By Gareth Vaughan
The NZ$75.7 million price South Canterbury Finance (SCF) paid for a 33.5% stake in Dairy Holdings Ltd from its majority owner Allan Hubbard last year was almost twice as much as it was worth, according to Reserve Bank analysis.
In a swathe of correspondence released by the Reserve Bank relating to SCF, Douglas Widdowson, an adviser on domestic deposit taking oversight at the central bank, tells John Park, Treasury's manager of the Crown retail deposit guarantee scheme, in an email that, the sale price was "probably inflated." A report attached to the email argues the price paid should have been just NZ$42 million rather than NZ$75.7 million.
This is based on a Reserve Bank valuation of Dairy Holdings of NZ$125 million as opposed to the NZ$225 million the Hubbard-SCF deal valued the business at, which according to a September 3, 2009 email from the Reserve Bank's Andrew Hemphill had NZ$340 million of bank debt.
Widdowson says the transaction led the company to technically breach some of its banking covenants and notes it would probably leave SCF worse off from a capital ratio point of view, and would require the injection of additional capital to ensure that the entity's capital ratio remained the same.
"The transaction transferred cash from SCF, and moved assets into the company that were readily realisable for supporting the company, and in some instances would leave the company more vulnerable to additional calls for funds,' Widdowson writes.
The report attached to Widdowson's email reviewed and criticised the pricing methodologies used by Dairy Holdings and an un-named expert.
"The effect of using my pricing methodology is to reduce the capital injection from the stated NZ$40 million to NZ$2 million," Widdowson says.
"The impact on SCF's capital ratio under the new NBDT (non-bank deposit taker) regime will be negative because the shares, at their true value of NZ$42 million, will be risk weighted at 600%."
Land and buildings value 'materially' overstated
The expert's report had "materially" overstated the current value of land and buildings by reducing them by just 1.5% from the May 2008 market peak. Dairy Holdings itself had trimmed them by 8%, but Widdowson argued even this was not conservative enough, and in his calculations he assumed a 22.5% fall.
He also questioned, but used the expert's current liabilities figure of NZ$3 million. Widdowson pointed out this was down from NZ$11.3 million a year earlier, looking low for a company under "extreme financial pressure" that would presumably be trying to make maximum use of trade and other miscellaneous sources of finance.
Dairy Holdings' valuation also ignored a NZ$37 million increase in debt liabilities during 2009.
Meanwhile, the email from Hemphill sent to Widdowson and another Reserve Bank staff member Andy Wood, outlines trading banks exposure to Dairy Holdings. Commenting on a report on SCF by Treasury's adviser KordaMentha, Hemphill says Dairy Holdings, owner and operator of 58 South Island dairy farms producing 1.5% of New Zealand's total milk production, isn't cashflow positive as previously thought. Dairy Holdings' website shows it is New Zealand's largest single privately owned supplier to Fonterra.
"At best the forecast for 2010 is breakeven, at worst a NZ$8 million loss," he writes.
ANZ exposure
He notes a NZ$45 million ANZ loan facility held by the Hubbard controlled SCF parent Southbury Corporation.
"There is a suggestion that SCF are indirectly funding this commitment," Hemphill says. "Assume failure of SCF will have a domino impact on ANZ facility."
An ANZ spokeswoman declined to comment.
In total Widdowson noted NZ$340 million of total bank funding in Dairy Holdings from "three majors" and Rabobank. He refers to a NZ$100 million Australian loan book with no detail known on its performance, and also says related party loans are nearer NZ$250 million, well up on the NZ$190 million disclosed to the Reserve Bank.
"The NZ$100 million standby facility provided by BNZ and (ASB's parent) Commonwealth Bank of Australia has already effectively been withdrawn by advising they will not honour any drawdown due to a technical breach of the covenants," notes Hemphill.
Meanwhile, Widdowson also notes a NZ$21 million SCF facility provided to PGG Wrightson and says a NZ$50 million facility to Silver Fern Farms may have been repaid.
Separately, a Reserve Bank report on SCF's position in the rural lending market noted it provided just 0.7% of total rural lending. Of its reported NZ$300 million rural exposure, half was attributed directly to farming the rest was farm related in areas such as the transport of farm related products. Of the NZ$150 million of direct farming exposure, about NZ$80 million was concentrated in Canterbury and the lower South Island.
