Bill English says govt moves to take pressure off SCF receiver to force quick asset sales

Bill English says govt moves to take pressure off SCF receiver to force quick asset sales

Finance Minister Bill English wants to avoid fire sales.

By Alex Tarrant

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.

English 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.

Meanwhile, he took a shot at the inadequate infrastructure at the finance company for handling the rapid growth it underwent in recent years.

English also said he hoped to "hear a bit more" from depositors and the community of Timaru and South Canterbury in terms of acknowledgement to taxpayers, who had forked out NZ$600 million for a "business that's actually gone broke".

(Update 7 adds sections 'All that's done is (hopefully) done' and 'Taxpayers deserve acknowledgement'.)

"There is no rush to realise the value of the assets is some kind of fire sale," English said.

He told a news conference in Wellington the receivership and the subsequent immediate repayment of NZ$1.775 billion to investors and South Canterbury's lead creditor would not affect the nation's credit rating.

For Standard and Poor's announcement on New Zealand's sovereign credit rating see here.

New Zealand's debt issuance program would not have to be changed, he said.

See here for results on the under-subscribed government bill tender following the receivership announcement.

English said the government had deliberately moved to take control of South Canterbury by ensuring the receiver would immediately repay prior ranking creditors, including George Kerr's Torchlight. The government loaned the receiver NZ$175 million to ensure prior ranked creditors were taken out. The government is also repaying NZ$1.6 billion to 35,000 investors.

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 government also aimed to take control to ensure the pressure was off the receiver to make quick asset sales, English said.

"As a result of the receivership, the Government is moving swiftly to repay the money owed to South Canterbury depositors under the Crown Retail Deposit Guarantee. We are also taking other steps to reduce the cost to taxpayers and minimise disruption to the wider economy," English said.

Steps the Government had taken included:

* The Crown has nominated the Trustee as the eligible creditor under the terms of the guarantee and will pay the Trustee NZ$1.6 billion in full today. This will ensure depositors and stockholders are paid promptly without the need to apply to anyone.

* The Crown will today make a loan to the receiver of NZ$175 million, which allows it to repay all of South Canterbury Finance's prior ranking debts. Once this transaction is completed it will put the Crown in a position of control, as the first-ranked creditor in the receivership, so we can ensure an orderly and well-managed receivership process.

'Minimum disruption to economy'

"Ensuring all depositors in South Canterbury Finance get their deposits back as quickly as possible will ensure a minimum of disruption to the economy," he said.

English said he expected depositors to be repaid "hopefully" within a month.

"While this will incur an upfront cost, it will ultimately reduce the cost to taxpayers by about $100 million by ensuring the Crown is not liable for interest payments after the date of settlement.

"Furthermore, being in control of the receivership process takes the pressure off the receiver to quickly sell any assets. This ensures the Crown can get the best deal for taxpayers. Businesses that owe money, or are owned by South Canterbury, can continue to operate and there will be a minimum of disruption to both the local and national economy," he said.

“I think people who had been concerned about the impact on land prices, for instance – it shouldn’t be an immediate impact, and maybe not a longer term impact either, depending on how the circumstances roll out.”
 
“South Canterbury will still be operating as a business, with the existing loans in place. With the receiver there running the business, there is no pressure there to call up loans and disrupt the financing arrangements of the many businesses that have borrowed from South Canterbury," English said.
 
"A significant proportion of South Canterbury’s loans are performing well – that is, they’re loans where people are meeting their capital and interest repayments and there’s no reason for that stream of finance into those communities to be disrupted."
 
Cost

"The up front cost to the Crown of repaying South Canterbury's depositors is about NZ$1.6 billion, but we would expect to recover the bulk of that as the receiver sells the assets over time. The final expected net cost to the Crown is already provided for in the Crown Accounts within the overall provision of about NZ$900 million for all companies covered by the scheme."

'Related party loans'

English told the news conference the net cost to the crown was likely to be around NZ$600 million after loans were recovered, however he noted that there could be some unpleasant discoveries once the bad loans were examined more closely.

"In the bad book, you might find there's a number of related party loans in there. There’s a real tangle there between the bad book and him (Allan Hubbard)," English said.

He also revealed that Korda Mentha had been advising the government on South Canterbury since mid 2009.

'Could still be sold'

English said it was still an option for South Canterbury, or part of it, to be sold as a going concern.
 
