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Countdown to a meltdown: Treasury's SCF chronology

The following is taken from a Treasury document released this afternoon under the Official Information Act. It describes the government agency's timeline of interaction with the doomed South Canterbury Finance, from its first meeting with Allan Hubbard to

Fri, 15 Oct 2010

The following is taken from a Treasury document released this afternoon under the Official Information Act. It describes the government agency's timeline of interaction with the doomed South Canterbury Finance, from its first meeting with Allan Hubbard to the drama of his personal receivership, and that of his wife, companies and trusts:

Treasury was first briefed by Allan Hubbard and Lachie McLeod on 22 January 2009 about plans SCF was making for restructuring and recapitalisation.

The plans involved acquisition by SCF of businesses within the Southbury Group (Helicopters NZ, Scales Corporation and Dairy Holdings), repayment of loans, sale of real estate loans, and an increase in ordinary capital.

SCF was advised on 23 January 2009 that prior consent on behalf of the Crown under clause 6.2 of the Deed of Guarantee would be required for these transactions.

In December 2008, SCF entered into a security sharing agreement with Southbury amounting to $89.6m.

There was a further transaction relating to the purchase of listed equity investments in January 2009. Prior Crown consent was not obtained for either transaction.

These transactions were brought to Treasury’s attention in April 2009 and SCF was notified of the requirements under the Deed of Guarantee on 21 April 2009.

In March 2009, Southbury Group introduced $20 million new capital to SCF. This was followed on 30 June 2009 by the acquisition of Southbury’s 33.6% interest in Dairy Holdings Limited for $75.73 million, being $40 million new capital and $35.73 million cash.

This required an opinion from an independent expert approved by the Crown that the transaction was at an arm’s length basis and represented fair value for SCF. This opinion was received on 29 June 2009 which confirmed that the transaction was at an arm’s length basis and represented fair value for SCF.

On 14 August 2009, Mr and Mrs Hubbard agreed to guarantee up to $25 million of a schedule of SCF loans, backed by the assets of Northwind Holdings (2009) limited, which at that time was owned by the Hubbards.

On 9 June 2010, their shareholding in Northwind was transferred to Messrs Bradley and Morris without advice to the Crown.

Southbury Corporation Limited was incorporated on 24 September 2009 as a wholly owned subsidiary of Southbury Group Limited. Southbury Corporation was intended to become the vehicle for an eventual IPO of the interests of Southbury, including SCF. However, a proposed issue to the public of preference shares that was to take place by April 2010 did not eventuate.

SCF announced on 11 October 2009 that its undrawn $100 million bank credit facility was being withdrawn and would be replaced by a $75 million facility with NZ Credit Fund. This was executed on 29 October 2009 with Torchlight Credit Fund.

In letters dated 14 December 2009 and 21 December 2009, followed by a director’s certificate on 29 December 2009, SCF sought Crown consent for a series of related party transactions in which ownership of SCF would be transferred to Southbury Corporation, SCF would guarantee up to $50m of convertible notes issued by Southbury Corporation, and ANZ would be given $40m priority ahead of SCF to securities issued by Southbury Group.

The issue of notes was planned to be the pre-cursor of an initial public offering being planned for April 2010. Treasury gave Crown consent on 29 December 2009 and the transactions were completed on 31 December 2009. On 18 January 2010, the shareholding in SCF was transferred from Southbury Group Ltd to Southbury Corporation Ltd.

SCF’s application on 19 January 2010 for the extended guarantee listed the following capital contributions that had been made since the original guarantee came into force:

27 Feb 09: $20 million
30 Jun 09: $40 million
31 Dec 09: $20 million
13 Jan 10: $6 million
19 Jan 10: $0.4 million

On 21 January 2010, the constitution of SCF was amended to allow transfer of shares that were subject to a security interest. The purpose of this was to facilitate potential restructuring proposals.

On 16 February 2010, SCF and advisers Forsyth Barr presented to Treasury a recapitalisation proposal they were working on that involved, first, acquisition by SCF of 100% of Helicopters NZ and 64% of Scales Corporation from Southbury Corporation for $152 million of SCF shares and, second, acquisition by SCF of the assets of Strategic Finance Limited for $220 million in cash, SCF debentures and SCF preference shares.

On 28 February 2010, Southbury Corporation sold its 100 per cent shareholding in Helicopters NZ and 64 per cent of Scales Corporation to SCF. The total purchase price of $162.5 million was satisfied by the issue of SCF shares and the payment of $10 million cash. Independent experts approved by the Crown that the transactions were conducted on an arm’s length basis and represented fair value for SCF.

On 1 April 2010, SCF announced that Torchlight Fund No. 1 LP would invest $22 million in Southbury Corporation secured convertible notes that, in turn, would be invested by Southbury Corporation into SCF. Torchlight Fund had an option to increase this to $37.5 million.

On 25 May 2010, Treasury gave Crown consent to two proposals by SCF to: (a) a “deposit reinvestment offer” that would allow investors in unsecured SCF deposits effectively to extend the maturity date of their investments; and (b) allow the maturity date of some of the listed secured bonds to be extended.

On 31 May 2010, the Crown declined to consent to a proposed transaction involving the guarantee by SCF of a new issue of convertible notes by Southbury Corporation. The proposed transaction was withdrawn by SCF.

On 4 June 2010, Treasury gave conditional consent to a transaction in which Torchlight Security Trustee Limited (Torchlight) would acquire $100 million of secured bonds in SCF, being $75 million obtained from NZ Credit Fund (being the facility that had been provided since October 2009) and $25 million issued as new bonds by SCF. All $100 million would mature on 30 November 2011 and would be secured by a prior charge in the debenture trust deed.

On 14 July 2010, SCF advisers and a potential investor presented to Treasury an initial recapitalisation proposal on which they were working. This involved separating the operations into a “Good Bank”, “Bad Bank” and investment division. Under the proposed transaction, the Crown was expected to:

 purchase the residual assets of the “Bad Bank” at the end of 2011;
 provide any consents that would be required under the guarantee deed; and
 provide a line of liquidity support in case SCF ran out of liquidity before the deal was completed.

The proposal evolved over the following weeks and a final proposal based on the same structure was submitted to Treasury on 18 August 2010. Under the final proposal the Crown would have been required to:

 fund a majority of the assets in the “Bad Bank” and fully underwrite any losses;
 agree to a four month period of due diligence during which the bidder would determine the final composition of the “Bad Bank”;
 fund (via a loan) repayment of all prior charges;
 agree to purchase at book value certain investment assets in the event that the bidder could not gain any necessary regulatory consents;

Following analysis by Treasury and external advisers, the Crown declined to support the proposal and that decision was communicated to SCF on 27 August 2010.

On 28 August 2010, Treasury received a further offer to purchase all the assets of SCF in the event that SCF was placed into receivership. The offer comprised an initial upfront payment with the remainder of the purchase price payable in instalments over the term of the sale and purchase contract.

SCF was placed into receivership on 31 August 2010. The receivers of SCF subsequently declined the offer and Treasury agreed with that decision.


Fri, 15 Oct 2010
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Countdown to a meltdown: Treasury's SCF chronology