SCF long-term rating cut, Hubbard moves to president
South Canterbury Finance has had its long-term credit rating downgraded by two notches to B plus by Standard & Poor's but remains covered by the government's extended retail deposit guarantee scheme.
The company has already been accepted for the scheme, which goes through to December 31, 2011, and at the time it met the BB or above rating criteria for acceptance. Its current rating is now below that level.
Chief executive Sandy Maier said the company has been canvassing investors and about two thirds are indicating an intention to renew deposits. The company was pleased to be taken off creditwatch negative. The short term rating was affirmed at B.
S&P said that the balance sheet liquidity build-up, to date, had not been as strong as it anticipated and it had observed delays during the past few months.
"Specifically, we believe that South Canterbury Finance's exposure to future refinancing risks is no longer tolerable at the previous BB rating," S&P said.
Separately, South Canterbury Finance announced that Allan Hubbard, the chairman and controlling shareholder, will to become president for life and step aside as a director.
Timaru-based Mr Hubbard is 82 years old and it has been reported that he requires regular dialysis treatment.
Mr Hubbard indicated at last year's annual meeting that he intended to step aside as chairman this year. As president for life he will still attend board meetings. Directors will convene in the near future to appoint a new chairman.
Mr Hubbard said significant achievements had been made by the board and new management team in the last six months to put the business on a sound footing.
"I am confident the decisions being taken will restore South Canterbury Finance as a leading provider of finance for business development beyond the traditional banking sector," he said.
Mr Hubbard said the board and management were working to overcome the short-term liquidity issues that had arisen as an unintended consequence of the initial Crown retail deposit guarantee and secondly to find an equity partner to achieve an orderly succession and underpin the long term future of the business.
Mr Maier said Mr Hubbard would focus on seeking a new equity investor for the company.
Mr Hubbard said South Canterbury Finance had impacted the lives of many people over the years by providing resources at crucial times to support their endeavours.
"It is essential to the New Zealand economy that firms such as South Canterbury Finance are able to continue in this role,"Mr Hubbard said.
Mr Maier said that in the years Mr Hubbard has chaired South Canterbury Finance, he had transformed the business from a small local finance company into one of the country's leading players in the non-banking finance sector.
"The South Canterbury Finance story is remarkable, and a tribute to the dedication of Allan, his wife and co-owner Jean and the people who have worked with him over the years," Mr Maier said.
Timaru lawyer Edward Sullivan has also announced his retirement as a director of South Canterbury Finance with effect from May 31.
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Comments and questions18
It is only news because S&P have recognised what practically everyone else (other than Chris Lee) recognised about 6 months or so. S&P have consistently told us that SCF was worse than the rating they gave it, and warned of multi-notch downgrades that they have not delivered until now.
And to think S&P and its few competitors are the ratings agencies that we are told are key to provising investors with better information about the risks of finance companies! I think a lot of people will be skeptical about that.
We are now in the final countdown towards enaction of the government guarantee - the taxpayer will kiss goodbye to $700m plus I would imagine. It would rather blow a hole in all the savings English says he has been trying to make. How an earth they were allowed into the extended guarantee is beyond me.
However PGC/Mr Kerr will no doubt move in quickly to pick over the carcass.
Looks like its time that company is going into receivership. Hubbard resigning as director dosnt look good.
Having done some detailed analysis of the SCF balance sheet, it would appear that SCF needs a minimum of $400m in new capital (i.e. a cash injection) which nobody in their right mind would contribute. How the SCF prospectus passed through the regulator is beyond me when you delve into the balance sheet. Unfortunately, 99 percent of those rolling over investments or making new investments would not bother reading the complex prospectus which produced unaudited figures as at 31 Dec. 2009 with an Ernst & Young "report"attached.This is a scandalous situation and in due course the propsectus and SCF will be exposed. Hopefully the Government has made a provision for a great big payment from taxpayers. SCF has been a reckless lender for the past few years and now the chicken is finally coming home to roost.
