South Canterbury Finance Limited

[mouse]

Many posts about SCF. Mine was, 'would you lend SCF cash in the present situation?' Since that is what is required, cash, and long term it is required without a Government Guarantee. The next danger, and it is just as serious, is 'would you borrow cash from SCF?' The danger of borrowing from SCF is you might have to repay it at short notice and in a bad financial market. The business of SCF is to borrow cash in and lend money out. Both are very difficult until everything is cleared up and SCF has a clean bill of health. I would neither lend to nor borrow from SCF at the present time.
It is perfectly OK to take a punt for excellent gains. Would you do it for 8%?
That is the question for the market.
Would sharebrokers, or sharemongers, recommend investing in SCF deposits?

[percy]

Many posts about SCF. Mine was, 'would you lend SCF cash in the present situation?' Since that is what is required, cash, and long term it is required without a Government Guarantee. The next danger, and it is just as serious, is 'would you borrow cash from SCF?' The danger of borrowing from SCF is you might have to repay it at short notice and in a bad financial market. The business of SCF is to borrow cash in and lend money out. Both are very difficult until everything is cleared up and SCF has a clean bill of health. I would neither lend to nor borrow from SCF at the present time.
It is perfectly OK to take a punt for excellent gains. Would you do it for 8%?
That is the question for the market.
Would sharebrokers, or sharemongers, recommend investing in SCF deposits?

Some time ago Marac lost shareholders capital.Shareholders put in fresh capital.Brand intact.A long time ago Westpac looked to be in trouble and looked as though Kerry Packer would take it over.went to shareholders for more capital.Brand intact.American Express looked to be in terminal trouble.Warren Buffett saw AE cardholders were still using the card.Brand intact,Buffett brought large shareholding and made huge amount of money.
What is needed inSCF is new capital.This will restore the brand very quickly.Very,very quickly if the new capital or new shareholding is also a known name or brand.Until that time there is uncertainity,so would be hard for adviser to recommend them in my opinon.
I still find it surprising how much money Kerr has raised with Torchlight and PGC and how Marac paid $70mil cash for GMAC.Seems to me there is plenty of money around so long as there are good rewards.

[Enumerate]

I am not recommending anything to anyone ... but as a hypothetical case:

Would sharebrokers, or sharemongers, recommend investing in SCF deposits?

If I had $100,000 capital ... and needed 5% before tax to live on ... that is $5,000 per year, at the bank, at best.

This is what I might do as an alternative:

I'd put $90,000 into SCF020 (due 15/6/2011) at 11.5% - that gives me $10,350 per year.

I'd put $5,000 in the bank, on call, at 4% - that gives me $200 per year.

I'd put $5,000 into SCFHA at 13cents each - about 38,500 scfha at 5.71%. or about $2,198 per year

Analysis:

If it turns to custard ... I could lose up to 1 quarter's interest from my SCF020s and all my SCFHA capital ... I simply cash in my on call money to cover off my income needs .... I get my $5,000 to spend (the on call money) get an extra $10,350 +$200 in interest pro rated and my $90,000 guaranteed capital back. Basically, I'm fine - on average, slightly better off than money in the bank.

If it goes well ... I make out like a bandit. I get my interest of $10,350 plus on call interest of $200 plus $2,198 from the SCFHA. I exceed the $5,000 I was going to get from a bank by a wide margin and have made a tax free capital gain on my SCFHA asset that now has a capital value of $38,500. I now have capital of $133,500 and income approaching 3 x what the bank was paying. Tasty!

[minimoke]

Would sharebrokers, or sharemongers, recommend investing in SCF deposits?

I don't see how a Financial Advisor could point clients to SCF at the moment. The risks are not well enough known nor are the results if those risks come home to roost. The risk for Advisors is they don't know how long it would take for a client to get their money back if things go bad - nor can they guarantee the interest payable. And there are better alternatives for those who would seek financial advice. Though that probably wouldn't stop ForBarr pointing their clients to SCF.

Thats not to say that there aren't opportunities for more sophisticated investors / institution who can do their own research and come to an independent view on the returns relative to that risk. They will know the business and also have sufficiently deep pockets to ride out any loss if things go pear shaped. They won't use Advisors.

There are also opportunities for those uninterested in the risk (or what Advisors have to say) and will put money in for the sole purpose of supporting AH. Clearly AH has support to December 2011 - the test for these people will be if they leave their money in after the Guarantee runs out. If SCF lasts that long these punters will be in the minority as they will be minor players since the real equity injection will come from the big players.

