South Canterbury registers new prospectus, but Hubbard and non-core assets to go (Update 5)

South Canterbury Finance has registered a new prospectus, allowing it to start taking in money again from investors. But its prospectus discloses Allan Hubbard will step down as Chairman within 12 months and that will divest non core assets, including its major stake in New Zealand's largest corporate dairy farmer Dairy Holdings and in South Island Farm Holdings, which has 20 dairy farms. (Update 5 includes final prospectus, as initial document did not contain pages 44-74: 'South Canterbury Finance and charging subsidiaries financial information' and 'auditor's report'.) The prospectus also details plans for South Canterbury to borrow up to NZ$75 million from an unidentified third party that would put a new prior ranking charge over its assets and this would be used to repay US lenders US$100 million over the next 6 months. It also disclosed South Canterbury had NZ$41.3 million of cash and NZ$47.6 million of realisable investments as at September 30. More details and the full prospectus are below. We welcome comments and insights from readers on the prospectus below.

South Canterbury is offering 8% for debentures renewed up until October 11 next year when the current guarantee expires. It is offering 8% for two years and 8.5% for three years and longer. This is just 2% more than being offered by investment grade rated banks.  See all bank and finance company deposit rates for 1 year and more here. South Canterbury Finance chairman Allan Hubbard said South Canterbury would apply to be in the extended deposit guarantee scheme. "We have had to attend to a number of matters in recent weeks which caused delays in the registration of the prospectus. We very much appreciate the patience of our loyal investors and customers and look forward to their continued support," Hubbard said. "Further announcements will be made as we evolve our restructuring and recapitalisation plans." The prospectus also includes many details about past deals with related parties, the state of the loan book and the plans to inject more equity into Southbury Group, the parent company of South Canterbury that is owned by Allan Hubbard. These include: * Southbury Group has agreed to pay the US private placement noteholders a refinancing fee of $US15 million by the end of  March next year. * The NZ$75 million that South Canterbury plans to borrow will be used to repay the US private placement holders * As at September 30, South Canterbury had existing prior ranking charges of NZ$34.1 million and can borrow up to a further NZ$127 million by way of prior ranking charges. * South Canterbury has been trading profitably since June 30 * South Canterbury has met its obligations to creditors since its stopped taking in new funds by selling assets and by collecting interest and repayments on its loans * Southbury Group plans to raise NZ$40 million to NZ$75 million by raising "additional equity or convertible equity by way of a private placement to selected investors." *South Canterbury "understands that its parent also intends proceeding with a wider capital raising once the proposed private placement has been completed and that further additional equity is proposed to be injected into the Company following that wider capital raising." * South Canterbury plans to sell a range of non-core assets over the next 6-12 months. * "The Dairy Holdings Limited shareholding is, in the Company's view, a high quality asset and is expected to attract wide-spread interest should the Company decide to reduce, or sell all of, its shareholding in that company. South Island Farm Holdings Limited owns shareholdings in some twenty dairy and other farms across the South Island. In the medium term, the Company is likely to seek to divest its holding in South Island Farm Holdings Limited to ensure the Company is able to meet proposed Reserve Bank capital requirements for non-bank deposit takers." * South Canterbury plans to reduce its related party lending by up to NZ$50 million by end of June 2010 * South Canterbury plans to appoint new independent directors and an independent chairman within the next 12 months * It will review its lending and credit approval processes and systems "in light of adverse market conditions" * South Canterbury will not be "making any new capitalised lending in the property development sector other than in very exceptional circumstances and then only where the loan is extremely well secured." * South Canterbury "intends re-focusing its lending operations on its traditional business, plant and equipment, consumer and rural lending areas and winding down and, where possible, divesting its exposure to property development lending." * 79% of South Canterbury's business loans (including manufacturing, professional services, fishing, tourism, hospitality and importing and exporting businesses) are interest-only loans. * At June 30 impairment provisions for business lending represented 3.7% or NZ$21 million of the total NZ$618.8 million in business loans * "Over the last 12 to 18 months, the Company has made a number of larger loans to corporate borrowers reflecting, to a large extent, the relative absence of liquidity in the mainstream banking sector." * "In the future, 90% of its business loans will be for amounts of less than $5 million with the bulk being below $1 million. The focus, in the sector, will be on loans in the provinces to well-secured, small businesses with loan exposures of less than $1 million." * 50% or NZ$310 million of South Canterbury's business loans are secured by second ranking or subsequent charges * South Canterbury had NZ$485.7 million of property loans as at June 30 with 12 loans in excess of NZ$10 million each, including the biggest loan being to a hotel business for NZ$44 million. * Almost all the property loans are interest only and most of those are capitalising loans. * About 10% of the property loans were impaired at June 30. * 43% of its property loans are secured by second mortgages * "The Company significantly reduced its lending of this nature in early 2008 but has been required to continue funding development costs for existing borrowers to enable the completion of projects. At the time of origination of those loans, there were clear exit strategies, mainly involving the sale of the project. However, in many cases the exit strategy has not eventuated for a variety of reasons such as defaults by purchasers and the failure of the developers to complete subdivisions in time." * 19% of South Canterbury's NZ$178.2 million