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.

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?
   

Chris Lee Goes Off At Perpetual, PWC

Kapiti Coast stockbroker Chris Lee has been spraying gunfire far and wide in his latest Taking Stock, hitting primarily Perpetual Trustee, trustee of Strategic Finance. Perpetual appointed PWC receivers of Stretegic Finance last week. Mr Lee also implies that PWC have an incentive to drag out receivership in order to earn more fees rather than to do a deal or sell the assets quickly, although he also expresses some faith in John Fisk at PWC. He also takes aim at the rating agencies. Strangely, Mr Lee defends Strategic and HBOS (aren't they the villians?) and South Canterbury Finance (didn't he damn them last week?).

Mr Lee is still pushing for a deal with South Canterbury Finance, involving preference shares in SCF, and options on SCF ordinary shares. SCF preference shares are trading at 36c in the dollar today.

Is it just me or has Mr Lee lost his marbles? His proposal seems more outlandish and unlikely every day. I'm sure his truck-load of grey haired clients relied on him to warn them about the risk of whether, for example, the following strategy was at high risk of failure:

It [strategic finance] assumed banking liquidity and investor confidence would recover sufficiently to see projects like Soho, Fiji, Albany and Bendemere (Lake Hayes) up and running.
Strategic foresaw market recovery; in fact the market for land, tourism, and office development is still deteriorating, not improving. It is going from worse to worser, as my little sister used to say of my art work.

$84m 'Deferred taxation' Potentially Worthless to South Canterbury Finance

I've added the following to my growing list of items of concern on South Canterbury Finance's balance sheet:

As at 31 Dec 2009, the company now has $84m in Deferred Taxation asset, in its balance sheet. In note 2 of the 30 June 2009 accounts the company states 'Future income tax benefits attributable to temporary differences are recognised in the financial statements to the extent that it is probable there will be future taxable profit to utilise these differences.' If the receivers were called in, the company would be likely to end up with tax losses that cannot be used. Put another way, should the company (or the user of the company's financial statements) conclude that the company is not likely to make profits in the future, this $84m on the balance sheet would be written off (or considered written off).

This brings the total to about $280m.

See here for the updated list:

Growing List of Uncertainties for South Canterbury Finance

Growing List of Uncertainties for South Canterbury Finance

(UPDATED 4th April) There are a growing list of transactions and balances of South Canterbury Finance that don't quite add up, or provide serious concern about their substance or value. Here is a list of items:

RBNZ NBDT Liquidity Regulation Submission

Today I submitted the following in response to the Reserve Bank of New Zealand's consultation document on Non-Bank Deposit Taker Liquidity Regulation. The text is below:

Submission Summary

I submit that the RBNZ should recommend 'Maintaining approximately the status quo' because:

1. The public policy case for regulation is very weak. The two arguments raised for regulating liquidity are flawed and I will address them in my submission.

2. The diversity of business models in the NBDT sector make a diverse range of liquidity management policies appropriate, including definitions, indicators and levels of liquidity risk. This makes the option of 'Prescribing a measurement framework' inappropriate.

3. Imposing quantitative liquidity requirements would be ineffective, or competitively non-neutral, and/or overly complex and this option should be decisively rejected.

4. The particular quantitative liquidity requirements and indicators presented in the consultation document as an illustration from the regulations for registered banks are flawed and inappropriate for the NBDT sector. I will criticise these indicators in my submission.

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:

Draft Submission on NBDT liquidity consultation

I have drafted my submission on the RBNZ NBDT liquidity consultation document, and would welcome any comments or corrections. It is due for submission on Monday 15th March 2010.

Investors Downgrade South Canterbury Finance

Investor concern with South Canterbury Finance appears to be increasing, with the company's first ranking secured Dec 2012 bonds closing at 52c in the dollar on the NZX yesterday for a yield of 40% p.a. Confidence in the company by investors has been falling since the company was downgraded again by Standard and Poors to a lower junk rating, and investment advisor Chris Lee criticised the company.

End the Fed: Internet Radio Discussion

I'm pleased to announce that I will be interviewed by American author Chris Wilson on his internet radio show on Thursday 3-5PM, New Zealand time (Wednesday, 10 March 2010 at 9-11PM EST) in a review of Dr. Ron Paul's recent book End the Fed referring to the US central bank, the Federal Reserve System. Dr. Paul is a Texas congressman who is well known as an advocate of limited, constitutional government in the United States of America.

Dr Paul advocates and end to the Federal Reserve System, and a return to the gold standard. He also advocates prohibition of fractional reserve banking.

The show is live, and readers are encouraged to listen live, and to call in to take part in the discussion or ask questions. New Zealand callers can call toll free on 0800 895 213, or call the American number: (347) 945 5419. The recording of the show will also be available afterward.

Supporter Damns South Canterbury Finance While Vultures Circle

Kapiti Coast stock broker and long time supporter of South Canterbury Finance (he has invested money in them and advised clients to do so) Chris Lee, who has so far backed the company and its capacity to overcome its troubles, has now damned the company, its management and even its beneficial owner Allan Hubbard.

South Canterbury Finance Downgraded to BB, Watch Negative

Yesterday evening Standard and Poors downgraded South Canterbury Finance from BB+ to BB, and placed the company on Credit Watch Negative.

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.