Massive Payout on SCF

By WARREN HEAD. There will be a massive $2bn payout by the Government as a result of today’s ‘Black Tuesday’ when South Canterbury Finance went into receivership.

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SCF chief executive Sandy Maier said at a media briefing today “it is a very inclusive payout” except that it will not include the company’s equity holders, notably founder the famous millionaire Allan Hubbard who appears to have lost everything after a lifetime of effort.

Headliner understands that the Government will pay out to all secured deposit holders almost immediately under the Crown Retail Deposit Guarantee Scheme.

This will include around $1.2m of deposits and debenture investments owed back to some 35,000 investors.

“The protection is not for SCF, it is for the investors directly,” said Maier.

 It is also expected to pay out holders of bonds which have soared to yields of 30-40% in recent weeks as the August 31 deadline to resolve the recapitalisation of the company loomed. There are suggestions in the market of outright speculation in the bonds. Yet the punt taken by bond-holders appears to have come off spectacularly with $300m of government funds expected to be paid to them

There is the surprise news that prior charges totalling around $150m will also be repaid. These will include some $100m advanced by the Torchlight Fund managed by George Kerr, renown for his financial shrewdness and one of the winners on the day.

The Crown itself will achieve a lower cost of funding (effectively the rate of interest on government stock) rather than the 8% being paid on debenture deposits by SCF.

While Sandy Maier did not agree that the effect of the receivership was neutral he did comment that other savings institutions would be rubbing their hands at the release of such a massive amount of money back to investors who would need to re-invest.

In essence, the receivership triggers a $2bn ‘cash injection’ back into the economy and some 60% of that will go to the South Island.

Maier said most commentators had ignored that fact.

The $2bn figure is substantially higher than numbers used by the Government in discussing the extent of the taxpayer’s exposure but the difference rests in the potential size of the financial recoveries that the receivers may achieve from sale of SCF’s assets.

The fate of South Canterbury Finance, the massive $2bn receivership confirmed today, is “of its own doing not the Government’s” SCF chief executive Sandy Maier said at a media briefing today.

He was responding to questions driven by public anger at the pressure placed on SCF founder Allan Hubbard. But Maier stressed the separation between the statutory management of Hubbard interests and the SCF receivership.

“SCF's failure is its own failure...the company made poor choices…and we could not overcome the baggage (after his appointment last summer)”

Maier said that the statutory management of Hubbard businesses other than SCF “technically had no impact.”

“Having said that the brand connection is a powerful one and people became confused as to the relationship.’ This made it harder for SCF to continue to bring in the essential funds flow that was whittling down the so-called “wall of maturities” looming from October.”

“I’d be lying if I said it didn’t impact in a confidence sense.”

Maier is credited with a Trojan effort to turn SCF around, building two separate teams, one for the ‘bad bank’ holding non-performing loans and the other ‘a good bank’ lending to the small-to-medium market.

Back in March the situation was very bleak with $1bn of maturities to reduce. Maier said this was reduced to under $300m. “But now they’ve gone across to the Crown.”

DEAL IMPOSSIBLE

Why couldn’t SCF get a recapitalisation deal completed?  Partly because of the challenges facing the company, which brought forth hopelessly discounted offers mostly from opportunists or they were so heavily conditioned as to be non-viable.

Maier said there were several parties that emerged from a longer list of about 15 possible investors. “We couldn’t agree on price and terms in the time-frame. You don’t get there (with a deadline handing over your head)…and there were some that wanted to be paid to conduct due diligence.

Why was there a deadline with the Trustee under the debenture Trust Deed for 31 August?

“It was the day we had to certify to the Trustee in respect to the required certificate of compliance with various covenants in respect of the June balance date.

“It is our reporting day for our accounts.”

With more liabilities than assets, the directors could not sign off that certificate.

“It became logical to do the appropriate thing. Our relationships with Government is quite straight-forward – there is a contract from the government to individual investors in SCF.”

“It is depositor insurance.”

Maier dismissed speculation there had been an attempt at a capital rescue with the Government. “Forget what you read on the blogs.”

“I have never abused that (*relationship) by saying “Rescue Us.” The deal was always that we would seek a private sector solution.”

It seems likely that (all) that SCF needed was $100-300m in new capital to give a recapitalised business a chance. But there were sticking points. Some bidders may have wanted to see the government guarantee extended beyond December 2011.

The receivers will now try their luck.

And in the remains of this day, there may well be hope that the ‘good bank’ may live on for another day. Because as Maier told Headliner “one of the largest finance company operations in the country is still lurking in there somewhere.

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