Some big winners from South Canterbury collapse
South Canterbury Finance chief executive Sandy Maier says there will have been some big winners from today’s receivership decision.
Speculators who had been buying the company’s tradable bonds at significant discounts could have made up to 30% to 40% on their punt, he said
“A lot of bets in the casino would have paid off today.”
He also described the immediate payout to debenture and bondholders as a massive infusion of equity in the market.
Mr Maier stated the amount covered under the government deposit guarantee at $2 billion (although Finance Minister Bill English said the amount was $1.6 billion). He said it included the amount owed to corporate investor George Kerr’s Torchlight with a first priority of about $100 million of the total $150 million amount that has first priority. But it also appears to include a group of unsecured depositors owed more than $100 million collectively.
The South Canterbury team had advised the government to keep the payout simple “and it looks like they’ve taken that advice on board,” Mr Maier said.
The government would now effectively become the main creditor of the company.
However, it would be able to fund the payout more cheaply at levels of about 3% rather than the 8% paid by South Canterbury “so they’ll pocket the difference of about $100 million a year.”
The losers in today’s announcement will be all shareholders including founders Alan and Jean Hubbard. Mr Maier acknowledged it would be a bad day for the Hubbards, with whom he had retained a professional working relationship.
“It’s not a good news story for Alan.”
He described South Canterbury Finance as an iconic New Zealand company with long service to the rural sector. When he took over nine months ago he was attempting to bring in new governance rules and correct a lot of problems.
The receivership would have been more negative if the company had continued with vigorous lending “but we’ve pulled back to lending on equipment and plant.”
A great deal has been achieved, he said. Since January, when South Canterbury was looking at having to repay $1 billion of maturities, that amount had been reduced to $300 million by collecting outstanding loans and repaying investors. The company would have needed between $100 million and $300 million in new equity to continue.
But a couple of things had derailed the process. Some problems turned out to be deeper that anyone could have imagined. The timing of refunds had been difficult and the statutory management of Alan and Jean Hubbard had affected confidence.
“We started the process in February to look for equity. We received some from local sources and from the Hubbards. We went on an international search with about a dozen parties whittled down to three. One was a South East Asian fund; another was a mix of international and local interests.”
But South Canterbury had an August 31 deadline from trustees and faced a “wall of maturities” in October. Mr Maier said he would not have wanted to be in a position where funds had run out and investors were not protected by the government deposit guarantee scheme.
In the end, the South Canterbury team had been unable to achieve agreement on price with the interested parties.
He told NBR that the company had about $300 million of property and would have settled for $200 million.
“We were offered $35 million. At that point you say ‘good bye’ it would have been irresponsible.”
Mr Maier said there had been a lot of speculation about a bailout from the Government but South Canterbury had never sought equity.
The deposit guarantee that had been put in place by governments around the world was simple and clear.
“It’s had a lot of unintended consequences but undoubtedly has kept South Canterbury alive. In our talks with potential buyers we had to take these things into account.”
But the business of the finance company has not “disappeared in a puff of smoke” and would continue under the receiver, he said.
The decision to call in receivers had been made yesterday even though negotiations continued into the early hours of this morning and he had kept Prime Minister John Key informed.
Since his appointment as chief executive nine months ago the $700 million of “toxic loans” had been separated into a “bad bank” with the remaining $900 million of good loans being managed as usual by a special division based in Christchurch.
There were also the three healthy subsidiaries – Helicopters NZ, Scales Corporation and Dairy Holdings.
Borrowers would continue to work them off in the usual way. Most lenders and investors were in Otago and Canterbury, particularly Timaru.
“What was there is still there. The pockets have changed.”