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Strategic Finance (SFL) Chairman Denis Thom has warned investors in letter they should not rely on receiving their first payment of 9 cents in the dollar due on January 7 because of very weak conditions in the development property market and because it needs to repay Bank of Scotland first.

Strategic was behind projects such as North Shore’s Sentinel Tower (still being sold), Fiji’s Hilton (still being built) and Ponsonby’s Soho Square (in receivership and unbuilt).

Strategic said it had already made a NZ$5 million payment to Bank of Scotland (BOSIAL), which had a prior charge over the property development loans controlled by Strategic, more than 50% of which are second mortgages or worse. In some cases Bank of Scotland has the first mortgage on these projects and it is still owed NZ$11 million by Strategic.

Strategic said many of these loans are due to be repaid in coming weeks and it is possible not all will be repaid in time for the January 7 payment deadline because they rely on sales of properties. Strategic also has to repay the remaining NZ$11 million to Bank of Scotland before it can start repaying debenture holders the NZ$291 million they are owed.

“These loans involve conditional and unconditional sales which are required to complete in order for SFL to receive proceeds. If these loans are repaid, we forecast having sufficient cash flow to fully repay the BOSIAL prior charge and allow for some or all of the planned payment to stockholders to occur on 7 January 2010,” Thom said in the letter, reproduced in full below.

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Failed property financier Strategic Finance has reported an audited annual loss of NZ$175 million for the year to June 30, just six weeks after predicting a full year loss of NZ$98 million. Strategic Finance said it had decided to book provisions for losses on property loan values and cashflows of NZ$146 million because of what it described as “a disconnect between property valuations and the market value of assets.”

Strategic had written second mortgages on a range of resort, commercial and residential developments in Auckland, Queenstown and Fiji over recent years, including North Shore’s Sentinel Tower, Fiji’s Hilton and Ponsonby’s Soho Square. Many of the developments are either derelict, half completed or not sold, leaving Strategic as a hostage to first mortgage holders, many of whom are banks reluctant to allow development to continue while units on plans are unsold or unleased.

Strategic Finance, which is in a moratorium and had predicted a 100% payout for debenture holders, said in its full accounts republished below that its trustee, Perpetual Trust, could put the property financier into receivership because it may fail to meet some of the deadlines for repayments over the next 5 years.

Strategic Finance had NZ$291 million of debentures on issue and frozen in its moratorium at the end of June.

It said on page 50 that current management forecasts were that debenture holders would receive between 85 and 93 cents in the dollar over the five years of the moratorium and there would be no interest paid. On July 14 Strategic said it was on track to repay debenture and deposit holders 100% of their capital and interest, as scheduled in the December Moratorium agreement.

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Here’s my Top 10 links from around the Internet at 10am. I welcome your additions and comments in the comments below. Please send any suggestions for tomorrow’s Top 10 at 10 to bernard.hickey@interest.co.nz We don’t use dead or live squirrels to help us drink coffee.

1. Lloyds Banking Group, which controls Bank of Scotland International, is set to post 13 billion pounds of losses on commercial property, business loans and housing loans, The Times reported.

First-half results due to be posted in three weeks will show that its losses are accelerating, in spite of recent suggestions that the worst of the recession is over.

UBS analysts expect Lloyds to announce a bottom line half-year loss of £6.3 billion as a result of the soaring provisions.

The writeoffs for the first six months of the year would match the losses recorded by Lloyds TSB and HBOS in 2008, as they consummated their disastrous merger. The expected bad debt charge is almost twice what Lloyds paid for HBOS when they came together under the government’s watch last autumn. Total writeoffs for this year at Lloyds could exceed £20 billion.

2. This video after the jump from the American News Project on the drive to audit the Fed is well worth watching. HT Tyler Durden at Zero Hedge

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Back on June 26 I wrote the following about Strategic Finance in an article looking at how the biggest finance companies ranked in terms of our Five Survivability factors (Diversified funding, diversified lending, strong corporate or individual shareholder, an investment grade credit rating and a local bank funding line).

Strategic had none of the 5 survivability factors. Hanover Finance also had none of these factors. Both have now closed their doors.

Strategic Finance is exposed completely to residential property developers, has a (not strong) corporate backer in Allco HIT, does not have a local bank funding line and is exposed almost completely to retail debenture funding. Allco Finance Group, which owns a stake in Allco HIT, is trying to renegotiate its own funding with its banks in Australia and is not in a position to inject capital into Strategic if needed.

Strategic has used up all its NZ$75 million funding line from BOS International (Halifax Bank of Scotland), which does not rank as a local bank. It has said it is confident it can repay maturing debentures from loans as they mature. It has more than four times as much maturing from loans in the next three months than the cash needed to repay debentures maturing over that period.

More than 80% of its loans are capitalising loans and it is currently in the process of looking for a strong corporate backer. One loan to the Hilton Denarau project in Fiji is worth more than 60% of its equity.

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