By Bernard Hickey Renowned South Island investor and financier Allan Hubbard has moved to bolster the balance sheet of South Canterbury Finance by injecting his 100% ownership of Helicopters (NZ) and his 64% stake in Scales Corp into South Canterbury in exchange for new South Canterbury shares worth NZ$152.5 million and NZ$10 million in cash. "We've had a shareholder who instead of walking away has said: 'Yes, I'm going to massively support this company'," South Canterbury and Southbury Holdings Chief Executive Sandy Maier told interest.co.nz. "He has increased the equity and his investment in South Canterbury in a very large way," Maier said. The injection of equity came as South Canterbury Finance released its half year results showing a NZ$154.9 million net loss after it booked NZ$229 million of losses on asset realisations and further impairments on loans. The result and the deal announced today also breached two covenants of South Canterbury's Trust Deed, but South Canterbury said its trustee Trustees Executors had granted a waiver from compliance with these covenants. They related to having no greater than 35% of shareholder funds being to a single party (Helicopters) and the level of equity investments being greater than 100% of shareholder funds.
South Canterbury Finance owes more than 40,000 investors over NZ$1.5 billion and its survival depends on its ability to get through this year with an extended government deposit guarantee and a further capital injection that Maier said South Canterbury was still working to obtain with brokers Forsyth Barr. It may also require asset sales. South Canterbury Finance is heavily involved either as an owner or a lender to large swathes of the rural and tourism industries in the South Island. Its failure would shake the South Island economy and hammer the government's finances. South Canterbury's investors are currently covered by the government guarantee and the government has been heavily involved in monitoring South Canterbury's efforts to recapitalise and rebalance itself after heavy losses in property development lending. The government has already made a provision in its December 31 accounts (Note 19, Page 32) for net losses of NZ$776 million from finance companies defaulting under the scheme. Guarantee extension crucial Treasury is now considering South Canterbury's application for inclusion in the extension of the scheme from early October this year until the end of 2011. South Canterbury currently has a BB+ credit rating from Standard and Poor's, which is above the BB threshold set by the government as necessary for inclusion in the scheme, however Standard and Poor's has a negative outlook on the rating and has yet to comment on the latest deal. Maier said the inclusion of Helicopters and Scales added valuable earnings-generating assets into South Canterbury Finance and the price paid by South Canterbury had been judged as fair and at 'arms length' by independent advisors appointed by the government. "The earnings contributions of these two successful companies are now part of South Canterbury Finance, which materially and substantially changes the earnings profile and prospects for the Company," Maier said. In the year ended 30 June 2009, Helicopters (NZ) reported earnings before interest, tax and depreciation (EBITDA) of NZ$30.2 million and net profit after tax (NPAT) of $16.2 million. Scales Corporation reported EBITDA of NZ$35.4 million and NPAT of NZ$13.6 million. The combined results for Helicopters (NZ) and Scales Corporation were EBITDA of NZ$65.6 million and NPAT of NZ$29.8 million. This would imply South Canterbury paid 5.5 times historic profits for the businesses. Profit caution However, South Canterbury warned that profits from Helicopters and Scales may not be so strong in the current year. Helicopters NZ provides services to the mining, agriculture and tourism industries in New Zealand, Australia and Vietnam. Scales runs packing, coldstores and shipping agency operations for apple and other primary exports in New Zealand. "The results for the current financial year will reflect more challenging market conditions and the usual uncertainties regarding currency and export realisations," it said. Maier said the forecast improvement in the Fonterra payout was helping economic activity in the regions where South Canterbury operated. "The rural sector is benefiting from the upturn in the price of milk solids which has in turn had a flow-on effect to businesses in provincial areas where the bulk of South Canterbury Finance's lending customers and assets are located," he said. "The half year result incorporates a total of $229 million of losses on asset realisations and additional allowances for impairment. The underlying trading results show a breakeven result for the six months which is creditable given the significant disruption and costs experienced during this period." NZ$13.6 million in cash Maier said South Canterbury's cash holding were currently "reasonably robust at this point in time. At this point I'm comfortable with it." Maier said there had been a steady inflow of funds in excess of redemptions through January. "The re-investment of funds has also continued at satisfactory levels as qualifying investors continued to seek the benefit of the Company's attractive rates and Crown retail deposit guarantee scheme," he said. South Canterbury had cash on hand of NZ$13.6 million at December 31, down from NZ$322.5 million a year earlier and NZ$123.3 million six months earlier. South Canterbury is currently offering 7% for a guaranteed deposit for 5 months until the end of the deposit guarantee. Asked if South Canterbury could survive without a government guarantee, Maier said: "If comes back to the government guarantee. Today's operation will clearly help," he said. He said the lack of a government decision on the extension of the guarantee was clearly an 'inhibiting' factor for South Canterbury and some other finance companies. He said it was not clear when a decision was due on both the guarantee and Standard and Poor's credit rating, which would no doubt be reviewed after this latest deal. South Canterbury 1st Half Result