Clearly you have not read with detail why they do not need anything like that. SCF is going to be split up into 3 , with the new "SCF" (excluding the bad debts, investments etc) being only of $700m-$900m in size, and with $200m capital (which is what they said it would have without any injection) it is enough. If they have a new $400m injection, that would make the business funded with $600m equity.
I believe this annoucement of Hubbard hopping off ship is because SCF have a new shareholder, that did not want Hubbard interferring with their plans. Why else would he just give up? That is not like him unless something very large is about to happen with a new shareholder perhaps.
Watch this space is my guess.
ps - Kerr just put in $37.5m of NEW shareholders funds, clearly he did not put in $40m odd only to see it disappear in a matter of weeks/years?
Think about it.
Hard to escape the fact that the 31/12/09 balance sheet has assets of $1.96bn and shareholders equity of $47m resulting in an equity ratio of just 2.3%. There has been additional capital post 31/12. Doesn't leave much room for further impairments on the $1.5bn of financial assets.The business is funded with $1.89bn of secured debentures plus some other bits and bobs.If as you say the "good bank" will have assets of $700-$900m against capital you say of $200m, what capital is attached to the other $1bn left in the balance sheet and which secured investors go to the 'good bank" and which are allocated to the balance?All I say is that the Big 4 banks carry capital of between 8.5% and just over 10% for ANZ and these are the best rated banks in the world, what would one expect capital to be in a B+ finance company - at least 20% I would have thought. With Standard & Poors issuing a downgrade to below what is required for the Government guarantee I think that says something.Good on SCF if it can raise a big chunk of new capital. The key risks for SCF appear to be the percentage of retentions from existing secured debenture holders within the expiry date of the Guarantee, new monies raised to replace run off, minimal new impairments and run off of existing assets in terms of the maturity profile.
SCF have publically stated that they have $80m cash and as at tomorrow, after Kerr puts in his funds, they will have $100m.
SCF also publically stated that their roll over rate is 65% and get new money of around $30m a month.
They had $900m of debentures falling due between now and October (according to their prospectus).
That equates to around $600m of debentures being renewed if they can hold 65% (why wouldn't they when offering 8% for 12 months GG).
They also stated that $300m of loans will actually mature between now and October. Shrinking their business by $300m debentures (65% renewal rate), and $300m loans.
The "bad bank" gets $1m a week of loan recoveries, and is being marketed overseas as a bundle of loans which have been revalued at 50c. So that is another $50m per year unless they can sell the whole $200m in one hit.
They are not after 1c beyond the current guarantee, they don't even offer a term beyond the guarantee (unless you are stupid enough to go "unsecured") which indicates to me that they are operating as if they WILL fail, unless something happens.
IF scf can sell their "investments" which will be extremely easy to do as they are good ones, then that might shrink the business by $300m, coupled with the $300m shrinking in debentures, and the shrinking of the "bad" bank by $50m within the next 12 months (unless sold as a package) would mean their business would be a lot smaller, manageable, and will have retained earnings from Helicopters and Scales over the next 12 months of around $40m profits etc.
I can see an out for SCF, and if Hubbards departure means a new shareholder coming in, that say puts in $150m - $200m CASH into the bad bank, and the good bank, after selling the "investments" then this business will survive?
Kerr putting in shareholders funds just does not make sense unless he was part of a bigger plan, $37.5m is not chicken feed. Perhaps he might even convert his $75m prior charge into equity and infact be the new shareholder?
Next step new shareholder, then a float of Dairy holdings, Scales and Helicopters then we have left a very small SCF funded with an equity ratio of 20% - 25% ($200m - $400m depending on how they allocate it)
They also have no tax to pay for many years due to all of their tax credits $80m)
All the new outside 'equity', as I've said many times, is actually super-senior debt, in substance, ranking ahead of debenture holders. What is Mr Kerr's plan with it? I'm not sure, but if I were him, I'd like to see SCF keep going for as long as possible, to keep realising their bad assets bit by bit and keep finding out which of their non-bad assets are bad, and then, in late 2011 if they can last that long, negotiate with the government or the receiver, to convert their interest to equity in the business stripped of the assets they don't want, at the price they want. If necessary, PGC can do another share issue, and Marac can acquire the business.
