By Gareth Vaughan
New Zealand's largest independent finance company, South Canterbury Finance (SCF), has called in receivers McGrath Nicol after failing to secure new investors.
The move will shock the South Island rural economy and triggers a NZ$2 billion payout to investors under the government guarantee, including to speculators who bought bonds on the market at effective yields of up to 40%.
"A lot of bets in the casino paid off big time today," Chief Executive Sandy Maier told a news teleconference.
South Canterbury, which has been operating as a finance company in Timaru since 1926, threw in the towel shortly after 9.30 am in a statement to the NZX saying it had been unable to complete a recapitalisation and restructure and Kerryn Downey and William Black of McGrath Nicol have been appointed receivers to the company and an array of subsidiaries.
South Canterbury's assets of almost NZ$2 billion are equivalent to around 0.8% of GDP, while Lehman Brothers' US$600 billion of assets was worth around 0.5% of US GDP. It is New Zealand's biggest corporate collapse since the NZ$2 billion collapse of Equiticorp in January 1989. The New Zealand dollar fell below 70 USc early on Tuesday evening in the wake of the collapse and is down more than 1 US cent since the announcement. A Treasury bill auction by the government was also poorly received with bids of just NZ$305 million in the NZ$350 million auction.
Early on Tuesday afternoon Allan Hubbard, the owner and the driving force behind SCF's growth into the largest South Island based financial institution, issued a statement attacking the government's decision in June to place his personal financial affairs under statutory management as the Serious Fraud Office launched an investigation.
'Knee jerk, sledgehammer response'
Hubbard said he believed he could have helped save the company if he hadn't been sidelined as a director and his assets hadn't been seized.
"Surely they realised that by freezing me out and taking over control of my affairs that they would be dealing a body blow to South Canterbury Finance?," Hubbard said in the statement.
"Instead they bring down the boom, take me out, freeze my access to my personal funds and now so many families, small businesses, farms and enterprises, throughout the South Island in particular, are going to be seriously suffering,” he said.
“It was an unnecessary, knee jerk bureaucratic response and it required a strategic solution not a sledge hammer.”
(Updates add CEO Sandy Maier's comments including NZ$2 billion government tab, Treasury comments including major change to pay all depositors in failed companies with guarantees including retrospectively, McGrath Nicol appointment, Hubbard statement, Bill English's pledge to avoid fire sales, S&P downgrade of SCF to D, Scales
Corp's reassurance it is still operating as normal, S&P's comment that NZ's sovereign rating is unaffected, poor NZDMO auction of T-bills, background, further detail).
SCF is covered by the Crown retail deposit guarantee scheme. It has about NZ$1.6 billion worth of debentures on issue and about 35,000 depositors according to Treasury. It also has NZ$250 million worth of bonds listed on the sharemarket which are also covered by the Crown guarantee. However, SCF's preference shareholders aren't covered.
Acting Secretary to The Treasury Gabriel Makhlouf said all depositors and stockholders on SCF's register of debt securities will be repaid by the Crown.
Makhlouf said SCF trustee Trustees Executors has been nominated as the eligible creditor under the terms of the Guarantee and the Crown today paid the trustee in full.
“Depositors and stockholders do not need to make a claim to The Treasury because the Trustee has made a claim on their behalf. All depositors and stockholders on South Canterbury Finance’s register will be repaid,” Makhlouf said.
Just NZ$7 million of cash
SCF chief executive Sandy Maier told a media briefing despite working until 4am this morning with three parties on potential rescue deals, agreement on a combination of price and terms proved elusive. Maier said despite "fantasies" reported in the media, SCF had never sought additional equity from the Government, merely worked with it in terms of the Crown guarantee. The receivership decision was largely taken yesterday.
Maier said SCF had just NZ$7 million of cash when he took the helm last December and about the same amount last night. The three parties SCF had been talking to about potential rescues included a large offshore South East Asian/US trust, a consortium of local and overseas investors and an offshore investment group which has previously had interest in New Zealand. He estimated the total Crown tab for SCF at about NZ$2 billion.
Maier noted the company was facing a considerable wall of debenture maturities in October when the initial Crown retail deposit guarantee scheme was due to expire. He said SCF owner Allan Hubbard's statutory management had damaged confidence in SCF through brand, but not a technical, connection.
