South Canterbury Finance Limited

[Enumerate]

Yes, but would you put your cash into SCF?

Yes, I have.

The SCF010s were attractive, because of the partial guarantee and the high yield - 30%. I decided against this.

Investing SCF020/SCF030 with 12% yields, full guarantee, and the ability to roll them on maturity to "help out", is attractive. I decided against this.

Investing in new debentures at 8.25% with full guarantee, is attractive, and "helps out" with new money. I decided against this.

The SCFHA's are an insane yield - but are the highest risk due to deep subordination of the debt and lack of guarantee.

I went for the SCFHA ... because I have spent the last month extrapolating the SCF balance sheet from Dec '09 to current, incorporating the likely structural outomes, estimating the effect on the balance sheet ... I have been following up changes to SCF subsidiaries on Comapnies Office filings to understand what structural changes are happening in the background ... I have been analysing the debenture prospectus and the various Trust Deeds to understand the senior debt ... I have been following every scrap of publicly released news including following the various commentators.

In short, I put myself into an acceptably risky position with the expectation of the greatest return based on being as fully informed as I can possibly be.

[Dubdee]

Enumerate,

an excellent piece of analysis.

One thing that should be mentioned is that both SCF's own auditor and that of the Crown (Korda mentha) have been looking at SCFs assets with a fine tooth comb. Probalby the impairments are very conservatively cast, but to protect themselves the SCF directors will be taking a most conservative line. Remember thay are personally liable for misstatements in the prospectus and that they are now not shareholders of SCF, so there is little upside for them taking a liberal line.

[minimoke]

Yes, a great summary Enumerate and I agree SCF is viable - except there remains a great deal of challenge and uncertainty which should not be understated. That risk can be measured in some part but as has been previously mentioned there is probably something in SCF's offerings to suit different appetites for risk.

I agree with your Simple Facts but we should perhaps not be too simplistic
1) The SCF loan book is no doubt better than Hanovers - but there is still the issue on related party lending which I'm not entirely sure we have seen the last of.
2) Torchlight has introduced new funds - and part of that is $20m from AH - which makes it a third injection by him.
3) While undergoing structural change SCF has a Standard and Poors Albatross of a C short term rating which puts it in a Substantial Risk / Extremely Speculative grade or a B- long term which is still highly speculative.

Your "Steady State" summary contains lots of "could's" - all rational, but the sooner the coulds turn into "dids' the better.

Your "Viable Business" provides an interesting analogy.
Shouting "fire" where it is clear there is no fire is surely irresponsible - but perhaps there is enough of a whiff of smoke that a precautionary approach is the most pragmatic. We've seen from the weekend that you don't even need smoke to end up with dead bodies lying around a picture theatre. Conversely shouting "all is well" when it is not, is also irresponsible - and that is where SCF separates itself from the Hanovers - we haven't had that kind of misleading message presented by celebrities: though perhaps some of the AH adorees are getting a bit close to that position.

I'm not sure anyone here is suggesting SCF is insolvent or fraudulent. On balance, based on cash flow, I'd say the scales are tipping towards drawing on the Govt Deposit Guarantee being called on. SCF need more facts and "dids" (like "we did secure $200m in equity") to get them tipping back in the right direction.

But in the meantime there is something there for those with an appetite for risk.

[COLIN]

Excellent summary Enumerate - Well done.

Alan.

Excellent presentation, Enumerate, just excellent.
Without the H-bomb of the Statutory Management of the Hubbards and the SFO scud missile attack on them I firmly believe that the SCF situation could have been successfully managed back to health and happiness. Now we have the potentially disastrous effects of collateral damage to the whole SCF business, by way of a likely serious falling-away of debenture inflows and rollovers, that even Sandy Maier seems to be acknowledging as a "given".
I had been steadily accumulating the SCF010's, as well as the SCFHA's, at recent high yields, but have now sold back most of the SCF010's, at a small loss. However, like you, I decided to stick with the SCFHA's, given that there is little to be derived from selling them now, and a great deal to be gained from a possible eventual restructure of sorts.

[Enumerate]

Mini, thanks for your in depth comments ...

1) The SCF loan book is no doubt better than Hanovers - but there is still the issue on related party lending which I'm not entirely sure we have seen the last of.

I get the sense from reviewing Companies Office filings that alot is happening on the related party front. The Kelt Finance and Mercer changes are an example of this. It should be noted that there are no Trust Deed covenants on the level of related party debt, per se.

2) Torchlight has introduced new funds - and part of that is $20m from AH - which makes it a third injection by him.

I note that Torchlight have raised $150m (up to $170m). Torchlight could buy SCF - or they could take out the equity assets and the "Bad Bank". Related party or not - SCF needs all the "white knights" it can get.

3) While undergoing structural change SCF has a Standard and Poors Albatross of a C short term rating which puts it in a Substantial Risk / Extremely Speculative grade or a B- long term which is still highly speculative.

NZF has a B rating for short and long term debt. They managed to package up $100m of AAA rated RMBS - that were sold into the institutions. B- long and C short, in SCF, reflects the cash planning issues with the "Wall of Debt" and the overall negative outlook S&P has on the NZ finance sector. Do not interpret the S&P rating that the SCF loan book is in any way a toxic mess. My basic belief is that the loan book is solid ... the dynamics of the SCF business are the issue. SCF needs more primary equity, less equity assets and to be rid of the property sector loans. All this is happening ... as far as I can see.