[percy]

[QUOTE=Enumerate;310235]I am not recommending anything to anyone ... but as a hypothetical case:


Loved it,but what hypothetical recommendation would you make for your mother in law ,or your grandmother?

[Enumerate]

Loved it,but what hypothetical recommendation would you make for your mother in law ,or your grandmother?

For a start ... I am not a registered financial adviser ... so I never, ever, ever make recommendations as to what or how to invest.

However, for my grandmother or mother in law, I would suggest that they investigate the following model.

Take their $100,000 and borrow a further $100,000 from the bank at 7.4% interest.

We have income requirements of $5,000 + $7,400 +28% tax for the interest. Hence we need $13,880 income.

We have $200,000 to invest ... but put aside $15,000 for the call account earning $600 per year.

We put $180,000 in SCF020 at 11.5% - earning $23,000 per year.

That leaves $5,000 for the SCFHA, as above, which allows us to buy the 38,500 units at 13cents yielding 5.71%. or about $2,198 per year.

Analysis:

If it turns to custard, we get pro rated $23,000 + $600 + $2,198 = $25,798 per year plus our $15,000 on call capital plus government guaranteed $180,000. We pay back the bank's $100,000, pay the $7,400 + 28% interest. That means we have $16,918 pro rated left - we take our $5,000 income and add the $11,918 pro rated to our income for the year.

If it all goes well ... we are in like a lizard drinking, as before!

All sorts of interesting models are possible when your basic capital is protected by the NZ government.

[percy]

For a start ... I am not a registered financial adviser ... so I never, ever, ever make recommendations as to what or how to invest.

However, for my grandmother or mother in law, I would suggest that they investigate the following model.

Take their $100,000 and borrow a further $100,000 from the bank at 7.4% interest.

We have income requirements of $5,000 + $7,400 +28% tax for the interest. Hence we need $13,880 income.

We have $200,000 to invest ... but put aside $15,000 for the call account earning $600 per year.

We put $180,000 in SCF020 at 11.5% - earning $23,000 per year.

That leaves $5,000 for the SCFHA, as above, which allows us to buy the 38,500 units at 13cents yielding 5.71%. or about $2,198 per year.

Analysis:

If it turns to custard, we get pro rated $23,000 + $600 + $2,198 = $25,798 per year plus our $15,000 on call capital plus government guaranteed $180,000. We pay back the bank's $100,000, pay the $7,400 + 28% interest. That means we have $16,918 pro rated left - we take our $5,000 income and add the $11,918 pro rated to our income for the year.

If it all goes well ... we are in like a lizard drinking, as before!

All sorts of interesting models are possible when your basic capital is protected by the NZ government.

Well I did ask.Not the answer I thought I would get.Should you change your mind and become a finnancial advisor may I become your first client?

[Enumerate]

Well I did ask.Not the answer I thought I would get.Should you change your mind and become a finnancial advisor may I become your first client?

Lol.

I did appreciate your point - what would the ultra simple, ultra conservative approach be? (Decided to put the leveraged model up for a bit of fun).

There is a much simpler model ...

Key point is that you can collect interest, on the SCF020s, for a full quarter - without actually owning them for a full quarter.

Lets say you have $100,000 and buy half way through the quarter - look at the www.nzx.com site and check out SCF020. The "buy per $100" and "sell per $100" prices INCLUDE accrued interest. So with your $100,000 you would get $100,197 of debentures with the entitlement for a full quarterly interest payment of $10,520/4 = $2,630.

Skip the SCFHA investment ....

You put in $100,000 into SCF020s. However, you time it until shortly before an interest payment. You get about $2,630 (with tax deducted) as your first interest payment. This is like half a year of bank equivalent income gained in a few weeks.

[Enumerate]

I'd just like to restate .. these models explore generic approaches to structuring fix interest investments.

People reject the SCF debentures/bond because of the ability to lose up to a quarters worth of interest ... due to the delays in processing the government guarantee.

What I am trying to prove is that:

A) The government guaranteed nature of debt is worth alot ... it makes models, pointed out above, work - even the leverage case.

