You're dreaming if you still think you'd get paid out in 14 days - read the thread back up - that was debunked in the article I quoted.
Alan.
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But the yield may not be that great. Say you have $50k which you want to spend on your summer holiday. Stick it in SCF at 8% and it looks good - but say they go bust in three months. You get your $1,000 interest for the three months but no interest for the next three moths. Alternatively you could have put your $50k into any old bank at 5% and you'd get $1,250 in six months time less the grief of having to fill out a whole pile of forms.
It looks worse if you are a Mom and Pop investor - say its only $5,000 you have deposited. Thats $100 gross in interest v $125. Whats your time worth? Its probably going to cost you $50 net in time and Postage (who knows exactly - you get my drift) your return is now down to less than $50 so the lure of the big 8% doesn't look so flash now.
Yep - fair points.
Worst case, you could invest the day before they go belly up, and then your yield would be zero in three months (say).
If you had invested in a big bank, and were getting (currently, say) 5% pa, then you lost 1.25% over the three months.
Still, not a disaster.
Alan.
The Deposit Guarantee ensures any deposit won't be a disaster but I think we can safely say that depositors aren't really looking at the yield - the risks are just too high to make this a valid reason for depositing. An outlandish statemewnt I know - but who else out there has B- credit rating?
What we are really seeing is a donation scheme where punters get to make a donation to SCf for a period of time and enough time they hope for SCF to get back on its feet. That loyalty or support will be repaid, at worst, by the return of the deposit and if all goes well some interest.
But the fact remains its not the depositor making the donation - its the Tax Payer sitting behind the depositor who is underwriting it. We've got all these South Canterbury folk saying "I trust Alan - he won't default on me, he'll personally give me my money back". Well sure you'll get your money back but it won't be AH's if things go bad.
So, what's your point?
But it's not the "investors" who are in SCF - it's the mums and dads, and they wouldn't know a maturity profile from a hole in the ground. As for diversifying, how many horror stories have we had about people who had all their money with (say) Hanover.
So I think that they'd have a lot to worry about if the timeline was stretched.
There is so much mischievous nonsense being put about concerning SCF.
The simple facts are:
1) Sandy Maier took the CEO position last year. Like any good CEO he went through the cupboards and dragged out all the skeletons. SCF declared a $200million loss for the year end Dec 2009. This loss was predominantly due to loan impairments. Unlike Hanover - I believe this figure. The SCF loan book is of better quality than Hanover, for example; there is the application of IFRS accounting rules, which are more stringent; and, there is the new CEO wanting to get all the bad news out, on the table, to begin the recovery.
2) Due to this loss - SCF was in breach of it's Trust Deed. (If you are not aware of the debenture covenants - and they are extensive - you don't know anything about SCF). Three things happened ... Allan Hubbard introduced two new equity assets ... Torchlight introduced a bridiging loan senior to all other debt ... and the Trustee agreed to delay full enforcement of the Trust Deed, via waiver, until 31 August. The new equity healed most of the breach.
3) SCF is now in a period of structural change. The business has been partitioned into 3 parts - the "Good Bank" - a fine $1billion finance business; the "Bad Bank" - impaired and non strategic loans - the "Equity" portfolio. Both the "Bad Bank" and the "Equity" portfolio are non strategic to SCF.
THE "STEADY STATE" ISSUE FACING SCF IS WHERE IS THE NEW EQUITY, FOR THE "GOOD BANK" FINANCE OPERATIONS COMING FROM?
The magnitude of the requirement is that a $1billion dollar finance company could be run with equity of $100m. (The actual SCF covenant is debt <= 12 x equity).
A) SCF could sell the "Bad Bank" loan book. While this will happen, the old Benjamin Franklin saying "Necessity makes a bad bargain" is true - the margin is likely to be too thin.
B) SCF could sell selected assets in the "Equity" portfolio. This will happen ... Allan Hubbard was hoping it was to be back to Southbury ... that is "Plan A". "Plan B" is to sell them to wider interests. Sale of this portfolio would save SCF - it would repair the outstanding Trust Deed issues.
C) SCF could find a new equity partner. $200million, tops .... the only issue is what kind of deal (and dilution) would Allan Hubbard take (or the Statutory Manager, de facto)?
THE THREAT TO SCF COMES FROM THE "DYNAMICS" OF DEBT MATURITY vs LOAN MATURITY
The key issue facing SCF is cash flow planning. The "wall of debt" provides CASH FLOW challenges (NOT as everyone implies BALANCE SHEET challenges). If your debt is due in a couple of months and yet debts owed to you, to cover your debt, are spread over a year - you have a problem if you cannot "roll" you debt.
Bridging finance and spreading the maturities of new debt will solve this issue. SCF should not fail because of this issue - that would be completely tragic - because a viable business would be destroyed. Remember, the "wall of debt" is balanced by the "hill of maturities" ... the combination of downsizing the business and the structural changes outlined above will see SCF into calmer waters.
The business is getting smaller, we all know this. A finance business needs to borrow in order to lend. If SCF can borrow $1billion - it can lend $1billion; if it can borrow $500m it can lend $500m. So the issue is - how much can SCF raise, in the current market ... that is the "steady state" size of the business. Clearly, the higher amount it can borrow simplifies the cash planning challenges of the "wall of debt".
SCF IS A VIABLE BUSINESS
This is why the arrant nonsense spouted by ego maniac, self appointed, "industry commentators" is tragic. The orderly reduction of SCF to a $1billion business is easier than a paniced reduction to a $500m business.
Shouting "Fire" in a crowded picture theatre causes damage and harm, as people rush for the door; if there is, in fact, no fire - this act is more than dangerous, it is criminal.
Final point. An intelligent commentary on SCF should focus on the Trustee. If you do not understand the Trust Deed covenants, what the Trustee has done, in terms of waivers, deadlines and monitoring; you do not understand anything about SCF. The Trustee has behaved responsibly - if there was a serious balance sheet issue - the Trustee would act to defend the position of the debenture holders.
There, more facts and balance than anything Bernard Hickey is capable of. I do grow tired and sickened by his "headline grabbing" sensationalism.
SCF is viable ... lets not make Maier's job more difficult than it already is by imagining SCF is insolvent or fraudulent ... it is simply facing cash planning issues in the face of business restructure and downsize. These difficulties present significant risks ... but the most likely outcome is a full recovery - to the downsized state.
Excellent summary Enumerate - Well done.
Alan.