“If the receiver gets a credible bid, we’d certainly want to hear about it. We’ve got Sandy Maier saying it’s got more value as a whole than as parts, and you’ve had any number of people who, over recent months, have been having a pretty good poke at it.
 
“So they know it reasonably well.
 
“It’s quite possible that now they (a potential buyer) don’t have to deal with everybody – they’ve only got the receiver and the government – that it looks more attractive perhaps it did before."
 
If South Canterbury was not sold as a going concern, then it could take four to five years for the government to work through all the assets to get its money back, English said.
 
'Tough few days'
 
English said it was late last week that this move became a more of a clear option.
 
“The chief executive has been working pretty hard with a menu of investors to see whether he could get a recapitalisation together, and then late last week it started looking like it was, at least, not likely. And probably over the weekend it became clear it was not going to happen."
 
'Repaying everybody'
 
English said the decision to repay even ineligible depositors would simplify matters and help make sure the government had the sole interest in the receivership. However, this decision may not have been taken if the costs were much greater.
 
“In the first place it’s a pretty minor cost," he said.
 
"Out of the NZ$1.6 billion it’s a net cost of about NZ$20 million.
 
"The reason we’re doing this is to simplify the receivership. They would have competing claims alongside the crown, so at a very low cost we can remove their competing claims. 
 
“Look, if the number was NZ$200 million we probably wouldn’t do it." 
 
 
'All that's done, is (hopefully) done'
 
English said he was “pretty much” confident that there would be no more calls on the government's NZ$900 million provision for the deposit guarantee from other finance companies yet to fail.
 
“There’s not many left [that are likely to fail].”
 
On Hubbard, SCF's rapid growth and inadequate infrastructure
 
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."
 
'Taxpayers deserve acknowledgement'
 
“The underlying issue here is not a political point of view," English said.
 
"The underlying issue is a company that has grown fast, without growing its infrastructure to manage a multi-billion dollar enterprise, and has been caught out by changes in the market, driven by the world economy, so it’s not a political matter."
 
“I think what everyone needs to bear in mind here is whatever your point of view about how South Canterbury’s been run, or the personalities, taxpayers are ending up with a bill of NZ$600 million. There (are) a lot of other things we could have used that NZ$600 million for. 
 
"And I would hope that the depositors of South Canterbury, and those who are supporting the company, are grateful for the support of the New Zealand tax payer . Because without that support, Timaru and South Canterbury could have ended up NZ$600 million out of pocket.
 
"I would expect to hear a bit more from that community about their acknowledgement of the tax payer support of that business."
 
"I just think they should acknowledge that taxpayers across New Zealand are putting their hands in their pocket to the tune of NZ$600 million to honour a promise made with a business that’s actually gone broke."
 
 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

42 Comments

Comment Filter

Highlight new comments in the last hr(s).

Wow, I'm impressed - someone has thought through how to handle this very very well!

Good on National? Are you high? It's National that wrongly gave SCF and other risky finance companies the guarantee in the first palce. They had absolutely no right to do that with our money. Why should we be guaranteeing 8% returns to people too lazy to do due diligence before investing in these shoddy companies?

Oh really? So it wasn't under the National cabinet that Treasury offered the guarantee to second rate finance companies just months ago? Idiot.

Hi guys, the extended guarantee came under National in August last year

http://www.treasury.govt.nz/economy/guarantee/retail/extension

The original guarantee was under Labour, but had National's full support.

Cheers

Alex

I have no problem in guaranteeing well capitalised banks. Am I worried about a run on second tier finance companies who shouldn't be in business anyway? No.

@Alex Tarrant: Please ask S+P for their view.

 

Standard and Poor's have downgraded SCF to D for default.

"SCF's 'CC/C' ratings—prior to being lowered to ‘D’—highlighted that there was a strong possibility SCF could default on its obligations. The 'CC/C' ratings recognized a material weakening of SCF's liquidity and cash position such that SCF was in danger of running out of cash. The rating also recognized the lack of progress in recapitalization efforts heading toward the covenant breach waiver deadline of Aug. 31, 2010. Standard & Poor's noted in its release dated Aug. 20, 2010, that the lack of progress in recapitalization had compromised SCF's business viability. Although Standard & Poor's acknowledged that recapitalization and restructuring efforts were being progressed, no rating benefit from these efforts was ever factored into the rating."

cheers

Bernard

That's it ...............I'm starting up a ratings agency........ and I'll do everything to thwart my competitors by rating.........before....... disastrous events occur ....... brilliant..!