B) It is possible to construct a very simple structure that overcomes the risk of losing income for a quarter

If NZ's financial planners cannot see this or cannot structure an even better portfolio to deal with this risk ... then I am amazed. What matters, in a portfolio, is return for a defined level of risk. Even the 8.25% SCF debentures offer some amazing alternatives to bank deposits.

I hope that I have proven that it is worthwhile paying closer attention to the possibilities.

Do your own research or ask for a qualified expert to pass judgment on any investment proposal! Do not take these illustrative models as an investment proposal!

[minimoke]

[QUOTE=Enumerate;310255]For a start ... I am not a registered financial adviser ... so I never, ever, ever make recommendations as to what or how to invest.{/quote]
If I may, for a moment, play devils advocate.

However, for my grandmother or mother in law, I would suggest that they investigate the following model.

There’s your first hurdle. Your mother-in-law still doesn’t think you are good enough for her child so she ain’t going to be taking no advice from you. As for granny – she’ll already have her money tied up with that nice Mr Hubbard.

Take their $100,000 and borrow a further $100,000 from the bank at 7.4% interest.

Hurdle two. Head down to the bank and say “ I want to borrow on my house so I can put money into to SCF”. The bank teller needs a good a laugh!

But lets say they are a bit more courageous than most – the best you’ll get, maybe is 30% loan on the value of your property (rather than 90% if you were to leverage into property). You're there fore not utilising 60% of the potential equity in your own property.

And since we are borrowing on the house we should take Bernard Hickeys wise words into account: "You're house will lose 30% in value"

We have income requirements of $5,000 + $7,400 +28% tax for the interest. Hence we need $13,880 income.

Not sure where the tax payment comes in - wouldn't you claim your interest as an expense and reduce your net tax payable. I might just keep the tax implications out of the equation for the time being since there are possibly some capital gain issues in there somewhere

What you will certainly need though is cash to repay principal as there is no way the bank will let you go Interest Only on a loan relating to SCF. I'd imagine that until 31 December 2011 they would be wanting big chunks back - maybe $30k a year. You could of course renegotiate along the way as SCF position firmed.

We have $200,000 to invest ... but put aside $15,000 for the call account earning $600 per year.

OK - I'm going to call you on your call account interest. You're really looking at 3% gross or there about - so thats $450 less tax: peanuts I know. So you have your $200,000. put aside $5,000 for living; $7,400 for interest and $30,000 for capital repayments. You're closer to $158k

We put $180,000 in SCF020 at 11.5% - earning $23,000 per year.

lets call it $152k earning potentially $17,100 (less tax)

That leaves $5,000 for the SCFHA, as above, which allows us to buy the 38,500 units at 13cents yielding 5.71%. or about $2,198 per year.

Analysis:

If it turns to custard, we get pro rated $23,000 + $600 + $2,198 = $25,798 per year plus our $15,000 on call capital plus government guaranteed $180,000. We pay back the bank's $100,000, pay the $7,400 + 28% interest. That means we have $16,918 pro rated left - we take our $5,000 income and add the $11,918 pro rated to our income for the year.

if it all turns to custard, say on 13 October (and Sandy Maier reckons he can make payment for the time being) you don't get any interest past the 13 Sept coupon date. You will get your $158k cash back - eventually. You'll also loose your money on the SCFHA's. You'll also having the bank knocking on your door wanting their $100k back - but you only have $30k put aside.

So you can give the bank $30k plus the remaining interest cash you'd put aside (lets call it $5,500) leaving you a shortfall of $64,500. So what do you do? You can't use your own $100k cash cos thats tied up until Treasury releases it in how many months. The bank wants its regular interest payments on the $64,500 balance in the meantime - and they have put your interest rate up because your house has dropped in value and you don't have the income to support the debt you previously had. You do have your $5,000 to live on (which you have wisely put aside) so you could use that - but that means your spare cash is pretty much shot. So now rather than thinking your rolling in loot your worried about how you are going to meet the banks demands for their interest repayments.

If it all goes well ... we are in like a lizard drinking, as before!

If not, the mother-in-law will only blame that no good piece of rubbish that married their precious child " I always knew you were trouble!!" ands thats you off the "Socks at Christmas" present list. As for Granny - she'll just trust that nice grandchild to see her right - except the grandchild is also in hock cos their money is also tied up in SCF!

All sorts of interesting models are possible when your basic capital is protected by the NZ government.

Lets not forget its actually the tax payer who is allowing people the freedom to punt on long shots.