By Bernard Hickey

South Canterbury Finance Chief Executive Sandy Maier has talked up the prospect of splitting South Canterbury's delinquent loans off into a 'bad bank', which would create a 'good bank' with enough capital to satisfy Reserve Bank capital adequacy rules due to kick in later this year. He was speaking after the release of South Canterbury's prospectus last week.

Maier also spoke in a long video interview below with interest.co.nz about South Canterbury's cash position, its dividend reinvestment rate, its ability to survive without a government guarantee from the end of 2011 and the health of Allan Hubbard. Among other details, he said:

* He was appointed by the board of South Canterbury, not by the government.

* South Canterbury's cash position was "uncomfortably tight" at the end of December and was still tight with "tens of millions of dollars" of cash in the bank, rather than the hundreds of millions of dollars it would prefer.

* South Canterbury plans to unwind its related party transactions by selling assets, finding alternative financiers or running down the loans.

* South Canterbury has not put any of its equity investments up for sale "with any sense of urgency because that's not how you get the best price."

* On reinvestment rates he said: "I have days at 38% and days at 65%. Generally reinvestment rates have been trending down for some months because South Canterbury has two constituencies of investors". The first group were around 40,000 'warm nosed loyalists to South Canterbury'. The second group were more recent arrivals who were investing because of the government guarantee.

* South Canterbury is planning roadshows this week promoting its new prospectus and beginning to offer un-guaranteed debentures.

* South Canterbury sees a long term future for itself as a finance company in area where banks are not competing, including equipment finance and rural lending.

* On the 'good bank, bad bank, equity investments: "We need to split the business into segments. Into a good company with close to a NZ$1 billion of compliant assets that are very financeable. We could seek partners in that, we could attract capital in that and it would have a certain amount of capital and it will fit the bill. There's a second pile of assets that are discontinued activities that are the larger real estate loans where we haven't done well at it and we've provisioned them down to a good level and they'll be managed for disposal. The last category is several hundred million dollars of things like South Island Farm Holdings and Dairy Holdings, which aren't good loans or bad loans. They are equity interests with some loans attached, and they need a different type of management and home and holder. Over time we'll start to manage those on a segmented basis and you'll find that depending how we do it, the amount of capital may not be anything like the rumours (NZ$400 million plus) of 600% of this or 400% of that. That would be a dumb way to do it.".

*On whether South Canterbury needs new capital: "Mathematically, depending on how you do it, we might get by with little or no capital. My suspicion is to make it all go, we probably will raise some new capital."

* George Kerr (PGC)'s Torchlight has prior ranking over secured debenture holders, using a facility in the trust deed for 7.5% of assets to have a 'first position'. "There's nothing unusual or sinister in it and it's quite handy."

* Maier confirmed that South Canterbury Finance would keep its extended government guarantee even if Standard and Poor's downgraded its rating below the BB rating required for the guarantee extension in the first place.

* Maier said South Canterbury Chairman and owner Allan Hubbard was actively involved in the business and healthy. "He is at South Canterbury virtually every day seven days a week at 6.30am, or in the adjoining office. He is active in our affairs. He carries on a spirited correspondence with depositers, with borrowers, with regulators and is a vital part of the business, and makes a hell of a contribution, not just in the equity. He is our chairman and he runs the board meetings and we're on the phone and on the end of memos very frequently. Going forward, part of this change, part of talking about independent directors, part of refreshment of the board, part of talking about potential equity, is a sign that we all know there must be a transition at some point and we've actually started that."

This was first published exclusively in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.