However, at the rate they are going, they'll run out of cash by 12th Oct 2010. They've been in the market with the DGS extension for 2 months now, and still got only about $100m in cash -- wasn't that about the same as they had a month or two ago? If I understand how markets work, when you're making an offer that meets the needs of a market, the volume of sales you can get tapers off as the people who want your product get it, and don't want anymore, and the remaining potential market is smaller and doesn't want your product as much. Investors should be wary of extending their debentures or investing in new debentures because, chances are, they can't get past 12th Oct 2010, which means you'll lose earnings on the money while waiting however many months it takes for the govt to administer and pay out the guaranteed funds. E.g. if you could get 2-5 months interest, and then 2-4 months with no interest, making your 8% p.a. more like 5% p.a.
kerrs $40m odd is infact share capital. he has another $75m debt with them which holds a prior charge (super senior). his total exposure is around $112.5m with 37.5m as capital. as you know you can not take out that capital and was only recently put in meaninng he has confidence that they will survive (surely he didn't do it just to blow it a few months later?)
i suspect alans departure is part of a bigger picture, why else would he depart it is not his style. if he really is running away without a new shareholder then he has lost the plot. no other company in new zealand would not have their major shareholder on the board of directors.
hurry up SCF and tell us your plans before we do all just take it out.
ps SCF cash balance has increased by $50m over the past few montns which is some positive seeing that half are reinvesting and half are not.
Time is up for this dinosaur _ Hubbard tried hard to keep it going and at least he put most of his assets back in to keep it going - unlike Strategic's directors and Consultant who live in huge houses - the Consultant livuing in NZ's richest street - Cremorne Road Herne Bay ( not bad for a consulatnat ).
The Govt has been hoodwinked by the current management and has only recently extended their guarantee based on information that is now - " a lie " .
Bill English and Simon Power have no option than to put SCF into statutory management which will then let them, control the recovery or wind down process. Otherwise another greedy bugger in George Kerr will steal the prize for a token equity investment and the taxpayer will once again lose out. Kerr has no claim to fame that warrants him or PGC benefiting from this - unless he is politically connected ( interesting thought considering recent actions ).
There is only one answer - Statutory Management - that is if the Govt has the Balls to act in the interests of the investors and taxpayers.
On second thoughts - it would be best if the Government didn't progress with Statutory Management until June 1 or later so that at least they collect George's money( or whoever is funding him ).
It appears I was wrong to say that SCF has not increased their cash levels significantly, it is up from about $40m on 7th April. But it appears that the increase (not counting the top up) is not significant enough at about $25m/month.
Paul Ranson is not correct to say that the $37.5m is share capital. It is convertible notes issued by Southbury Corp, guaranteed by SCF, and secured by prior charge security over SCF's assets. So, even if SCF fails and costs the government even a billion dollars, that money is hardly at risk as it is at the head of the queue.
If you believed that the GG will be called up, and if they market in general shared your view, then why are you not buying their senior 2012 bonds at 65c? Shoudlnt' they be the best buy on the NZDX if you are going to get back 100c in a month or two?
David Hillary's response is yet another reason the Govt needs to act and quickly before all is lost under their guarantee scheme and the holders of the convertible notes take the prized assets and leave the rubbish for the Govt to try and retrieve value from.
Where is Treasury while all of these deals are being done and the company continues to under perform?? Wake up Whitehead and Co.
Isn't time for for John Key to show some leadership and direct his ministers and officials to wake up and proactively manage this situation, rather than watch George and co fill their pockets with dirty money.
