News of a Serious Fraud Office investigation into Allan Hubbard's Aorangi Securities, which has been placed in statutory management, was followed yesterday by a credit rating downgrade on South Canterbury Finance in which Mr Hubbard is a key shareholder.
The government appointed statutory managers to manage Aorangi's affairs, and those of Mr Hubbard and his wife, on Sunday, following weeks of consultation between the Companies Office and Mr Hubbard.
Companies are put into statutory management to prevent fraud and reckless company management and to protect investors.
NBR reported yesterday that South Canterbury has had past related party dealings with two of the entities involved.
In 2005 and 2006 South Canterbury lent money to Aorangi Securities and Te Tua Trust, two of eight entities now under statutory management.
Accounts for the December 2006 financial year note that South Canterbury received interest payments from Aorangi of $914,851 in 2006 and $64,925 in 2005. No loan balances were disclosed.
During those periods South Canterbury also received interest payments of $165,053 and $89,571 from Te Tua Trust.
It is unclear from the financial statements whether there are any loans outstanding, although chairman Bill Baylis has been advised there are none.
It has been four months since an investor laid a complaint with the Securities Commission about Aorangi Securities, in which the Hubbards are managers, trustees, borrowers and depositors.
The SFO became involved because it believed an inquiry was in the public interest. The investigation was being carried out under Part 2 of the SFO Act, which deals with suspected offences involving serious or complex fraud, chief executive Adam Feeley said.
The SFO would examine concerns about whether any or all of about $134 million of investors' funds deposited with Aorangi had been received after proper disclosure, and whether those funds had been dealt with in a manner consistent with representations made to investors, Mr Feeley said.
"This is an investigation of major importance to our financial markets, and the need for a thorough and fair investigation cannot be compromised by the understandable desire for early answers."
Mr Hubbard has defended his operations saying all the loans were documented, but were being renewed so the paperwork was with lawyers. He could have had the necessary paperwork gathered together within a fortnight.
There were sufficient funds to pay interest due at June 30, and he has said he would meet any shortfall "provided it is within my resources."
Mr Hubbard was a director of hundreds of companies in the South Island, and along with many other entities in the South Island, South Canterbury Finance was "looking at how this plays out", said SCF chief executive Sandy Maier.
SCF is owned by Southbury Corp, which is owned by Mr Hubbard and his wife, and is excluded from the statutory management.
In technical terms there should not be an impact on the company but Mr Maier appreciated the effect on perception.
The appointment of statutory managers in respect of Mr and Mrs Hubbard had created uncertainty for the rating agency, he said.
"For eligible investors, nothing has changed regarding the Crown's extended retail deposit guarantee scheme which remains in place through to 31 December 2011."
As a consequence of the change in credit rating, a memorandum amending the company's current prospectus would be registered as soon as possible, following an earlier amendment yesterday.
"If anything, the rating action reinforces the determination of the directors and management to build on the good progress already achieved to turnaround the business of the company," Mr Maier said.
S&P lowered its long-term credit rating on SCF to B- from B+, and placed it on CreditWatch Negative, on concerns about Mr Hubbard's affairs.
The short-term rating was lowered to C from B, and also placed on CreditWatch Negative.
A short-term C rating meant a business was vulnerable to nonpayment, one step above default, while a long-term B- rating was below investment grade.
"The downgrade reflects our view that news surrounding SCF's key shareholder will likely erode debenture investor confidence, which is critical to SCF's ability to manage its liquidity and its significant debenture reinvestment requirement," credit analyst Derryl D'silva said.
"We are also now concerned that the company's recapitalisation efforts could be compromised or delayed."
SCF has been drumming up investment as it tries to manage a large volume of deposits maturing around the time the existing crown guarantee scheme ends in October.
"In our view, SCF's recent momentum of improvement in its management of forward maturities and new debenture inflows will materially weaken because of this announcement," Mr D'Silva said.
"Additionally, SCF's cash balance has not increased as rapidly as factored into the previous rating, and there is now greater uncertainty around the support from SCF's key shareholder, Mr Hubbard."
However, the company's new debenture inflows were steady, and it had had some success in building balance sheet liquidity.
"Supporting the rating, however, is the New Zealand Treasury's announcement that eligible SCF depositors remain covered under its guarantee," Mr D'silva said.
S&P would review its CreditWatch negative over the next few weeks.
NZPA and NBR Staff
Wed, 23 Jun 2010