capital Allan Hubbard was reported as disclosing:
South Canterbury Finance is set to get a new injection of capital, but chairman Allan Hubbard is keeping the source of the new money under wraps.
Although putting these items together in this way runs an obvious risk of being proven wrong, it also could indicate that a lifeline SCF may have been relying on has disappeared. What options might still remain to improve SCF's position and chances?
  1. Selling Scales Corporation and/or Helicopters NZ at a profit. This would increase the company's capital, and remedy its breach of its trust deed, and provide it with urgently needed cash.
  2. Some kind of restructuring of the company's preferred share capital. For example, preferred shares could be converted to ordinary shares, and a renouncable rights issue could raise a small amount of capital. This would also save the company the cost of paying preferred dividends.
Whether such options are planned, and, if executed, would be enough to save the company I do not know. However, without some fairly large deal fairly soon, don't expect a happy ending for the company.

6 comments:

Anonymous said...

Hi David,

Are you saying that holders of SCF preference shares could be forced to swap them for ordinary shares?

If they can't be forced, why might they agree to do that? They have better security as preference shares don't they?

Thanks,

Alan.

David Hillary said...

Alan, SCF can stop paying dividends to preference shareholders at any time, and preference shareholders have no recourse, and, should SCF fail, preference shares would be worthless. This puts preference shareholders in a powerless position and means that they could be inclined to accept restructuring proposals that leave them with a small stake in a surviving firm rather than nothing at all.

Anonymous said...

Thanks David.

If they were converted, would they HAVE to be converted at 1 for 1 with ordinary shares, or could the offer be, for example:

10 ords per pref; OR

1 ord per 10 prefs


Also, if they were made into ords, what impact would that have on their listing?

Would it mean that all the ords of SCF would also become listed?

If not, then presumably it would represent a substantial loss of liquidity for those investors (if they didn't sell out before the change, but that might also be at a low price).

Alan.

David Hillary said...

Alan,

There is no fixed relationship between ordinary shares and preferred shares, any conversion would have to be on the basis of an offer accepted by the required proportion of shares. The company can't force them to accept any deal, but it can stop paying preferred dividends, making some other deal more attractive, and saving the company cash and capital it would rather retain.

Preferred shares are unsecured, but they do rank ahead of ordinary shares.

I don't think this kind of transaction is common, however, under stressed conditions, shareholders might agree to anything and everything required to maintain some value rather than be wiped out. I would expect they should retain their listing but convert the shares to ordinary shares and move them to the NZSX.

However, the company can make the first move by unilaterally stopping the preferred dividends. This will save cash and help the company's capital position (a little). After that, preferred shareholders might agree to anything.

Anonymous said...

Hi David,

Sounds like a definite possibility.

If they kept their listing and moved from NZDX to NZX (I assume that's what you mean?) then presumably Allan Hubbard could also then sell some of his ordinary shares on market?

That would be a possible route to increasing the capital of SCF if he then took the proceeds and put it back into SCF?

Alan.

David Hillary said...

Looks like the rumour is not dead yet. http://www.radionz.co.nz/news/stories/2010/03/15/1247f823bfe3
http://www.stuff.co.nz/business/industries/banking-finance/3448351/SCF-may-rescue-Strategic
But it seems less likely now. Basically the Trustee and PWC have given the deal a vote of no confidence.