And I'll jazz up the terms a bit...like er............T for terminal..!.... followed by ....W for who..?

G fer gurgler

Thanks Bernard, that was a comprehensive answer! My error in not being specific: what S+P thinks about the NZ economy now. Though I suppose it would be churlish to alert them. 

yep like it now got to fit it between t and w.............. Cheers Ruru

Ruru

You're asking the right questions. Here's the S&P view on the NZ sovereign rating. They don't think the SCF collapse will change much.

Here's our story

http://www.interest.co.nz/news/standard-and-poors-says-south-canterbury-...

cheers

Bernard

don't need the fire sales that's for sure - and gives time to sort out the OIC... 

Bear in mind that Timaru is going to be the hardest hit by all this - lost jobs, investments vaporised overnight (for those who owned preference shares in SCF) etc etc

Also bear in mind that house price bubble problem is not a Timaru one - it belongs mainly to Auckland. If it hadn't been for Auckland's over-inflated house prices SCF would have been all good. (PERHAPS!)

Soon the shenanigans in the SuperCity Auckland will put the Timaru Gang to shame..

Watch out for the next episode of "Screw the Citizens'

Democracy is like Team Work......'You get screwed by the Politicians or your Team Mates but say you are enjoying it'

Chaps and chapesses,

Have added in a little update 2.

Cheers

Alex

Hey Alex ....i hope thats a library shot of English..... because if it's not mate ..... he looks like he just got away with murder.

I didn't have a camera with me, so I would say library shot. Exact same seat he was in though, and suit I would say, too, so you're all pretty close to the real deal.

Anyway, we need a few smiles around here after all this...

How did that Monty Python song go? Completely gone out of my head.

calm down boyo word has it Graeme Henry may run for mayor down your way..... so you don't feel too left out.

 How's Robbie doing on the scoreboard........?

No argument there...... Richie will take allcomers in the AB hall of fame

Mr Blobby............your not listening..... put it in your mattress.... that way you may at least get a glimpse of who robbed you.

If folk like me are halfway right about energy, Farmer Will, you'll get your wish.

They might have to learn about hames and swingle-trees, but. Wonder how many of us are left who could teach them?

From my reading on AH/SCF history - he/it had a great deal to do with financing various  irrigation schemes in the south - thus enabling dairy conversion.  It was (IMO) always a flawed vision... wrong for the environment, wrong for the stock.  The mismanagement scenario you describe might just as easily be committed by any type of desperate, over-leveraged farm owner - be they corporate or mum and dad.  Desperate people do stupid things.

Update 5 in now.

Update 6:

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."

Timaru spelt backwards is U-RAM-IT.  I never agreed with these government guarantees from the freakin start.  The government is casually throwing around 1.6Billion like its left over lunch money and there will be some hard realities over the next couple of years as they try and recover that money by getting rid of overpriced assets.  If you invest and take the upside then you should take the downside as well.  But SCF investors wanted all the dessert but none of the potential downside risk.  Far out.... 

Rant over.

Foot in mouth disease!

 http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10670179

 "South Canterbury Finance got itself into trouble by lending money to people who couldn't pay it back and on assets that have no value, with many of the loans now bonfire material," Prime Minister John Key said today.

Well done John...shame you had to tell the truth about the value of the assets..arrrm which assets are you on about John?

Where's Wolly on this now?  He seemed adamant that the government would not allow SCF to be put into receivership, may be he'sa little too adamant and opinionated on things sometimes

Never Uzzam, I just got it arse about face....English has bought out the South Canterbury economy and now controls the purse strings from the Beehive. The GG cash and the extra few tens of millions being thrown about, will likely pork some happy activity down Timaru way and memories will be strong come the election.

Don't expect to see National moving to flog any of the assets any time soon.

Update 7 in there everyone.

English hoping South Cantabrians will acknowledge the taxpayer support, also remarks on the inadequate infrastructure at SCF for such rapid growth.

General gist from Key and English over last two days is they're not too impressed with how the company was run in recent years. Rapid growth without the necessary growth in infrastructure to handle it.

Going to go eat lunch now. 

 

Soon the shenanigans in the SuperCity Auckland will put the Timaru Gang to shame..

Watch out for the next episode of "Screw the Citizens'

Democracy is like Team Work......'You get screwed by the Politicians or your Team Mates but say you are enjoying it'

BE is expecting the people of Timaru and SC to show their gratitude............in Votes to National, of course......

