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South Canterbury Finance's expected related party loan losses rise, hit government's books
Finance Minister Bill English says a NZ$331 million increase in expected losses under the retail deposit guarantee scheme today is mostly due to South Canterbury Finance related party lending.
The increase was one factor for the government's operating deficit before gains and losses being 23% worse than forecast in the eight months to February, along with an estimated NZ$1.5 billion cost to EQC following the February 22 Christchurch earthquake.
“Most of this [rise in expected Crown retail deposit guarantee scheme losses] is attributable to a reduction in expected related party loan recoveries from the receivership of South Canterbury Finance (SCF)," English said in a media release.
“The receiver has provided updated information on South Canterbury’s lending business not available previously," he said.
In addition, the expected effect of the latest Canterbury earthquake had been factored into likely recoveries from the South Canterbury Finance loan book, English said.
"Overall, we now expect a net loss from the Crown Retail Deposit Guarantee Scheme of around NZ$1.2 billion, compared with earlier estimates of around NZ$900 million," he said.
NZ$290 million to NZ$300 million from SCF, receiver says
SCF receiver and McGrathNicol managing partner Kerryn Downey told interest.co.nz that his best guess was that between NZ$290 million and NZ$300 million of the NZ$331 million in additional provisions referred to by English stemmed from SCF with the balance coming from the other eight finance companies to have failed whilst carrying the Crown guarantee.
However, he was seeking clarification from Treasury on the precise number government officials were attributing to SCF.
Downey said the provisions related to about 30 loans made by SCF to related parties including about NZ$160 million worth to SCF’s parent Southbury Corporation and its parent Southbury Group. Both were controlled by former SCF chairman Allan Hubbard. Another of the related party loans worth a “significant” sum was to the Hyatt Regency Hotel.
“They are the additional provisions that we identified that were necessary in valuing the recovery – realisations – from the related party loans,” Downey said. “They have nothing to do with the SCF loan book or major investments like Scales, Helicopters and Dairy Holdings.”
Asked whether he expected the NZ$290 million to NZ$300 million to bring an end to the SCF related party loan provisioning, Downey said: “I think we’re roughly probably 90% of the way there in understanding these loans now. But I’m not ruling out that there could be some further, probably less significant adjustments to value,” said Downey.
SCF collapsed into receivership on August 31 last year triggering a NZ$1.6 billion taxpayer funded payout to 35,000 of the company’s investors under the Crown guarantee. The Serious Fraud Office (SFO) revealed in October it was investigating five SCF related party loans (including the Hyatt loan) made between 2005 and 2009 for potential false statements or other fraudulent conduct.
Meanwhile, Downey has previously told interest.co.nz that McGrathNicol has shared information with the SFO relating to "some monies that were directed to Hubbard for investment with specific instructions as to where the monies were to be invested and they were not invested that way."
Frustrating for the government
Meanwhile, Prime Minister John Key said it was frustrating that another NZ$330 million in costs had been added to the government’s books at such a tight time.
“But I think it’s important to understand we inherited the problem through the previous deposit guarantee scheme. I think it shows you the magnitude of the losses, and also the significance of the corporate failure at South Canterbury Finance,” Key said at his weekly post cabinet press conferrence in the Beehive.
“Obviously that’s an ongoing process.
“I would make one point - because others have made it to the contrary, and not speaking from a position of knowledge – no potential bid that the government could have accepted for the assets of South Canterbury Finance would have helped the government had we accepted that bid," Key said.
"All of the bids had a provision for us to still be responsible for any bad assets when the value of the book could be established. So it wouldn’t have made any difference whether we accepted a bid or not,” he said.
The expected total loss for the government from South Canterbury Finance in gross terms had moved from about NZ$800 million to NZ$1.1 billion.
“We can then take off that the fees that we’ve earned through the scheme, which are in the order of about NZ$500 million. So I think the whole scheme has cost us about NZ$600-NZ$700 million net, on the best information that we have at the moment,” Key said.
(Update adds video of PM Key, comments from Prime Minister John Key, South Canterbury Finance receiver Kerryn Downey).
*Additional reporting Gareth Vaughan.