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SCF bondholders rejoice, told to spend cash wisely

South Canterbury Finance investors, including all bondholders but not preference shareholders, have been told to spend their cash wisely when they are reimbursed by the government a total of $1.6 billion following the company’s receivership today.

In addition, the government is negotiating a loan of up to $175 million to the receivers for repayment of prior charges over South Canterbury’s assets, including a $100 million facility arranged through investor George Kerr’s Torchlight fund.

The payment under the Crown guarantee appears more favourable to South Canterbury investors than to those in other failed finance companies in recent times.

This is because some depositors and investors in long-dated bonds will now be repaid – having earlier been told not to expect anything.

This also represents a significant payday for plucky investors who bought South Canterbury 2012 bonds in the last days of last week at an 80% discount to their value today.

South Canterbury chief executive Sandy Maier said today that the payout under the guarantee scheme would lessen the impact on the South Island economy, where much of the company’s funding base and lending activities were based.

“Very shortly there’s going to be a massive infusion of liquidity in the South Island as all these debenture holders and bond holders get their dough,” Mr Maier told a media conference in Christchurch.

“I hope they do wise things with the money next.”

All up the government will repay about 35,000 investors $1.6 billion, hoping to recover as much as it can from the receivership. Repayment of prior charges gives the government first call on South Canterbury's assets, which the receivers are expected to sell down over time.

Mr Maier said the wider effects of the receivership on the South Island economy was also lessened by the fact that South Canterbury had not been doing any new lending for most of this year.

Government defends decision
Finance Minister Bill English said repaying all depositors as quickly as possible would ultimately reduce the cost to the taxpayer by about $100 million by ensuring the Crown is not liable for interest payments after the date of settlement.

"Furthermore, being in control of the receivership process takes the pressure off the receiver to quickly sell any assets,” he said.

"This ensures the Crown can get the best deal for taxpayers. Businesses that owe money, or are owned by South Canterbury, can continue to operate and there will be a minimum of disruption to both the local and national economy.”

A good day for Torchlight investors
Pyne Gould Corporation subsidiary Torchlight Investment Group recently increased a $75 million credit facility to South Canterbury to $100 million, of which PGC contributed $15 million.

The facility was secured ahead of other charges under the trust deed, and was essentially a first mortgage over South Canterbury’s charging subsidiaries.

Mr Maier said he understood Torchlight would be paid out first and foremost.

Torchlight is chaired by PGC cornerstone shareholder and director George Kerr.

“Today has been a successful investment for them,” Mr Maier said.

Not so lucky are preference shareholders owed about $100 million and South Canterbury’s ordinary shareholders, who consist largely of founder Allan Hubbard and his associated entities.

Down to the wire
Mr Maier said he worked through the night trying to secure a last minute rescue package for South Canterbury but in the end a deal could not be reached with private investors.

When he was appointed chief executive on December 23 the company had just $7 million cash in the bank and last night the figure was about the same.

“So in essence, I guess you could say we haven’t made much progress – however we paid hundreds of millions of deposits off and shrunk the book.

“This is a business that hasn’t disappeared in a puff of smoke. Ultimately it will change hands and that process will go on. It’s a going concern today and has a certain ripeness to it,” he said.

Mr Maier confirmed talks with three interested parties right to the end.

One was a large offshore South East Asian/United States Trust, which was engaged in talks through to 4am this morning.

The other two included a consortium of partially overseas and partially local investors and another offshore group with a history of investment in New Zealand.

Mr Maier said there were a number of sticking points but overall South Canterbury’s board didn’t believe the price or the terms of offers were right.

“Some of it was around what they were going to charge us for due diligence fees, break fees etc, but the problems were infinite in variety. “There wasn’t one in there made for us.”

What’s left?
South Canterbury is split into three business units.

These consist of a bad bank with loans of a nominal value of $700 million (estimated to be worth about $250 million today), a good bank with $900 million worth of loans and a private equity division holding investments in Scales Corp, Helicopters NZ and Dairy Holdings.

While the upfront cost to the Crown is about $1.6 billion plus the prior charges, the government expects to recover the “bulk” of that as the receivers sell the assets over time.

"The final expected net cost to the Crown is already provided for in the Crown accounts within the overall provision of about $900 million for all companies covered by the scheme," Mr English said.

More by Duncan Bridgeman

Comments and questions

It surprises me they've paid out the longer term bonds: that's not even sanctioned by the GG.

I don't agree with having to pay out under the GG in the first instance, let alone to investors who weren't eligible under it.

What is the reason for this extraordinary turn of events?