Labour is too wimpish to capitalise on this blatantly political decision.

"And I would hope that the depositors of South Canterbury, and those who are supporting the company, are grateful for the support of the New Zealand tax payer . Because without that support, Timaru and South Canterbury could have ended up NZ$600 million out of pocket."

 

I am a depositor from Wellington.  I would like to take this opportunity to thank the tax payers and people of NZ including myself who have stumped up $400 each to pay back the money I invested in SCF with the Government Guarantee.

 

I am very grateful for your support.

 

Is that ok Bill?

Sam and some others 'I never agreed with these GG's from the start'...

Just as well you weren't the govt then, once Ausy brought in GG for their financial institutions, NZ had no choice, unless you wanted a massive run on banks in NZ as the money poured out of the country to Australia.

Now there is no choice but to honour the commitment ,unless you wanted NZ to be an international pariah which nobody would have trust in ever again.

I'm no real fan of Mr rort, Bill English, but he and the PM seem to be displaying a level head, which is more than a lot of emotive clap-trap being posted by quite a few on this site.

Sandy Maier has told on Campbell Live that SCF had lost nearly 700 million by investing in real estate. Who actually received these funds, and where did they spend it ? How much of it has gone overseas ? Is the Government going to track these funds ? And also are they going to investigate whether these loans were made on genuine business proposals or on inflated values/cooked-up proposals ? Is it all fraud, deliberately done to take money out  ?

Who benefited ? 

There should be serious investigation into these money trails.

Also, based on the experience of ALF's assets disappearing in value after taking over of Handover, what is the assurance that even the 1 Billion the government is expecting to recover in 3/4 years will not dwindle down to just 200 or 300 million ?

 

In some cases no one benefited.

If the market value of your property goes down and you still own it, no one gets the money that the property has dropped. It just drops and the equity evaporates.

No one stole it.

WOW! NZ must be loaded because we now have 'welfare' for dumbass investors! Well done Bill & John, You really know how to buy votes!

Let's ALL set up finance companies! totally risk free thanks to the NZ taxpayer who seems to have bottomless pockets of borrowed funds coming in from all corners of the globe. Interest attached ofcourse but DON"T WORRY, your kids pay that, NOT YOU!
 

If Cactus Kate ever gives up law she could easily jump into journalism and stand among the best. Insighful piece here, which left me asking why there isn't an exporting business investment guarantee scheme? Anyway, enjoy:

http://asianinvasion2006.blogspot.com/2010/08/ahubb-over-hotch.html#links

(Err, apologies for living on the South Island. I'm sure we'll all get over it eventually.)

 

I thought these last three paragraphs were interesting:

"Asked whether it had been cynically exploiting the government guarantee, Mr Maier replied: "It might have been cynical, it might have been merely incompetent... it probably violated a lot of prudent lending criteria."

Go back to 6.3 of the DOG's and tell me that SCF in the guarantee period was run in a "proper, business like, efficient and prudent manner". It's own CEO, in the final foreign accented "fuck you" to New Zealand taxpayer has now publicly admitted it was not.

There is preference for South Islanders. Bill English is incorrect (well let us face facts - teling porkies) in this interview. The taxpayer did not have to pay SCF anymore than they would have had to for Hanover or Blue Chip. SCF took deposits for and moved $700m (or 41% of total) of their lending to more risky criteria even into the the hyper-risk of mezzanine lending. They breached the guarantee and their own CEO said so."

(Do read the whole article folks.)

Anyway, I always find NZ politics  easier to understand when I think of our gubmints (either shade) as 'The County Council' of the most southern of  England's 'Home Counties'. Things just seem to make a lot more sense and are not so surprising, regarding competence, connections and cronyism.

 

Cheers, Les.

www.mea.org.nz

Justice, are you trying to be the loudest drunk in the bar? The govt had no choice in 2008 to have the GG and now it has no choice but to honour it, end of story.

Hmm so I dont know where the farms loaned on are (that are now Govt owned until sold) but if I assume they are in Canterbury proper does this statement hold any merit:

"The Govt now owns lots of farms in Canterbury AS WELL as controls the water supply?"

Seems like the SCF move is/was part of a larger plan to my eyes.

It could be worse though couldnt it?

I mean a fire sale to Sanlu or similar seems a heck of a lot worse.

Not justifying anything just saying it could be worse.