I predict SCF will limp along under the protection of the Govt guarantee for a while yet, maybe till mid-late 2011 and Mr Hubbard will try and get some more badly needed equity, BUT here's the problem:-
Since Forsyth Barr were commissioned with the task or raising new equity many many mnoths ago, not a single cent of real new equity in cash has been raised. The reason why Mr Hubbard introduced Helicopters N.Z. and Scales interests in shares into SCF is if he hadn't the company would allready be in receivership. Note these were introduced as shares only because Forsyth Barr couldn't find any buyers for these companies for cash, despite trying for many months and couldn't float them on the market.
They were introduced at theoretical values, allbeit approved by Govt theoretical scrtiny. Cash wasn't introduced because it couldn't be, the companies couldn't be sold or floated on the market, simple as that.
Like I said SCF will limp along steadily losing more money and gradulally winding down their loan book. There latest quarterly figures saying they had basically broken even have ABSOLUTLY NO credibility as they're unaudited and anyone who thinks there arn't further massive losses coming from restating impared advances still totalling about $500m plus new impared loans has rocks in their head and only needs to look at the appalling situation faced by 70% write-downs on Allied Farmers advances. What a HAND-OVER that was...but I digress...
Sometime in 2011 the Govt may well find themselves in the catch 22 situation again, either they give SCF more protection past the Dec 2011 cut-off date or they face a significant loss.
S & P's role in coming late to the party to re-rate SCF down to where it should have been many months ago is interesting. I suppose I should be happy, at least it kept the company going long enough for thinking investors who don't like relying on Govt guarantee's to get out.
Why else would SCF be so slow to build up cash, because thinking investors such as the writer have chosen not to re-invest.
This is nothing but a Zombie bank which the Govt decided was too big to fail. If people want to be extremly brave and buy the preference shares or long dated bonds that mature in December 2012, I wish them all the luck in the world, they'll need it !!
Take Note:- I am brave enough to put my name to my comments and suggest people unwilling to do likewise have NO credibility.
I tend to agree with you Roger that SCF will limp along. My concern is that if this happens a number of things could happen, all of which I think will dilute the ability of investors to get 100 cents in the dollar.
The Torchlight funds are NOT equity they are preferential loans, meaning they will have 1st pick at the carcass, equity would give them the leftovers.
If SCF fails it is a shame there can't be action against S&P (or mybe there can, what a precident that would be) as they clearly knew the company was not rated appropriately.
S&P mis-rating?....really??? that would be a first -not!
'thinking' roger should have thought better of investing in another finance coy,after JUST scaping out of another,prior!
i,for one,wouldnt hang everything on a govt guarantee
me thinks 'thinking' roger to be very fortunate/blessed!
investing with finance coys is like dancing with the devil -you'll lose!
but even then,i too,thought that that incredibly lovely & honourable man,mr hubbard [with the beatle],with truckloads of integrity & fiscal conservatism,was still running the show
sadly his HEALTH, 'management' & ability to properly supervise failed him
or maybe he thought he might be 'behind the times',after listening to the mr new-kid-on-the-block,manager in charge...with all the latest 'expertise'
mr hubbard,who lived thru a great depression,was the best captain after all
i hope & pray,thru a divine miracle,he gets to live another day...he has given much to charity,is an honourable,decent,honest man & deserves much better than this
nowadays banks might not be so safe either,keep your eye on europe
so much crap is going to go down [who knows exactly when?],any coy struggling for its life now hasnt got a chance,as the nxt leg down -far worse- is coming
Unfortunately, despite bringing the ultimate corporate undertaker on board, SCF is stuffed. While I don't doubt the integrity of Alan Hubbard, he and his management got caught up in the real estate euphoria of NZ, as did so many mezzanine finance companies in NZ in recent years. The tragedy for NZ is that they turned down many start up or early growth NZ companies that they could have supported instead, with economic benefits to NZ and no worse risk than their loans to real estate speculators turned out to be.
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