SCF, whose credit rating was recently downgraded to CC by Standard & Poor's, had needed to raise at least NZ$180 million worth of new equity by today to bring it back in line with its Trust Deed after receiving a waiver to a Trust Deed breach from Trustees Executors earlier this year. Maier confirmed SCF hadn't applied to the trustee for an extension of its waiver breach which expired today.
Needed between NZ$100 mln and NZ$300 mln
Maier said the company had needed between NZ$100 million and NZ$300 million.
"It requires some bravery today to invest that amount of money especially in a finance company," Maier said.
However, SCF had received offers in that range but the terms and details proved sticking points. Other issues included some parties wanting to charge for doing due diligence on SCF and wanting to negotiate break fees. All up SCF had talked to about 15 potential rescuers.
Maier said SCF had received offers on some individual assets at about 35 cents in the dollar.
As of December 31 last year, SCF had about NZ$1.75 billion of loans outstanding.
Read South Canterbury Finance's announcement below:
South Canterbury Finance Limited announced today that it has been unable to complete a recapitalisation and restructure. As a result, the Company would have been unable to certify to Trustees Executors Limited, in accordance with the terms of its debenture trust deed with Trustees Executors Limited, that it was compliant with various financial covenants under the debenture trust deed for the financial year ended 30 June 2010.
Accordingly, South Canterbury Finance Limited has requested Trustees Executors Limited to appoint a receiver in respect of the whole of its undertaking and assets, and Trustees Executors Limited has done so. A further announcement will be made by the Company in due course.
And read the company's second statement:
Kerryn Downey and William Black of McGrath Nicol have today been appointed receivers to South Canterbury Finance Limited and the following of its subsidiaries:
- Belfast Park Limited
- Tyrone Estates Limited
- Braebrook Properties Limited
- FACE Finance Limited
- Fairfield Finance Limited
- Flexi Lease Limited
- Rental Cars Limited
- Galway Park Limited
- Helicopter Nominees Limited
- Hornchurch Limited
- SCFG Systems Limited
- Sophia Investments Limited
- Southbury Insurance Limited
'Prompt' payment predicted
Makhlouf said when an up-to-date register of debt security holders was available, the Crown and SCF trustee would arrange "prompt payment" to everyone on the register.
"We expect an orderly and prompt payment to South Canterbury Finance depositors and stockholders.”
Because the Trustee has been nominated as the eligible creditor, some depositors and stockholders who may not have previously been repaid will now be repaid by the Crown.
"While this will incur an upfront cost, it is cheaper overall for the Crown because it facilitates immediate payout of depositors and avoids the need for the Crown to make future interest payments. Criteria relating to citizenship and tax residency do not apply and depositors and stockholders will not be assessed using those criteria," said Makhlouf.
"The criteria for being repaid is that you are on the South Canterbury Finance register of debt securities at the date of default. Ordinary shares and preference shares issued by South Canterbury Finance are not eligible for repayment. Debt securities eligible for repayment include: call deposits, term deposits, non-guaranteed deposits, debentures and bonds issued by South Canterbury Finance."
Treasury said it was facilitating repayment of all of SCF’s prior-ranking debts along with all debt-security holders in order to put itself first in line to be repaid by the company’s receivers, behind only those protected by statute. Makhlouf said this means it can ensure an orderly and well-managed receivership.
"Taxpayers will get the maximum value the receiver can recover from South Canterbury Finance.”
“This is the cleanest, quickest way to achieve an orderly and well-managed receivership that minimises the cost to taxpayers and minimises the impact on South Canterbury Finance suppliers and the customers it has lent money to,” Makhlouf added.
Without becoming the first-ranked creditor, there was a significant risk that the Crown would not recover as much for taxpayers as it could because of the scale and complexity of the SCF receivership. By creating the conditions for an orderly and well-managed receivership, it removes pressure from the receiver and protects taxpayers’ interests.
Treasury makes major changes, will payout for all depositors of failed companies with guarantees, including retrospectively
Furthermore, Makhlouf said, the Government had also decided today it would repay all depositors of guaranteed companies that default, including those that have already defaulted, regardless of any previous eligibility criteria that were in place for the Retail Deposit Guarantee Scheme.
The scale and complexity involved with repaying SCF depositors altered the costs involved in running the guarantee scheme. Therefore repaying all depositors of all guaranteed companies that default will save taxpayers from having to pay ongoing interest that otherwise would have accrued as thousands of claims were assessed, processed and paid.
