By Bernard Hickey
Sometimes it pays to take some pain now rather than store up more pain for later.
The government's decision not to support a recapitalisation plan for South Canterbury Finance was the right one. Receivership was the cleanest, simplest and ultimately safest option for both taxpayers and investors.
The government will now have to pay out around NZ$1.6 billion to 35,000 depositers in South Canterbury Finance that were covered under the extended guarantee scheme. Some investors who owned preference shares will be wiped out. Allan Hubbard's equity in South Canterbury Finance will be wiped out.
But now the government will be in complete control of South Canterbury Finance's morass of lending and funding. That is a good thing and avoids the sort of corporate no-mans land that proved so disastrous for Strategic Finance, Hanover Finance and St Laurence investors.
The government has done the right thing by choosing not to extend and pretend in the same way that depositers in those other finance companies did.
Now the receivers and liquidators can get under the hood of the South Canterbury empire and work out what Allan Hubbard was really up to. They can join the dots with the other dealings, if any, he has done with Southbury Holdings, Aorangi Securities and Hubbard Management Funds.
It became increasingly clear with the second receivers report from Grant Thornton on Friday that Hubbard's affairs were a very complex intermingling of affairs that would take years to unravel.
Hubbard needed to be removed completely from the situation and for there to be no doubt about who owns or controls what. A receiver and liquidator will protect the taxpayers' interests.
The Serious Fraud Office's decision announced yesterday to extend and deepen its investigation of Allan Hubbard's affairs may well have been the final nail in South Canterbury's coffin.
It was clear from Prime Minister John Key's comments yesterday about the administrative and institutional mess inherited by CEO Sandy Maier that he was no fan of the way Allan Hubbard had created and run the business as part of his own charitable small business empire. Hubbard was making no interest 'helping hand' loans to young farmers and then mortgaging his own assets to make the interest payments. He also ovestated assets in Hubbard Management Funds, including what had been invested where and how much cash was on hand.
Tough but correct decision
The government was right not to choose to extend the life of South Canterbury Finance and pretend there was something left to save after the expiry of the guarantee at the end of 2011.
At the end all that was left was a damaged brand and a very damaged loan book.
It certainly did not have a future as a traditional finance company backed by investments from Mums and Dads in debentures. That model is now broken utterly for any institution that is not a bank or investment grade company.
More than a third of South Canterbury depositers were Hubbard loyalists who were likely to have left the company once Hubbard was removed. He was never going to be a part of the company's future in the wake of the SFO investigations.
More than a third were 'rate chasing' government guarantee investors who jumped in after October 2008 to get hold of the 'free money' returns of over 8% that were guaranteed by the government.
Some would argue the advent of the government guarantee exacerbated South Canterbury's problems because it triggered a flood of new money into the finance company. CEO Lachie McLeod then deployed it in a rash of lending to property developers and struggling farmers. That was eventually disastrous for South Canterbury.
The final group of investors would have looked at South Canterbury as a CC rated finance company without a guarantee and decided it was too risky.
That would have left a much reduced institution without much to lend. Even with the backing of new private investors, South Canterbury Finance would not have been able to compete hard with the banks.
Rural land prices in the spotlight
Now, unfortunately, the pain will begin for the South Island rural economy.
South Canterbury owns a third of Dairy Holdings, which is New Zealand's largest dairy farm company with 72 farms that produce more than 1% of Fonterra's supply. It also owns fruit packaging and warehousing company Scales Corp and HNZ, which is New Zealand's largest helicopters company.
It also has close to NZ$2 billion of loans out there in the rural economy, backing farms, contractors and small businesses in provincial centres.
Hubbard's Aorangi also has around NZ$130 million of loans outstanding with 25 farms.
It is possible there will be a series of dairy farm sales, particularly of the heavily indebted marginal conversions on irrigated land. That may slice prices sharply lower and force banks to look at the valuations of other similar farms.
But this was a process that had to happen.
New Zealand could not afford another zombie institution to stagger on allowing New Zealand's over-indebted rural sector to continue to extend and pretend that everything would be alright when land prices started rising again.