According to KordaMentha figures, SCF's rural portfolio comprised about 200 loans with 80% worth less than NZ$1 million.
SCF bought the one-third stake in Dairy Holdings in a related-party transaction with its main shareholder, Hubbard's Southbury.
SCF receiver works through ownership issues
Hubbard, was placed in government enforced statutory management on June 20 this year. SCF collapsed into receivership on August 31, with McGrathNicol appointed receiver.
McGrathNicol has appointed Goldman Sachs to advise it on the sale of Scales and Helicopters NZ, two other businesses SCF bought from Southbury, and Deutsche Bank to assist on the sale of SCF's core financial services operations. However, McGrathNicol managing partner Kerryn Downey recently told interest.co.nz there would be no quick sale of the Dairy Holdings stake.
"We're working through certain issues regarding the nature of some of the statutory documentation, or the documentation regarding the various ownership interests,” he said.
“And till we’ve been through some of that documentation we’re not really quite ready to offer our shareholding.”
Hubbard remains a Dairy Holdings director.
SCF related party loans and other entities associated with Hubbard including Aorangi Securities, Hubbard Management Funds and several charitable trusts, are now under investigation by the Serious Fraud Office.
* This article was first published in our email for paid subscribers earlier today.See here for more details and to subscribe.
17 Comments
If it was overvalued by that much then someone is liable and should be responsible. Lets go get it back. I dont believe it is possible to mistakenly overvalue a business by this much.
If this is happening here then its got to be worse on Landcorps Central North Island operation and the banks wont be happy farming Crafar's much longer.
Meanwhile, the email from Hemphill sent to Widdowson and another Reserve Bank staff member Andy Wood, outlines trading banks exposure to Dairy Holdings. Commenting on a report on SCF by Treasury's adviser KordaMentha, Hemphill says Dairy Holdings, owner and operator of 58 South Island dairy farms producing 1.5% of New Zealand's total milk production, isn't cashflow positive as previously thought.Dairy Holdings' website shows it is New Zealand's largest single privately owned supplier to Fonterra.
"At best the forecast for 2010 is breakeven, at worst a NZ$8 million loss," he writes.
I remember reading an article about AH after the 2008 financial massacre. He was talking about how many dairy farms he had, there was no dairy real estate bubble, and he would continue to invest at these high prices... something along those lines. I didnt really know about this guy, but thought what a twit. (Which is a bit silly of me considering he built such a big business). I guess he still believed the white gold thing was built on reality, and forced through a valuation that was optimistic at best. In my district there are a few others that were away in fairy land when doing business in dairy real estate. Banks are withdrawing, and demanding no more growing overdrafts. This is becoming very noticeable in the district. While those that were conservative are now doing extremely well, the others are looking quite dire. The market is full of unpriced farms, how do you price them? Nothing has sold. The tsunami of dairy farms hitting the market is growing to epic proportions, it is a diabolical mess.
Belle,
Ive got the same problem. A flood of farms are hitting the market but most sheep and beef operations up here have done badly the last few years. I have no idea what they are worth but its one hell of a lot less than they were and in many cases less than the mortgage. Many have lost money 4 years in a row, I decided to sit it out and watch what happens, its not going to be pretty either way, some farms re meant to be no reserve sales but I dont believe that for a moment. Some friends are desperate to get out and get on with life, are stuck unable to sell and the bank freezing the o/d account.
Went to Rotorua yesterday and the Motel owner said its the worst year ever.They have %40 to many beds in town, no tourists not even Asian ones appear to be around anymore.
Hi Andrew, I have been watching real estate sites closely for years now, I have never seen properties sit for years like they have now.
A comment about motels, personally I think the mobile home market is killing the moteliers. Every man and his dog owns one.
Southern Dude, I am so appalled at the govt giving a guarrantee, when people like me could say years ago that there was something not right about that company. If I could see it plain and simple from comments from the head man, then what the f...k were the people in treasury etc doing... oh I know they had their head up their butts, or more likely someone elses.
Another interesting bit of info. The real estate agent told me that most buyers are expecting a land or/and capital gains tax to be introduced next term and this is affecting buyers decision making. We need both parties to get together and get something decided one way or the other,the uncertainty is starting to effect sales, and I must confess it is in the back of my mind.