“Criteria relating to citizenship and tax residency will no longer apply and depositors will not be assessed using those criteria. The criteria for being repaid is that you are on the register of debt securities at the date of default,” Makhlouf said.
Debt securities eligible for repayment include: call deposits, term deposits, non-guaranteed deposits, debentures, and bonds. Equity securities such as ordinary shares and preference shares remain ineligible for repayment under the Crown guarantee. He said the Government’s decision to repay all depositors of Crown guaranteed financial institutions that have defaulted means repayments will be made to some depositors who may not have previously been eligible for repayment.
"The decision applies for defaults by approved institution from the start of the current Retail Deposit Guarantee Scheme started through until it ends on 12 October 2010. The following eight Crown guaranteed institutions have defaulted: South Canterbury Finance, Allied Nationwide Finance, Mutual Finance, Viaduct Capital, Vision Securities, Strata Finance, and Mascot Finance. The Treasury will publish details in due course about the process for repaying previously ineligible depositors."
However, eligibility criteria that include citizenship and tax residency will continue to apply in the event of a default after October 12, 2010 by entities approved for the extension to the Guarantee scheme. The extension to the Retail Deposit Guarantee Scheme runs from October 12 to December 31, 2011.
'No fire sales'
Meanwhile, Finance Minister Bill English has downplayed any impact from South Canterbury Finance's receivership on the wider economy or on New Zealand's sovereign credit rating. He argued the government had taken decisive action to control the receivership and pay back investors quickly to avoid disruption or any fire sale of dairy farming assets.
"There is no rush to realise the value of the assets is some kind of fire sale," English said. See the full story here.
Downgraded to D
Also, Standard and Poor's has downgraded South Canterbury Finance to D for default. But it said New Zealand's AA+ sovereign rating was not affected. See the full story here.
Fruit packaging and warehousing company Scales Corporation, which is owned by South Canterbury Finance, issued a statement saying it was not subject to the receivership and it made a NZ$10.1 million pre-tax operating profit for the year to June 30 just completed. Scales saw further profits in the year ahead.
The Receiver is now expected to sell Scales, along with other South Canterbury assets such as HNZ, New Zealand's biggest helicopters business, and a third of Dairy Holdings, which is New Zealand's largest dairy farming group.
English said he thought Allan Hubbard would be "as distressed as anybody" about the receivership today.
"It’s not something that he would have wanted, but the combination of the rapid growth growth of South Canterbury Finance, without the adequate infrastructure to run such a large organisation and a sharp downturn in market conditions, has meant he’s found himself in this position.
"As I understand it, there’s been a lot of discussion with Mr Hubbard over the last 12 months over his own affairs, the affairs of South Canterbury and what contribution he could make to sorting those out. "I think sometimes that’s been helpful and sometimes it hasn’t."
“There’s been ample opportunity for the owners of the business to save it. Mr Hubbard himself has made considerable personal commitments, which I think have been widely respected in the community and in the financial community.
"However the options have simply run out."
English delays overseas trip, Hubbard statutory management, Kerr's windfall
News of the receivership comes after Prime Minister John Key said yesterday that Finance Minister Bill English had postponed an overseas trip so he could deal with the resolution of the SCF situation. It also comes as the Serious Fraud Office deepens a probe into SCF's owner Allan Hubbard focusing on two companies he runs, Aorangi Securities and Hubbard Management Funds, which raised money from the public.
Hubbard has been in government appointed statutory management since June. The statutory manager, accounting firm Grant Thornton, released its second report last Friday. The report said there was an "alarming gap" between Aorangi's income the amount it owes investors and that Hubbard had over stated Hubbard Management Funds' position by at least 25%.
SCF's receivership should mean a windfall for the Pyne Gould Corporation owned, George Kerr chaired Torchlight Investment Group. Torchlight contributed NZ$15 million towards a NZ$100 million loan it arranged for SCF earlier this year. The loan ranks ahead of SCF’s debenture holders under the finance company's trust deed and means Torchlight has a prior charge on up to NZ$151 million or 7.2% of SCF's assets.
The demise of SCF brings to 61 the number of finance companies, investment funds and other entities and financial products that have failed over the past four years, putting about NZ$8.5 billion worth of investors' money held in about 239,000 accounts on the line. See our Deep Freeze list here.
Additional reporting by Alex Tarrant and Bernard Hickey.
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