South Canterbury reports NZ$58 mln provision for bad debts; first loss since 1934 (Update 1)

By Bernard Hickey South Canterbury Finance said on Friday afternoon it expected to report a NZ$37 million net loss for the just completed year to June 30 after a weak property market forced it to take a NZ$58 million provision for bad debts and non-performing investments. This was South Canterbury Finance's first loss since its foundation in 1934. (Updated to include comments from interview with CEO Lachie McLeod about the succession issue for Allan Hubbard, 80, and a potential IPO or the introduction of a new shareholder.) South Canterbury Finance said its principal owner, Allan Hubbard, had injected NZ$40 million of new capital in the form of cash into the business and would provide further support in case there were further losses. South Canterbury did not disclose the size of the potential further support. South Canterbury also said it was looking for other sources of equity over the next 3-4 months, but did not immediately say what form this might take. Chief Executive Lachie McLeod told interest.co.nz in an interview that the new equity could come in the form of a new cornerstone shareholder or even an initial public offering (IPO onto the share market. This decision to look for a new shareholder or shareholders was linked to the "start of the succession process," McLeod said, referring to the dominant shareholding of Allan Hubbard, aged 80.

Hubbard was "never a seller", but may look at owning a reduced stake after an equity injection by a cornerstone shareholder or after an IPO. South Canterbury had not looked specifically at its merger or acquisition options, but spoke regularly with other players about its options generally, he said. McLeod said South Canterbury had taken a very conservative approach in assessing the performance of the 200 property loans that make up 23% of its loan book. It found around 30 of the loans that were non-performing and had provisioned for that. The non-performing properties were in Taupo, Wellington and Dunedin as South Canterbury did not have substantial property loans again properties in the biggest 'problem' markets of Queenstown and Auckland, he said. One of the problem loans was against the old post office building in Dunedin and against some loans to property developer Dan McEwan. South Canterbury was not heavily exposed to the dairy farming sector and was actually looking to expand into that market, McLeod said. South Canterbury had about NZ$145 million worth of rural loans out of a total loan book of around NZ$1.7 billion, including around NZ$45-50 millon worth of loans against dairy farms. "There is some fantastic dairy farms out there and we'd like to grow our rural book," he said. South Canterbury had managed the size of its personal loan book down to NZ$80 million from NZ$200 million over the last 5 years and delinquencies remained low. "Most of the book apart from property is going very well," McLeod said. Meanwhile Standard and Poor's was in the process of reviewing South Canterbury's investment grade BBB minus credit rating. McLeod said the ratings agency had not indicated the outcome of the review, which was expected in the next few days. Here is the full statement below from South Canterbury.

South Canterbury Finance Group today advises that its principal owner, Allan Hubbard, has injected $40 million of new capital into the business and undertaken to provide further support if required, to counter the impact of any balance sheet write downs of property loans. Based on conservative assumptions a $58 million provision (non-cash) will be taken for non-performing investments and doubtful property assets in the financial year to 30 June 2009. As a result South Canterbury Finance now expects to report a net loss before tax of approximately $37 million for the financial year. Prior to the write-down, a net profit before tax of $21 million was projected. The group is budgeting a net profit before tax of $18 million to $22 million for the 2010 financial year. Chief Executive Lachie McLeod said the strength of the group's shareholder, Allan Hubbard, helps set it apart from many other finance companies and provides the resources to maintain the financial stability of the South Canterbury Finance Group through challenging times. Mr McLeod said the property market became more difficult in the last six months and conditions deteriorated more than anticipated. As a prudent measure South Canterbury Finance has undertaken a review of its loan portfolio. Non-performing and doubtful loans have been quarantined. In addition, a legal underwrite agreement with Allan Hubbard will stand as security for any further specific loans that could become impaired over the current recession period. Property development loans make up only 23% of South Canterbury Finance's diversified lending book. South Canterbury Finance Group Chairman Allan Hubbard said while the company expected to make an operating profit of $21million, it will be disappointing for the group to report its first bottom-line loss since 1934. "In considering the past 60 years of business, the lending environment today is difficult, due to lower confidence of lenders, lack of exit strategies and sale options. However, South Canterbury Finance will continue to seek lending opportunities in the next year to backbone businesses and industries. "The prudent actions we are taking to strengthen our Balance Sheet will see South Canterbury Finance continue to play a leading role in the New Zealand economy. South Canterbury Finance is a sound, profitable business and I am committed to supporting South Canterbury Finance and its 45,000 investors who have loyally supported the group for 83 years." Total assets at 30 June 2009 are projected to be $2.3 billion ($2 billion June 2008). South Canterbury Finance has liquidity from a combination of cash and investments in listed bonds up to $228 million. Net equity is expected to remain steady at $236 million. "Maintaining a high cash balance has been a prudent strategy in the current environment and provides comfort, along with the Crown guarantee, that all obligations to investors and perpetual preference shareholders will be met. At all times South Canterbury Finance has complied with the Deposit Guarantee Scheme and covenants within its Trust Deed," Mr McLeod says. Commenting on the outlook for the 2010 financial year, Mr McLeod says he expects a continued flow of opportunities to arise across the business, consumer and rural sectors. Tightening credit lines by the banking sector are having a positive benefit by presenting sound opportunities in core industries leading to further diversification of the group's asset base. South Canterbury Finance is also investigating other external sources of new equity, to continue to strengthen its position over the next six months.