SCF complexity ‘beggars belief’ – Reserve Bank
Reserve Bank officials were amazed at how complex South Canterbury Finance and Allan Hubbard’s supporting entities were when they stepped up their monitoring of the company in the second half of 2009.
Documents released on the Reserve Bank website this week reveal its members had frequent discussions with the Securities Commission around this time.
In an email dated October 8, Reserve Bank manager Andy Wood briefly outlined to Kathryn Rogers of the Securities Commission some scenarios when statutory management may be considered for a non bank deposit taking institution (NBDT).
At the Reserve Bank Mr Wood is responsible for the implementation of the new prudential regime and for oversight of the NBDT sector.
“In respect of SCF,” he told Ms Rogers, "a key consideration is the complexity of the SCF charging group, and indeed the complexity of the wider Southbury Group and Hubbard’s associated entities/interests.
“Related party transactions are a distinctive feature of the SCF business model and we have an A3 structure diagram that beggars belief.
“That said we hold the view that any such step should demonstrate a clear advantage over established corporate resolution strategies (i.e. receivership).
Mr Wood’s note came on the back of a report by KordaMentha, which was called in to assess South Canterbury’s loan book at the request of the Treasury and the BNZ.
Several issues were identified in the report that were “new” to the Reserve Bank.
These included South Canterbury’ owner, Allan Hubbard’s Southbury Group, having a $45 million facility funded by the ANZ.
“There is a suggestion that SCF are indirectly funding this commitment,” Andrew Hemphill said in an email to his colleagues Mr Wood and Douglas Widdowson on September 3, 2009.
Other new news was that related party lending was closer to $250 million than the $190 million South Canterbury disclosed to the Reserve Bank.
There were also concerns raised about the Australian loan book, which at June 2009 totaled about $100 million, and South Canterbury’s stake in Dairy Holdings Limited, which owns 58 farms in the South Island.
“Dairy Holdings Ltd … is not cashflow positive as thought, at best the forecast for 2010 is break even, at worst a c.$8 million loss,” Mr Hemphill wrote on September 3.
Mr Wood and fellow Reserve Bank staffer Toby Fiennes had earlier visited South Canterbury’s Timaru offices on May 20, following which they prepared a detailed report for the government agencies.
The main conclusion of the report was that ongoing close scrutiny of the company was warranted.
“SCF is an idiosyncratic institution by virtue of its wealthy backer [estimated to be worth $650 million in 2008] and his peculiar approach to business," the report said.
"Uncertainty remains in regard to overall capital strength of the Allan Hubbard empire – and its ongoing ability to absorb SCF’s non-performing loans.”
The report noted that Mr Hubbard had acknowledged that it was common practice for impaired assets to be removed from South Canterbury’s balance sheet and to be replaced with ‘good’ assets from Southbury companies or from Mr Hubbard’s private ventures at face value.
South Canterbury director Bob White told the two Reserve Bank officials that this was an idiosyncratic approach and “one that is only as effective as Allan Hubbard’s pockets are deep.”
The report states that Mr Hubbard then reiterated an oft-quoted point that “I will live in a tent before I see any of my depositors lose out.”
The report noted that Mr Hubbard was then aged 81 and had kidney dialysis three times a week.
Exactly one year later the Treasury approved a transaction that saw Mr Hubbard tipping his two best companies – Scales Corp and Helicopters NZ – into South Canterbury Finance. His holding company Southbury was effectively gutted of assets, yet still had a loan of more than $75 million owed to South Canterbury.
Shortly after that Mr Hubbard was placed in statutory management.