I don't know how class suits work, but every investor who has lost money in Bridgecorp, et al, should be looking toward some sort of class suit against the government. This is a rank playing of favourites and utter discrimination. It appears the government is above the rule of law.

These bonds ARE/WERE covered by the GG till the end of 2011

What about just saying thank you???

I don't recall Bridgecorp being covered under a Crown Guarantee - so the tax payer did not have a liability there. Treasury have already announced that all depositors of crown guaranteed companies will now be paid if they default, with no restriction on elegibility.. this is a level palying field for all crown guaranteed entities.

Bridgecorp was never an approved institution.

It's not about being a level playing field. The Crown Guarantee was a legal document setting out eligbility or not. It was sickening the way SCF was able to use the CG in the first instance to keep getting funds from those - like some commenters on NBR - using the taxpayers underwriting to make investments that no prudent person would, and now this. The government blitherly ignores it's own legal document and at taxpayers expense pays out those the CG didn't even cover.

Farcical. And unbelievable.

As the law of the land apparently means nothing to those who administer it, I'm sure John Key won't mind if I withhold my income tax payments from now on ... What's good for the goose, afterall.

This is ridiculous. Why does the GG even cover SCF? As far as I know, SCF had assets of less than $5b and therefore did not contribute to the GG scheme. Also why should investors who chased higher yield not also take the higher risk that would ordinarily come with this strategy. The government should let lenders and investors and borrowers work out their own mess. And yes, what about all the investors in the other failed finance companies. Why this special treatment for SCF.

I think the Tax Payers of New Zealand should be thanked.

"Rejoice and spend wisely"

This is a laughable statement.

How about "Thank you to the the New Zealand tax payers - especially those that live modestly, don't borrow and only spend what they earn.

How about a Thank you???

This is one of the most offensive things I have ever heard of a government doing. Agreeing to pay out investors that weren't even eligible is just sickening. I just don't understand how paying out on the ineligible long term bonds is saving in interest costs. Even if this was the case surely the government has it within is powers to pass some emergency legislation to prevent this massive injustice. These people gambled with the aim of high rewards but got it wrong. They expected and deserve to lose their money if the receivership scenario eventuated.

If the aim is to just inject money into the economy then surely there are more deserving folk than those who have enough spare money to play with in these types of investments.

I suggest an income tax revolt. Seriously.

If the government does not fell bound to follow their own laws and play so wantonly with our money, why should we fell bound to follow those same laws.

It shouild be followed through on how the Govt extended the guarantee at the start of this year and then days later their rating get lowered below the Govt requirement.
Also Kerr changing his mind from an equity enjection a year ago to a different class of investment that gets the Govt guarantee
Did he know the govt would reimburse him

I'm assuming the new random CG still doesn't cover SCF preference shares?

Thats right, SCF preference shares are not covered but I just heard on the radio they are not happy.Blaming the government for SCF going down.

What happens when Kiwibank goes under? Are tax payers going to come the rescue again? The NZ dollar could be in trouble.

How would you feel if you had invested in prefernce shares rather than secured debentures because you thought that gave you "preference."

The money will not be spent.
It will be invested elsewhere.
No wonder the yield for listed securities is so low when compared to coupon rate.

You will not succeed.
Look what happened with the Stop The Stadium Campaign where people were not paying their rates.
Didn't last.
Sukhi Turner paid hers in due course.

Hubbard s/be tarred-and-feathered -- and be made forced to walk, barefoot, down the main street of Timaru. The cagey codger.

"The money will not be spent.
It will be invested elsewhere"

Yeah, tip it into something else high risk with a GG. Marvellous result.

probably if Hubbard started a new finance company half the fools would invest todays payout with him again. There is really no hope for these people is there.

I assume that all the vocal supporters of Hubbarb will be investing their proceeds back into his businesses?

This debacle is a joke. Strings should have been attached to any taxpayer refund to this failed investment. I cannot believe SCF10's are getting their dough back, unbelievable! Speculators were rife in this coupon, only for the govt backstop. I know speculators who punted in the debentures with an 8.5% return, its a win win bet. Disgusting. I hope those punters donate a percentage of their 'investment' to charity, because it's my money you're getting.

Spend Wisely - I can see it now.

Fendalton will be spending up tonight on Champagne, new Airtek shirts, Pearls, Moleskins, Range Rovers, how to speak posh courses and boarding schools.

"AIr! And what date did your family's ship arrive on?"

Well your ship of hard working tax payers just came in now!

They are so fake down there!

I think you're getting a bit confused - Fendalton is about 100 miles north of Timaru.

And how amusing it is (despite the tax bill I'm facing as a result) to hear all these Aucklanders - that City of Charlatans - coming across so holier-than-thou about a rare Mainland failure.

