Strategic Finance warns it may miss first payment due on Jan 7

Strategic Finance (SFL) Chairman Denis Thom has warned investors in letter they should not rely on receiving their first payment of 9 cents in the dollar due on January 7 because of very weak conditions in the development property market and because it needs to repay Bank of Scotland first. Strategic was behind projects such as North Shore's Sentinel Tower (still being sold), Fiji's Hilton (still being built) and Ponsonby's Soho Square (in receivership and unbuilt). Strategic said it had already made a NZ$5 million payment to Bank of Scotland (BOSIAL), which had a prior charge over the property development loans controlled by Strategic, more than 50% of which are second mortgages or worse. In some cases Bank of Scotland has the first mortgage on these projects and it is still owed NZ$11 million by Strategic. Strategic said many of these loans are due to be repaid in coming weeks and it is possible not all will be repaid in time for the January 7 payment deadline because they rely on sales of properties. Strategic also has to repay the remaining NZ$11 million to Bank of Scotland before it can start repaying debenture holders the NZ$291 million they are owed. "These loans involve conditional and unconditional sales which are required to complete in order for SFL to receive proceeds. If these loans are repaid, we forecast having sufficient cash flow to fully repay the BOSIAL prior charge and allow for some or all of the planned payment to stockholders to occur on 7 January 2010," Thom said in the letter, reproduced in full below. "The difficulty we have and the position we need to highlight to our investors at this time is that in the current market we can not be certain that these loans will be repaid as and when we would like. An added complication is that we are entering the Christmas period and are conscious that if we do not have these transactions completed before Christmas then we are unlikely to see this cash flow until the end of January 2010 or potentially later, which is after the planned date for repayment to stockholders of 7 January 2010," he said. "Please do not rely on this payment being made in part or in full as our ability to do so is entirely based on loans being repaid over the next few weeks. It is our intention to provide investors with a further update early in the new year as the situation hopefully achieves greater certainty." Strategic announced in late August it made a NZ$175 million loss in the year to June 30 and was likely to repay between 85-93 cents in the dollar, which was less than the 100% promised when investors agreed to a moratorium on December 22 last year. Meanwhile, Commerce Minister Simon Power announced last night a toughening of the rules around moratoria so investors could decide directly to put delinquent finance companies into receivership if they miss payments promised under moratoria. Currently a missed payment only triggers a review by a trustee for a possible receiverships. Some trustees have agreed to revised moratoria or decided not to put finance companies into receivership. These were the directors of Strategic before it failed.

Strategic Finance Limited ("SFL") is approaching the first anniversary of the moratorium that investors approved and therefore it is appropriate that we provide you with an update on whether or not we will be able to meet the targeted repayment of the BOSIAL (Bank of Scotland) prior charge facility due 31 December 2009 and the first payment to stockholders due 7 January 2010. What was the purpose of the Moratorium? The Board of SFL supported the concept of a moratorium to ensure that the best return for investors could be achieved by providing time to realise the Company's loan assets. Almost all of the monies SFL had advanced was secured against property, with 41% secured by way of first mortgage and the balance by way of second mortgage. The objective of the SFL Board was to try and avoid being placed in a position where we were forced to sell assets at any price and therefore materially compromise recovery and value for our investors. Will I get paid on the 7th January 2010? The moratorium provides for SFL to retain a cash amount of $10m to fund operating costs and obligations, and at the end of each quarter for any balance over and above that figure to be released and used to repay the BOSIAL prior charge first and then stockholders. This would include the balance owing to BOSIAL. To date we have managed to reduce the BOSIAL prior charge from its original limit of $25m down to $11m (after a scheduled payment of $5.0m this week) with a further reduction likely to occur very soon. Our current cash flow forecast shows a number of specific loans which are currently being intensively worked on in order to generate the cash required to meet the first scheduled payment. These loans involve conditional and unconditional sales which are required to complete in order for SFL to receive proceeds. If these loans are repaid, we forecast having sufficient cash flow to fully repay the BOSIAL prior charge and allow for some or all of the planned payment to stockholders to occur on 7 January 2010. The difficulty we have and the position we need to highlight to our investors at this time is that in the current market we can not be certain that these loans will be repaid as and when we would like. An added complication is that we are entering the Christmas period and are conscious that if we do not have these transactions completed before Christmas then we are unlikely to see this cash flow until the end of January 2010 or potentially later, which is after the planned date for repayment to stockholders of 7 January 2010. The Board has also looked at current and future cash requirements of the business and believe that the cash retention amount of $10m can be reduced to assist in allowing funds to flow to make the required payments. Recently we contacted our investors to ensure we had all the correct details on file should we be in a position to meet the payment on 7 January 2010. Please do not rely on this payment being made in part or in full as our ability to do so is entirely based on loans being repaid over the next few weeks. It is our intention to provide investors with a further update early in the new year as the situation hopefully achieves greater certainty. We will continue to work the loan portfolio with a strong focus on recovery and maintaining value. What is clear is that we are not prepared to simply sell assets at any price to meet these targeted dates for repayment as that is not consistent with our objective of achieving the highest recovery for investors. What happens if we miss the target date for repayment? If we were to miss these milestones then this would trigger an "Event of Review" "“ this means that we will advise the Trustee that an "Event of Review" has occurred and allow SFL 14 days in which to correct the position or negotiate an alternative arrangement. Should the Trustee not accept this or SFL is unable to remedy the default, then the Trustee needs to decide what action if any it will take. What's happening with our loan book? In August we announced the need to make further provisions for loss across our loan portfolio, largely as a result of the impact of the current Financial Reporting and Accounting Standards and the delay being experienced in securing repayment of monies advanced. Asset values continue to be difficult to assess in this market and the timing for realisation in many cases continues to be delayed "“ both of these factors require negative adjustments to provisioning levels. Furthermore, where prior ranking mortgagees have exercised their rights then this is likely to require SFL to reassess the provisioning on its subsequent mortgage. We are experiencing a higher incidence of this happening which is of concern to the Board. The Board is in the process of reviewing its provisioning and its compliance with the relevant covenants in the Trust Deed and the Moratorium and will look to also provide an update to investors on this shortly. If we had the luxury of time and the benefit of being able to sell these assets with a view to maximising sale price, this provisioning could be reduced or in part recovered. How are we going on recovering monies owed to SFL? The performance to date is unfortunately running behind that contained in our moratorium forecast. This is largely as a result of continued deterioration in the local property market and the effects of reduced availability of credit in both local and offshore finance markets. Our moratorium forecasts were based on the assumption that the market would not deteriorate further and that we would in fact see some market recovery in the mid to late 2009 period. Unfortunately this has not occurred. SFL's borrowers continue to face significant challenges in either refinancing or selling property assets and other finance companies in moratorium have faced similar problems as widely reported. Furthermore there have been increasing instances where prior ranking mortgagees are taking enforcement action which materially affects the recovery for subsequent ranking mortgagees, which impacts SFL on loans where we are not a first mortgagee. We have noticed a recent improvement in sales volumes and sales enquiry for completed projects and although SFL may not have been the direct recipient of all of these funds we have in many instances seen a significant reduction in the amount of senior debt which ranks ahead of SFL. The Board of SFL remain committed to achieving the best possible outcome for investors in the shortest possible time. We will look to provide you with more certainty and comfort over the status of the first repayment milestone with our next communication which we anticipate will be in late December 2009 or prior to 7 January 2010. Denis Thom Chairman Strategic Finance Limited