Your "Steady State" summary contains lots of "could's" - all rational, but the sooner the coulds turn into "dids' the better.

Once the "coulds" turn into "dids" - you will no longer be able to buy SCFHAs at 10cents per unit.

Your "Viable Business" provides an interesting analogy.
Shouting "fire" where it is clear there is no fire is surely irresponsible - but perhaps there is enough of a whiff of smoke that a precautionary approach is the most pragmatic. We've seen from the weekend that you don't even need smoke to end up with dead bodies lying around a picture theatre. Conversely shouting "all is well" when it is not, is also irresponsible - and that is where SCF separates itself from the Hanovers - we haven't had that kind of misleading message presented by celebrities: though perhaps some of the AH adorees are getting a bit close to that position.

I'm not sure anyone here is suggesting SCF is insolvent or fraudulent. On balance, based on cash flow, I'd say the scales are tipping towards drawing on the Govt Deposit Guarantee being called on. SCF need more facts and "dids" (like "we did secure $200m in equity") to get them tipping back in the right direction.

But in the meantime there is something there for those with an appetite for risk.

Fair enough call. I have a different view.

The only response I would like to make is that the only entity capable of shouting "Fire" is the Trustee. Only the Trustee has the full facts, provided on a daily basis, in some cases. The Trust Deed is very good, in terms of defining the debenture holder position. Trustees will only act to enforce the terms of the Trust Deed - this Trustee has accepted some temporary waivers to the covenants ... has set a deadline for full compliance ... and is NOT shouting "Fire" like some uniformed commentators.

I draw confidence from this and my own research that the SCF balance sheet is sound, in the present situation; will get better with further structural change.

The key risk is the dynamics of the debt rollover (the cash management issue). This could kill SCF - but if it does, this would be the tragic loss of a viable business.

[Enumerate]

Without the H-bomb of the Statutory Management of the Hubbards and the SFO scud missile attack on them I firmly believe that the SCF situation could have been successfully managed back to health and happiness. Now we have the potentially disastrous effects of collateral damage to the whole SCF business, by way of a likely serious falling-away of debenture inflows and rollovers, that even Sandy Maier seems to be acknowledging as a "given".

If downsizing to a $1billion business is tough ... downsizing to a $500million business is more than twice as difficult. There comes a point at which it is impossible. This remains a clear risk ... akin to a "run on the bank".

I decided to stick with the SCFHA's, given that there is little to be derived from selling them now, and a great deal to be gained from a possible eventual restructure of sorts.

If SCF survives, there is alot to like about the SCFHAs. The fully imputed dividend and the 2.5% margin above the bank bill rate makes them very tasty. As a long term investment ... they are either worth the $1 ... or they are worth nothing. Mine are now in the bottom drawer - awaiting the judgment of the Gods of finance.

[minimoke]

The only response I would like to make is that the only entity capable of shouting "Fire" is the Trustee.

I think your "fire" analogy works - except the shout has already been made. It probably was made first by the Govt when they introduced the Deposit Guarantee. "Theres a fire on the horizon and we will make sure we have enough appliances to protect your assets". S&P have also shouted "Fire" - but they have probably been successful in squeezing out the oxygen needed by fire as well as life. AH has shouted fire and bought in the helicopter crews. and SM has shouted fire and is pleading for more cash. The Regulators sure have shouted "fire" - except that was the neighabours building and their emergency response appears to have been to (inadvertently) lob the flaming fuel next door. The message we'll get from the Trustees, in this analogy will be "Run!, the building falling down". If this happens the survivors will be the ones who didn't get too close to the heat.

[percy]

Enumerate and Minimoke.
May I say how much I enjoy your well thought out informed posts.
The magnitude of the requirement is that a $1billion dollar finance company could be run with equity of $100mil,you wrote Enumerate.I think the commentators do not understand this.
From the PGC exercise ie capital raising it was shareholder capital lost.The speed at which Torchlight raised $150 mil surprised me,then Marac paying cash of $70 mil for GMAC.
My point is that $220 mil At PGC makes SCF requiring capital look not so hard.
Shareholders led by Kerr saw Marac as a good finance company once the proprty loans were accounted for.SCF is the same.

[Enumerate]

Shareholders led by Kerr saw Marac as a good finance company once the proprty loans were accounted for.SCF is the same.

The Marac of old was an commercial/industrial financier, I believe. SCF is to agribusiness what Marac was to commercial/industrial. Both are specialist forms of lending and require much more commercial savvy than is present in the trading banks.

I'd say that if PGC had to choose between Marac and SCF ... they would choose SCF!

[percy]

.

I'd say that if PGC had to choose between Marac and SCF ... they would choose SCF![/QUOTE]

Yes.That's a thought.!!!PGC shareholders love divies,where they come from they do not mind.A few years ago I was at a PGC AGM when then chairman Sir Miles Warren announced that the divie was being increased.Greeted with hurrah,hurrah from the shareholders.I thought someone would lead three cheers for the chairman!!!!Yes SCF is more of a fit with PGC when you really think about it.