Bailout would have cost $400m less than receivership - SCF

South Canterbury Finance presented the government with a plan it believed would cost the Crown up to $400 million less than the receivership option.

READ ALSO: Countdown to a meltdown

Among the documents posted on the Treasury website today is a letter from South Canterbury to Prime Minister John Key, Finance Minister Bill English and members of the Treasury.

In the letter, dated August 27, South Canterbury expressed frustration that the government was not prepared to support an equity raising plan involving fresh equity from an investor, widely understood to be Duncan Saville.

“In SCF’s analysis the proposal presented will result in an ultimate loss or shortfall to the Crown of approximately $250-300 million. This compares with SCF’s estimate of a shortfall under receivership of up to $700 million,” South Canterbury said in its letter.

“On fiscal grounds alone, SCF believes the proposal presented to the Crown is compelling as it quantifies the loss on SCF to a smaller than expected amount and therefore provides strong validation of the decision to support SCF.”

“In [South Canterbury chief executive Sandy Maier’s] opinion the outcome from a receivership for SCF will be anything but a straightforward process given the nature of the assets in SCF and their lack of liquidity or appeal to other entities at values anywhere near carrying values.”

In reply Gabs Makhlouf, deputy chief executive of The Treasury, said: “The government does not share SCF’s views on the costs to the Crown of the recapitalisation proposal and I can therefore reconfirm that the government is unable to provide the support you have requested and is not prepared to entertain any similar proposals.”

Under the proposal the Crown would have been required to fund a majority of the assets in South Canterbury’s “bad bank” and fully underwrite any losses.

It would agree to a four month period of due diligence during which the bidder would determine the final composition of the “bad bank”.

The government would also agree to purchase at book value certain investment assets in the event that the bidder could not gain regulatory consents.

In further supporting documents the Treasury advice was that Crown support to recapitalise SCF would also raise important policy risks including the potential to adversely influence business incentives.

South Canterbury argued that the fiscal benefits outweighed the policy ramifications:

“We are surprised to be informed the government has decided not to support SCF, which we understand relate essentially to policy rather than fiscal considerations, and we respectfully request you reconsider the decision in light of this submission and request for support.”

The documents reveal the government assessed five resolution options for South Canterbury before opting to let the company fail and be placed into receivership.

This Treasury report outlines its considered pros and cons of each one. 

See Also: SCF Receivership to take four years