By Bernard Hickey
It has been an extraordinary week for South Canterbury Finance and its driving force Allan Hubbard.
It has also been a big week for taxpayers, although they may not know it. The government has allowed South Canterbury Finance to continue on with its belief it can survive past the end of the government's extended deposit guarantee, which expires at the end of 2011.
South Canterbury was not included in the statutory management order that pulled in Hubbard and all his personal entities, and it is continuing on employing people and making loans.
Chairman Bill Baylis and CEO Sandy Maier are now working on the hope that the statutory manager Grant Thornton can conclude a deal Hubbard hopes can be done by June 30 to bring in a new overseas investor with over NZ$150 million of fresh capital. They are also assuming they can eventually convince debenture investors that South Canterbury Finance can prosper without a guarantee and without Allan Hubbard. It's understandable they would retain those hopes.
They are working for their shareholders and want to do the best they can to keep South Canterbury stable and give it a future, but there are dangers in this for all New Zealanders who are taxpayers. The government has already made provisions for NZ$880 million of losses on the retail deposit guarantee scheme.
It has not broken out exactly which finance companies it expects to make losses on, but given the relative sizes of the various companies it's fair to say the government is expecting to have to take hundreds of millions of dollars of losses on South Canterbury Finance.
The only questions for the government and the taxpayer now are when and how much. Sandy Maier has done a magnificent job so far fighting the fires and holding it all together. After all, he is our most experienced statutory manager of a big financial failure after his experience with the Development Finance Corporation in the early 1990s.
But even he has an enormous uphill battle now that Allan Hubbard's reputation is under the darkest of clouds in the form of a Serious Fraud Office investigation into what it says could be a "serious and complex fraud." Can South Canterbury Finance survive without a government guarantee and without Allan Hubbard's reputation intact? I think this week's events have decided both are impossible.
We and the government will know for sure within a few weeks as Allan Hubbard made a promise this week amid all the sturm und drang that was crucial. He said he hoped to arrange an agreement by June 30 to bring in a big investor. That is now in the hands of the statutory manager Grant Thornton and Standard and Poor's pointed out this week when it slashed South Canterbury's rating two more notches to B minus that this recapitalisation could be compromised or delayed. South Canterbury Finance is now at least 6 notches away from an investment grade rating of BBB-.
The danger now is that South Canterbury Finance will continue making new loans and spending money on people and systems on the assumption it has a future past December 31, 2011. I can't see how it can have a future when it would have to rely on the support of debenture investors without a guarantee and without Allan Hubbard.
Does anyone really believe that investors will stump up nearly a NZ$1 billion to invest in a junk-rated finance company without the mana of Hubbard behind it?
It's time for the government to limit the losses for taxpayers by putting South Canterbury into wind-down mode. South Canterbury and the government should use the 18 months it has before the end of the guarantee to ask for loans to be repaid and to repay debenture investors in an orderly fashion. This doesn't necessarily have to be a receivership.
Putting South Canterbury to sleep could be done by its existing board with Sandy Maier at the helm. He has the most experience of anyone in the country and is widely acknowledged to have done a great job with DFC.
It's time for everyone to realise the dream is over.
4 Comments
Anonymous,
Happy to debate with you. I'd much prefer though that you gave your name, or at least a pseudonym.
Have a look at the video above. There's more detail in there, but here's the 9 reasons (data if you like) why I think the government should wind down South Canterbury in the next 18 months before the end of the government guarantee.
1. South Canterbury is now organising itself to be writing loans that are not due to mature for 18 months to 2 years from now, well after the deposit guarantee period. This assumes it can raise up to NZ$1 billion in unguaranteed funds after the end of the guarantee at the end of next year. This exposes the government to more risk.
2. South Canterbury needs to match its maturities and funding as best it can, particularly after the end of the deposit guarantee at the end of next year. There is an extreme amount of uncertainty about South Canterbury's ability to continue beyond then. It has more than NZ$1.2 billion of deposits due to expire by the end of next year.
3. Allan Hubbard is actively looking to exit South Canterbury and is no longer in control of the assets. He is banned from using South Canterbury's office or being involved on a minute-by-minute basis as he once was. Like it or not, his reputation is crucial for the confidence of investors, particularly after the expiry of the guarantee.
4. There will be no guarantee after December next year. A good chunk of those NZ$1.2 billion are solely dependent on the guarantee. With Hubbard gone, the rest will have to depend on a junk credit rating and unproven management.
5. South Canterbury has a B minus credit rating and it is on outlook for another downgrade.
6. This is 6 notches away from investment grade. The chances of South Canterbury of regaining that investment grade rating within the next 6-12 months is impossible.
7. South Canterbury has promised time and again over the last year to bring in a new equity investor without success. Allan Hubbard expects to confirm something before Wednesday. That is now highly unlikely given his assets are now under the control of the statutory manager.
8. The revelations of the last two weeks show how closely related Allan Hubbard's personal interests and South Canterbury's interests were. While a cloud hangs over Hubbard, a cloud hangs over South Canterbury.
9. Given South Canterbury needs to be making decisions about funding and lending now, time has run out to find a new investor and improve its credit rating.
Regards
Bernard
To those who accuse me and interest.co.nz of not reporting the facts on South Canterbury Finance, have a look at the stories on this link
http://www.interest.co.nz/category/institutions/south-canterbury-finance
cheers
Bernard
Anonymous (go one give us your real name. I give you mine...)
You are right. I don't have the latest figures from South Canterbury Finance. But I have spoken regularly in recent months to Sandy Maier and have been reporting on South Canterbury closer than most for the last two years.
However, it is interesting that those people who do know the dynamics and insides of the South Canterbury situation (the Treasury and the Companies Office) were happy to recommend to the government that Allan Hubbard's holding in South Canterbury Finance be put into statutory management.
That told me a lot.
cheers
Bernard
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.