of rural loans are secured by second mortgages * "The Company's credit approval processes were reviewed and amended in July 2009 to provide for a more rigorous loan application and credit approval process than was the case previously." * South Canterbury has established a new independent credit committee * South Canterbury had past due loans at June 30 of NZ$132.3 million or 8% of its NZ$1.63 billion of loans, while NZ$301.2 million or 18% of the loan book is impaired * South Canterbury has shares and investments, including NZ$113.5 million invested in NZX listed companies. * South Canterbury also has NZ$67.2 million invested in South Island Farm Holdings Ltd, "the latter being acquired by South Canterbury Finance as partial consideration for the purchase from the Company of non-performing property loans in October 2008 by Mr A.J. and Mrs M.J. Hubbard. All of those loans were purchased for their face value." * At June 30 South Canterbury had NZ$220.3 million or 14% of its loans being related party loans, including loans to entities related by directorships and those linked to Allan Hubbard's Southbury Group. * "The principal related party loans included a $39.1 million loan to Kelt Finance Limited (a 75% owned subsidiary of the Company that is not currently part of the Charging Group), a $75.1 million loan to South Canterbury Finance's parent, Southbury Group Limited (which loan has subsequently been reduced to $65.2 million via a principal repayment of $9.9 million post balance date), and loans of $20.2 million, $15.3 million and $12.5 million to Helicopters (N.Z.) Limited, Plum Duff Limited and Commtest Instruments Limited, respectively." * The Company has borrowings of $919.2 million which are due to be repaid by 30 June 2010 and a further $255.4 million of borrowings which are due to be repaid prior to the expiry of the current Deposit Guarantee Scheme." * "The directors of the Company are of the view that the Company will, through the issue of Stock and Deposits under this Prospectus and the realisation of assets, be able to repay its borrowings as and when they fall due for repayment. The Company has a long and successful history of utilising the domestic debenture funding market to generate liquidity to meet its financial commitments." * South Canterbury's reinvestment rate fell to 60% by the end of June from 72% at the end of December. * "The Company attributes this fall in reinvestment rates principally to the interest rates it was offering compared to those offered by other entities which had the benefit of a guarantee under the Deposit Guarantee Scheme. The Company is confident that by offering competitive interest rates, it will be able to improve its reinvestment rates over time and, thereby, raise the funds required to enable it to meet its commitments through the issue of Stock and Deposits." * "If the Company is unable to realise assets (including loans) as and when required, or to raise sufficient funds from the issue of Stock and Deposits under this Prospectus, to enable it to repay its indebtedness as it becomes due during the term of the current Deposit Guarantee Scheme, then that will constitute a "Default Event" under the Crown guarantee with the result that, subject to the terms of the Deposit Guarantee Scheme, all eligible investors would be entitled to payment under the terms of the Crown guarantee irrespective of whether or not their Stock or Deposits were due to mature before or after the expiry of the Deposit Guarantee Scheme." * "South Canterbury Finance agreed on 9 November 2007 to sell its 12.75% shareholding in Dairy Holdings Limited to Southbury Group Limited with effect from 30 November 2007. * "On 30 June 2009, the Company acquired a 33.6% interest in Dairy Holdings Limited from its parent company, Southbury Group Limited, for $75.73 million. The purchase price was met, in part, through the issue of 40 million new ordinary shares in the Company to Southbury Group Limited at an issue price of $1.00 each (which shares were credited as fully paid) with the balance of the purchase price being paid by the Company in cash. This transaction was reviewed by an independent expert approved by Treasury in accordance with the terms of the Company's guarantee under the Deposit Guarantee Scheme. The independent expert confirmed that the transaction was on arm's length terms and that the value paid by the Company for the interest in Dairy Holdings Limited represented fair value for the Company." * "The Company entered into a Deed of Underwrite and Guarantee with Mr A.J. and Mrs M.J. Hubbard, dated 14 August 2009, under which Mr A.J. and Mrs M.J. Hubbard agreed to underwrite losses which the Company may incur in respect of certain specified loans, up to a maximum aggregate amount of $25 million, by procuring the payment of that sum, or the transfer of assets of that value, to the Company. The obligations of Mr A.J. and Mrs M.J. Hubbard under the Deed of Underwrite and Guarantee are also limited to the value of the assets of North Wind Holdings (2009) Limited. Before entering the Deed of Underwrite and Guarantee, the Company satisfied itself as to the financial position of North Wind Holdings (2009) Limited and, therefore, the ability of Mr A.J. and Mrs M.J. Hubbard to meet their obligations under the underwrite and guarantee from the assets of North Wind Holdings (2009) Limited. Under these arrangements, the Company also entered into an Amending Deed of Underwrite and Guarantee providing for Subordination, dated 25 September 2009, under which the Company is able to ensure that North Wind Holdings (2009) Limited maintains sufficient net assets to enable Mr A.J. and Mrs M.J. Hubbard to meet their obligations under the Deed of Underwrite and Guarantee." * "In the Company's view, if the credit rating is downgraded further, this may further impact the Company's ability to raise funds from local and offshore institutions and investors under its offers of Stock and Deposits with the result that the Company may not be able to raise the funds it requires to fund its business activities and meet its payment obligations in respect of the Stock and Deposits offered under this Prospectus. A further downgrade may also impact on the Company's eligibility to participate in the extended Deposit Guarantee Scheme (for further details refer to pages 31 to 32 of this Prospectus) and its ability to operate as a non-bank deposit taker under the Government's proposed new regulatory regime for non-bank deposit takers." Here is the full updated prospectus: Final South Canterbury Prospectus, Oct 20, 2009