For these farmers, their dream of highly leveraged capital gains on converted dairy farms is over. Rural debt is now at over 500% of rural output. That is utterly unsustainable.
Rural New Zealand is about to start deleveraging in earnest. South Canterbury's demise may prove the seminal event in the history of New Zealand farming.
It has already extended the amounts owed to 239,000 finance company and investment trust investors in our Deep Freeze list to NZ$8.5 billion. See the full Deep Freeze list here.
Your view?
26 Comments
Yes it was like pulling teeth anononno...bet the man from Dipton cut it from the screen and nailed it to the concrete wall in his 9th floor cell.
Thing is though...when you biff a big rock into a little wee pond...there are some awful shock waves in all directions...going on and on and on.
Me thinks this will put the chill up the backs of those who have more than 250K invested in the finance companies that are set to carry the GG past the change over date in Oct. You watch as the loot makes an exodus. That too will be like a bloody big rock hitting the same wee pond.!!
Clear summary,thanks Bernard.Do you believe the government is prepared to see a realligning of dairy land prices and so beef and sheep land , that will make all of our banks level of security look dangerous ?Or will we see another fudge of underlying problem.
Am a great fan of young ,new farmers getting a chance to revitalise our primary overseas income earner, but unless the realligning happens the scene looks grim despite present returns.
Sounds like Saint Alan is going into damage control mode. I can't wait to see what his delusional band of followers have to say about today's events. With luck, they'll all have their own savings at risk here, so they can share in the fisting along with the rest of us tax payers.
Thought I'd repost this here as the other thread is as empty as the SFC office and I got lonely.
Now Mr SFO what we'd like to .......know......is who....... made up the bulk of eligible payouts through the trust.
I mean that's a lot of serious mom n pop loot considering the environment surrounding Finance Company instability.
And the criteria covers off shore depositors..................we must not offend....
Their could be some Wang here yet.
"...the Government has paid out $1.7 billion this morning its net loss after the company's assets are sold are likely to be about $600 million..."
After they are sold!...to whom will they be sold?...at what price will they be sold?
The other minor matter...so small it really has passed most of us by....the govt is bailing out the entities who are not under the GG, entitled to be bailed out..............now who might they be and how much will the bill be....are we to accept the guff about it taking soooo long to determine who they are...that the interest costs would cancel out the payments......that's bullshit.
"Makhlouf said Treasury's arrangement with Trustees Executors meant some depositors and stockholders who may not have previously been eligible under the guarantee would 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." herald
A good result and as some other posters have noted; it's good to see Johnny Key and Bill doing the right thing for the country irregardless of politics,... as opposed to a political idealogical response.
glad Labour's not in power....anything could've happened.. like buying it all and merging it with kiwirail or something equally daft!
Bernard....can you shed some light on this ...please!
"Makhlouf said Treasury's arrangement with Trustees Executors meant some depositors and stockholders who may not have previously been eligible under the guarantee would 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." herald
Who is Makhlouf talking about?
Mr Bagrie said ..."SCF's tentacles spread far and wide through many sectors of the economy, and there could be some investors who are not covered by the Government's retail deposit guarantee scheme" stuff.co
What the hell is going on here? " Treasury broadens Crown guarantee criteria".....get out of here...this is a Cabinet directive to Treasury....WHY Treasury broadens Crown guarantee criteria
I remember how I, a stupid, money conservative Immigrant just arriving from Europe, investing money with a term deposit for then a “modest” 8.5% in a “New Zealand Bank”, while friends advised me not to waste money and better talk to a finance broker for a better deal (10% +) with one of the finance companies. Earning the money the hard way, I refused.
18 years later will under the leadership of the National Government, New Zealand like other western countries turning increasingly into a communist state bailing out the stupid risk takers “Mr. Greed & Rich” with taxpayer’s money ??? – a weird and crazy world !
..or is the 1.6 Billion pay out even more then just weird and crazy ?
Exactly - there's little mention of Lachie McLeod in the media. Hubbard at least dumped a whole of what was left of his 'fortune' into SCF a few months ago.
But McLeod just got the boot and walked away on all those non-recourse related-party loans!
If anyone should be strung up by the balls - it should be McLeod !
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 ?
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