New South Island bank won't rescue South Canterbury Finance (Update 2)

New South Island bank won't rescue South Canterbury Finance.

The proposed merger of Pyne Gould Corporation's Marac, Canterbury Building Society and the Southern Cross Building Society to create a "heartland" bank based in Canterbury won't be the white knight for struggling South Canterbury Finance, CBS CEO Bryan Inch says.

(Updates add background on South Canterbury Finance, including detail on borrowings due for repayment by June 30).

Inch told interest.co.nz talks between the three parties had been ongoing since he became CBS's CEO in October 2008 and had got more serious this year. Discussions incorporated "pretty well all" the main players in the non-bank financial sector. However, many of the other market players were still mutuals and would need to consider demutalisation if they were to join the trio, Inch said.

Asked if there had been any suggestion of including South Canterbury Finance in the tie-up Inch said "not at all."

"No, they have to sort themselves out," said Inch.

"The three entities involved have basically weathered the recession best probably out of all the non-banks in the market and have dealt with the issues they’ve got on their books. We’ve certainly come through the recession well and we’re looking to join parties that have taken positive steps to deal with any issues they’ve got so we can focus on the future rather than focus on any legacy issues."

South Canterbury Finance's owner Allan Hubbard announced on Friday he was stepping down as chairman and a director but would take up the role of president for life. On the same day, Standard and Poor's warned of liquidity problems at the struggling Timaru-based finance company and cut its credit rating one notch to B+.

Today South Canterbury Finance said its programme to smooth its debenture maturity profile was making "excellent" progress. As of May 31 holders of NZ$132.9 million of debentures scheduled to mature in "coming months" had accepted the company's offer to reinvest in new debentures with longer dated maturities.

The company is currently offering loyalty bonuses for investors as it strives to entice them to extend the duration of their investments. A prospectus released in April shows South Canterbury Finance had  borrowings of about NZ$461.1 million, including interest, due for repayment before June 30.

A further NZ$1.08 billion is due for repayment before the extended Crown retail deposit guarantee expires on December 31, 2011. The prospectus notes the company will need to manage its liquidity position carefully over this period to ensure it's in a position to repay this money as and when it falls due.

South Canterbury Finance also said today it was working to obtain the necessary consents to push through the previously announced NZ$37.5 million equity injection from George Kerr's Torchlight Fund and was finalising terms with Kerr's New Zealand Credit Fund for the replacement of a NZ$75 million funding facility.

Meanwhile, Inch said the strong Canterbury links with PGC and desire to build a broader home market in the province was a very attractive part of the propsed merger for CBS.

"We also share the desire for an investment grade (credit) rating and a banking licence as do the other two parties and this is the best way forward to achieve that."

The combined entity would look to provide full banking services for middle, or heartland, New Zealand. At this stage the three have signed a memorandum of understanding with the vast bulk of the detail yet to be worked through. Inch acknowledged there was a lot of water to go under the bridge but said all three parties were committed to seeing the merger through. Click here to read related story.

It was envisaged that PGC would hold a cornerstone, but not controlling, stake in the combined entity.

"We believe that we can create a point of difference, certainly in the Canterbury market, but also in the wider use of the Marac brand etc to get a nationwide reach," Inch added.

He said an amendment to the Building Society Act would be required to give larger shareholders voting power in line with their stakes. The Act includes a clause whereby one member has one vote on special resolutions as opposed to the Companies Act which operates on a one vote per share basis.

"So when you have major shareholders under the Building Society Act, they would only have one vote. In a discussion like this we are going to end up with a number of significant shareholders. They will be wanting more than one vote in terms of the ongoing entity," Inch said.