South Canterbury Finance – destined to fail?
If John Key needed an excuse not to bail out South Canterbury Finance he found it in the finance company’s founder, Allan Hubbard.
While the prime minister is refusing to rule out an injection of cash into South Canterbury, up against a deadline to raise capital today, he gave strong hints yesterday that doing so would be unwise.
It was fair to say, Mr Key said, that the degree of back office book keeping and general observance of standard accounting practices at South Canterbury was in line with Mr Hubbard’s other private companies, currently in statutory management and subject to a Serious Fraud Office inquiry.
It was also fair to say, Mr Key said, that South Canterbury chief executive Sandy Maier has been faced with significant challenges since he took over in late December.
South Canterbury’s perilous state was the doing of Mr Hubbard and previous management, Mr Key added dryly.
The government should know the state of South Canterbury because the Treasury has been intimately involved with the company for quite some time, certainly before the company was granted entry into the extended retail deposit scheme on April 1, and most likely before it dumped its previous auditors in February.
Since then South Canterbury’s impaired loans have ballooned from roughly $200 million to $600 million, and now estimates are as high as $700 million.
These assets have been ringfenced into a “bad bank” leading to speculation the government might use funds provisioned for the deposit scheme to buy these assets to help facilitate private investment in the rest of the company.
There is $934 million set aside for the Crown scheme, thought to be enough to cover all the companies which signed up to it.
Mr Key said the Crown liability for South Canterbury was about $600 million.
He said the cabinet has been considering options but the priority was minimising the bill to the taxpayer.
South Canterbury chief executive Sandy Maier said three investor parties were holding talks yesterday but warned there was no certainty that recapitalisation and restructuring proposals would be successful. He told National Radio this morning that the latest proposal cam through at 4.30am today.
The problem is South Canterbury owes 20,000 investors about $1.7 billion and is all but out of cash. A large chunk of those funds are due for repayment before the end of October.
It seems incredible, given all that has happened, that South Canterbury gained acceptance into the extended guarantee back in April.
The company had to do everything it could at the last minute to prevent slipping beneath the eligibility threshold for the extended guarantee.
In the end the Treasury gave South Canterbury its big tick on April Fool’s Day this year, less than a month after Standard & Poor’s lowered its credit rating on the company’s securities to BB, the minimum for inclusion in the crown scheme.
S&P flagged serious liquidity problems and wanted to see a marked improvement before considering any lift to the rating.
That improvement never came. In fact it got much worse. It wasn’t long before S&P downgraded South Canterbury two notches to B+ and later to CC, a rating defined as on the brink of default.
South Canterbury is expected to make an announcement about its future this morning. Mr Maier indicated on National Radio that it would not be a final solution – more a step in a process.