Let's put aside what Hubbard or the board may have done or approved for a minute.
This report is yet another example of the incompetence of Treasury, the Securities Commission and the RBNZ and the Government not doing their job.
They all knew this information and yet did not act. they allowed SCF to retain it's Government guarantee when they extended it - why aren't these people being held accountable??
In any other profession someone
s head would be on the line. this doesn't happen when the Government or its agencies are involved.
i don't get it, sure the assets may have been overvalued but given treasurys haste i don't believe that AH had the luxury of instigating a tender process to determine the appropriate value of the various assets that he tipped in. Besides what cash actually changed hands or were they "book entries"? either way the excercise is somewhat irrelevant as it merely prolonged the inevitable. AH was not in a position to argue and I belive he had SCF best interests at heart at the time. In terms of the risk weights Tsy applied in terms of AH investments they were not particularly generous, Frankly AH should have said "stuff you" here take a bunch of assets ($1.8b). The most interesting part of the transcript apart from Tsy comments in respect of S&P "garbage" report / rating are the SCF Boards comments about fostering investor confidence. anyone worth their weight in the finance or banking sector knows only too well that the industry survives on confidence. Tsy and the powers that be systematically went about detroying confidence and the NBDT sector along the way. Only Bollard and Co know if this was predetermined. OIA requests may eventually uncover the truth. If over pricing of assets and overcooking of the market bought about the actions of Tsy, Coys Office, then there are other mechanisms for managing down these risks that would be far more effective than detroying individual (AH) characters. and lead to long term benefits to the economy, prodcutivity and wealth. systemic weakness exists in NZ in terms of the judiciary, various laws around privacy and access to information on individuals, and the government seems to have no idea on how to effectively bring down house prices! heres an idea ...tyy this 1) sell off HNZ houses in central Auckland on the open market and create a SOE to build cheap affordable housing out in the back of beyond. ramp up supply.
My invoice in the post Bollard. Next time try and stay awake in economics 101!
It seems that the Government knew what a deep deep hole SCF was in before the government extended there cover, and then they paid out so quickly (a lot quicker than EQC payout), it would not be a surprise if someone, or someone's from government had a alrge amount of cash in SCF.
And I would expect since all assets are so over valued that perhapes we won't get back as much money from the sale of these as the government expected..considering most of these only survived on the inter company lending to sure up there cash flow.
I have looked at a couple more of the Reserve Bank documents and the entertainment and intrigue continues.
In this one - http://www.rbnz.govt.nz/finstab/nbdt/scf/4215203.pdf - Sandy Maier tells Reserve Bank officials his first few weeks at South Canterbury Finance were like "an exercise in triage."
In this one - http://www.rbnz.govt.nz/finstab/nbdt/scf/4216742.pdf - the demeanour of Neil Paviour-Smith, CEO of South Canterbury Finance's adviser Forsyth Barr, is described as "nervous" at a meeting with Treasury officials, Allan Hubbard and Sandy Maier.
It also notes that Treasury officials say Hubbard said the transfer of Scales and Helicopters NZ into South Canterbury Finance was conditional on entry into the Crown retail deposit guarantee scheme, although they believed he would contribute the assets regardless.
What other Western country has no land tax,stamp duty,inheritance tax,death duties and now no gift duty,and a weak IRD where a massive number of taxpayers escape tax on property speculation.
Of course it was the National Party who weakened IRD..
We will see the introduction of a Capital Gains Tax in this country after the next election.
Dairy fsrms are not selling because they are overpriced,
We saw values triple over a 15 year period.In my area this was from $13 kg/ms to $45 kg/ms for top farms.Those values are now at $34kg/ms but still too dear for financiers who are lending on a status quo of $5.50 kg/ms.
Nevertheless,we are seeing low debt sheep farmers continue to convert,as succession planning through sheep farming is very difficult,and land aggregation near impossible in such districts.
Farms will sell if you have a willing buyer/willing seller .
That does not exist at present.
that argument is no different when applying it to the finance sector collapse. Willing buyers evaporated regardless of what the asset was. Overpriced residential property or chattel security. Crazily now you can buy a book of assets for 10c in the dollar and even if they are uncollectible bank upwards of 50c if you are prepared to wait 2 to 3 years . You just need to know what you are doing and have balls of steel!
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