South Canterbury Finance Limited

[GTM 3442]

In normal circumstances i would agree with you. However there are a couple of scearios under which a total retructure of SCF could/would see the prefs being repaid in full .... and the way emotions are running anything is possible

On the other hand there is also a strong possibility that come Tuesday they could/will be worthless

Pick you odds and take your chance

Then again by Tu

Curious, I am. What are the scenarios ? Possibly means I'm ignorant as well as curious.

[Beagle]

With SCFHA paying 5.61% until the next reset, who on earth would pay face value ?

Perpetuals at over face value are those with AAA ratings (Rabobank) or the Aussie banks with Long (2013) reset dates.

Unrated Infratil is at 65c in the dollar.

How on earth could SCFHA's be worth face value ?

I can't see them going over 40c in the dollar, even in the most optimistic scenario.

Or have I missed something ?

No you havn't missed anything. Only completly delusional idiots think they will go back to a dollar. Fact is the terms of these PERPETUAL shares which were issued at a time when the margin over interbank swap rates was at an all time low, are woefully inadequate for the new economic environment we operate in today.

Enumerate and others invested in these type of instruments would do well to consider what would be an appropriare return for a non-voting perpetual preference share in the new operating environment of non-guaranteed debenture deposits post December 2011.

I would suggest on a risk adjusted basis the margin over 10 year interbank swap rate should be at least 9% not the woefully pathetic 2% the current shares offer. The implied yield would thus be 9% + current swap rate for ten year about 4.5 % = 13.5% required rate of return.

With a current return of 5.61% and an apparent protracted period of extremly low interest rates one could conculde that for the perpetual shares to offer a fair yield they would have to trade at 5.61/13.5 = 41.5 cents on the dollar and that's ONLY IF virtually all uncertainty regarding SCF is removed by some extremly complicated deal this week.

Unfortunatly many bloggers appear to be unsure of the methodology of the fundamental analysis of acceptable current market yields and their effect on the capital value of perpetual debt instruments which I have described above. I have suggested for some time that the odds when you buy in at 15 cents or thereabouts are simply not as attractive as they look as the absolute maximum possible realistic return is about three times your money. This is simply because in the new GFC environment which we currently operate, the market will demand such a return, in my opinion, especially for a finance company perpetual share.

[winner69]

Your analysis is quite correct Roger but those who took a punt on the prefs at 15 cents odd didn't do it for the yield .... like has been outlined a total recapitalsiation of SCF by somebody other than Southbury could/would result in the prefs being repaid in full

Than again come Tuesday and they might be worthless.

[GTM 3442]

Thanks Roger,

Not sure that I agree with your "...apparent protracted period of extremly low interest rates..." scenario, but that's a different subject.

Thanks for the reply.

[Beagle]

Winner 69 I'm picking they're worthless, which is why I havn't bought any.

GTM3442 - For what its worth I'm in the double-dip camp and believe that central banks world-wide will need to keep interest rates at historic lows for years to come.

[winner69]

Winner 69 I'm picking they're worthless, which is why I havn't bought any.

GTM3442 - For what its worth I'm in the double-dip camp and believe that central banks world-wide will need to keep interest rates at historic lows for years to come.

Prob are worthless come Tuesday but still a better bet than the guy from Christchurch (presumeably) who put $10k to make a profit of $3k on Canterbury to beat Tasman last week .... the punt in this case is $10k to make $56k profit ..... not that i punted that much

[GTM 3442]

Your analysis is quite correct Roger but those who took a punt on the prefs at 15 cents odd didn't do it for the yield .... like has been outlined a total recapitalsiation of SCF by somebody other than Southbury could/would result in the prefs being repaid in full

Than again come Tuesday and they might be worthless.

I see two scenarios:
(1) Someone buys SCF to cherry-pick it, in which case SFHAs, being equity, go to the wall
(2) Govt guarantee, in which case SFHAs, being equity, go to the wall

Who is going to pay them out when they don't have to ?

[winner69]

The Treasury carry on around the Gvt Guarantee not covering trusts managed by professional trustees or trusts/estates where any beneficiary is overseas could have a few ramifications here

I would hazard a guess that a lot of the so called rich SI money is in these sprt of vehicles

Maybe a quick payout under the scheme won't happen for many

[Jaa]

I would suggest on a risk adjusted basis the margin over 10 year interbank swap rate should be at least 9% not the woefully pathetic 2% the current shares offer. The implied yield would thus be 9% + current swap rate for ten year about 4.5 % = 13.5% required rate of return.

With a current return of 5.61% and an apparent protracted period of extremly low interest rates one could conculde that for the perpetual shares to offer a fair yield they would have to trade at 5.61/13.5 = 41.5 cents on the dollar and that's ONLY IF virtually all uncertainty regarding SCF is removed by some extremly complicated deal this week.
.

Instant Finance pay a 15% yield on their preference shares issued in Dec 2008. So I would say 13.5% for a larger and in theory more stable finance company would be about right reducing over time to 10% perhaps.

[winner69]

Good old Mick Hoskings guts eh .... after listening to Carruthers he is now convinced this is an injustice or something ... and tells us so ad nausem

whats overlooked is taht hubbards empire was unravelling a couple of years ago but the govt guarantee kept the money go round turning for a few more years ... and it still irks me that a company that essentially self destructed is bailed out by the taxpayer

Alan may have had a great business for decades but at the end of the day he will be remembered for other things