Your choice what you do with your GG proceeds oh prickly one.
You are parroting my old confidant Chris Lee with your advice to invest in another GG.
Now what did I receive in the mail at lunchtime.
An invitation from Marac Finance to my family trust to invest with them at 6% for 6 months GG or 7% for 6 months non GG.
What an attractive offer.
Now how did they know I would be receiving a big payout from SCF in 4 to 6 weeks time ?

Are you sure you are not talking about Remuera or St Helliers ?
Or how about Devonport ?
Carmel Fisher's $8 million house is in Devonport .

You conveniently overlook the fact that for every winner in the speculation game,there is also a loser ?
In other words,why did investors sell their investment on market at such a large discount,rather than keeping them.
If I was iRD I would be tagging the returns of Income of the speculators.

I would have though many original SCF10's thought the RDGS would not have covered their bonds. Others thought they would be paid out and have proved right. (some just made 80% cc of you and me). This is how a market works, each participant makes their own decisions. However 'efficient' and undistorted, or fair markets are supposed to work to the effect that if events go against you, like the company failing then you lose some or all of your investment. Remember, Risk Vs Reward. This debacle is no risk all reward.

The people who bought deeply discounted short-term SCF bonds in the last six months should only be reimbursed what they paid, NOT the coupon value. How disgusting that they could buy bonds guaranteed by the Crown, certain in the knowledge that if SCF did recover, they'd be fine, and if they didn't, they'd be even better. That's a gross misuse of tax money.

is anybody going to ask L Mcleod- the previous CEO what part he had in all of this-including all of lending?

Under your hypotheseis,would it not be fairer if the original bond holders received the different between what they sold for on market,and coupon rate ?
The problem is that the paperwork involved becomes an impractical nightmare.
In the end,the coupon rate is discounted for a reason.
Investors do not have to sell.
That is the stock exchange and the willing buyer/willing seller scenario.

OK I am one of those bad people that made money out of the long dated bonds.I spent hours looking into it,I new they were covered by the GG until the end 2011.I did not force the people to sell them to me.If some of you would like to educate yourself there are a few others bargins coming up.Fidelity bonds come to mind.

another celebration of uninformed opinion here from the little people.
the politics of envy are alive and well tonight.
get a life you-all, be grateful that the govt. pumped a spendable $1.3 billion back INTO the economy and saved a virtual collapse of the south island dairy industry....and paid out all foreign investors so they couldn't claim on assets.

SCF is not the only co. the Govt. has had to stump up for so far under the Govt G/tee..that's what a guarantee is...move on!

Dr Bob, I certainly aren't 'ill informed' or playing politic of envy, I'm just annoyed that those speculating on a entity that is/was looking very shaky were making investments they KNEW were covered by the taxpayer. And to the other anonymous comment above about you doing your research on SCF, thats fine, that's what investing is all about – just don't ask me to stump up your payout. I think the term here is Moral Hazard.

..and ,yes, ex SCF CEO McLeod has a lot to answer for...incl. the interest free $15 million loan he scored .
talk about mismanagement..

My old comrade Chris Lee is a Big fan of Fidelity Bonds.
So you must also be a comrade.

Um I think he is going to retire to his organic farm.
The recent sales history of SCF means he is only qualified for a position in the debt management division of a bank.

I think we have thrashed the main topic. So, a propos de rien Red Dog, what is your point about organic farming? Most would know that organic farming and sustainable agriculture are virtually synonymous ( you have MAF's word on that). I'm puzzled. What would McLeod know about sustainability? Were you just airing a little prejudice ; having a little dig?

I recall being asked to act as a receiver during the 1980's and refused to do so because shares in the company had been sold to a purchaser,and then the company had given security over its assets to assist with the purchase.
At that stage,this was an invalid charge under the Companies Act.
I asked the solicitor who prepared the documentation,for an undertaking to stand behind me if the security was found to be invalid.
He refused.
The solicitor later went bankrupt twice.

Don't get me wrong but doesn't the GG bail-out including immediate payment to overseas investors which in John Key's terms makes the NZ Government the only creditor mean that the taxpayer just bought SCF from the investors instead of from the preferential share holders who really own it? If the tax payer now owns SCF, I would expect them to make it prosper and thrive (the assets such as the Dairy farms could be nationalised and the farmers could remain employees with a 49% shareholding) and then pay back the true owners of SCF who are the preferential share holders.
The only people who should be grumbling are the preferential shareholders.

I've just read the other article on this site called "The Government now controls SCF in all but name" which I hadn't seen before posting the above comment.

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