South Canterbury Finance Limited

[Enumerate]

they just looked like a great return compared to other risk / return options (like 3% in the bank!)

Do not be dazzled by the deep discount you are buying these things to face.

You would have to agree that the most likely outcome for SCF is to emerge in a significantly deleveraged state from its reorganisation. The accumulated losses in property, losses that can be expected on the related party loans, losses from the reorganisation process and significantly scaled back business opportunities - will leave SCF smaller and weaker.

The SCFHA pref holders will be, along with the equity holders, the ones who "pay the piper".

If you factor in less optimistic scenarios - like a nervous government with a vast exposure through the retail investment guarantee scheme - the prospects for equity and pref holders are much worse.

Let me see ... 3% in a bank vs 50% in SCFHA ... I know how to evaluate the risk side of the equations, my deep fear is the the SCF reward parameters may be completely illusional.

[GTM 3442]

Hi GTM,

I picked up mine at a 24% return (or something like that) around Sep 2009 - more luck than judgement in getting the very top of the yield curve to be honest - they just looked like a great return compared to other risk / return options (like 3% in the bank!)


Alan.

If you're into perpetuals, you could look at Infratil at about 66c , which is effectively 7.5% (double 3% in the bank), with an annual reset to look after any coming inflation.

Nowhere near as good as 24%, sure. But less prone to rollercoastering around. . . .

Perpetuals got a really bad press last year, when the resets kicked in and people found that the rate could go down. Some of them were quite surprised by this, I gather.

[Enumerate]

Perpetuals got a really bad press last year, when the resets kicked in and people found that the rate could go down. Some of them were quite surprised by this, I gather.

Perpetuals have the worst aspects of equity - deeply subordinated debt, perpetual term, zero yield (in the bad times) ...

And the worst aspects of bonds - low yield (compared with equity in the good times), no voting rights, weak ability to trigger insolvency.

[Balance]

Balance - they have $79m in the bank .... ha ha

Indeed!

Just like they told the market in Aug 2008 - "we maintain $400m of cash and undrawn facilities."

Ticking away.

[Alan3285]

Hi GTM,

If you're into perpetuals, you could look at Infratil at about 66c , which is effectively 7.5% (double 3% in the bank), with an annual reset to look after any coming inflation.

Nowhere near as good as 24%, sure. But less prone to rollercoastering around. . . .

Perpetuals got a really bad press last year, when the resets kicked in and people found that the rate could go down. Some of them were quite surprised by this, I gather.

For that part of my portfolio that is interested in SCF, I wouldn't be looking at a 7.5% yield to be honest.

If I am chasing 20% plus for a small tranche, I'll stick with the ones I think have the best yield / risk trade-off and right now, I'd say SCF010 is a great one to go for.


Not worried about the resets to be honest. The SCFHA rate is set from the 1 yr swap rate plus a margin of 2.3%.

As at 1 Oct 2009, the 1 yr swap was 3.31%.

Clearly it *could* go up or down, but I don't expect it to be lower come next year or in the foreseeable future (you never know though).


Bear in mind too, that the 24% yield is based on when I put the cash in and could go up (on cost) if the rate reset is higher as seems likely at this point.


I might have a closer look at BLU020 though....


Alan.

[Balance]

PGW & FPA have obtained extensions for their government guarantee.

SCF still waiting.

http://www.stuff.co.nz/business/indu...extension-risk

Excerpt :

"Treasury did not say who had applied for the extension and would not announce who was turned down.

Treasury and Reserve Bank staff had started gathering data from SCF for the extension application. SCF did not know when it would get an answer from Treasury on its application, Maier said."

Tick .... tick.

No wonder the yields are blowing out again in the wrong direction.

[Balance]

Tick .... tick .....

More onerous conditions to qualify for the government's extended guarantee.

Government guarantee holds key to South Canterbury Finance's future: Maier:
20th February 2010

South Canterbury Finance's future depends on its acceptance into the government's deposit guarantee scheme as it approaches $1.1 billion of debt roll-overs between now and when the scheme shifts to new, more onerous conditions in October.
Maier, the head of embattled lender South Canterbury Finance says the government scheme has created the “unintended consequence” of making itself a necessity in giving investors piece of mind to roll-over their deposits as they come due – something that’s become a headache for the Timaru-based finance company.
South Canterbury Finance, which is owned by octogenarian millionaire Allan Hubbard, flagged a billion-dollar black hole in its latest investment statement, with some $491.2 million of debt to be repaid by the end of June, and a further $650.5 million coming due before the expiry of the existing guarantee in October. As at February 10, the company had cash on deposit of $79 million and realisable assets of $12 million, with a loan book of about $1.7 billion as at June 30.
“We’re in a temporary hump, but there’s a sense that if we can get into the scheme, we can open up a wider range of investments and move people to roll-over” their deposits, Maier said. “We’ve certainly handled individual roll-over days as big as these ones.”
Last month, South Canterbury Finance said it would apply for the extension to the Crown guarantee, which takes the scheme out to the end of 2011 with harsher requirements and more punitive charges, after it flagged more impaired assets in its first-half earnings that would lead to a loss for the period.
The Treasury requires companies that are already covered by the scheme, such as South Canterbury Finance, not to have had their guarantee removed, not to have been subject to a default event, and to hold a credit rating of at least BB. The finance company’s BB+ rating would see it pay a premium of 1.2% for coverage.
The finance company won’t be able to fall back on a banking facility after it was cancelled last year, and it has fully drawn down a $75 million facility with George Kerr’s New Zealand Credit Fund, which was used to repay American investors. Maier said there were no immediate plans to re-engage with the banks, though they’re reviewing all kinds of options to recapitalise the company.
Still, it did manage to attract new deposits after it released a prospectus in October, boosting its deposits to $34.9 million at December 31, from $29.2 million in June, and Maier’s confident they will be able to meet their obligations with renewal rates of between 50% and 60% from existing investors.
The Treasury kept its provisions for the retail deposit guarantee scheme at $899 million in the five months through November. About $873 million has been provided for future costs to the government. Some 73 institutions are covered by the scheme, with deposits totalling $133.1 billion, of which about $5.5 billion is in the non-bank sector.

[Balance]

Good lines of SCFHA and SCF010 on offer.

Whatever happened to all the bravado talk of buying plenty?

Tick .... tick .....

[Alan3285]

Hi Balance,

Good lines of SCFHA and SCF010 on offer.

Whatever happened to all the bravado talk of buying plenty?

Tick .... tick .....

Still waiting for the price (SCFHA) to get below 30c again.....

I'm not getting in again until the top sell on the board has a 2 in front of it.

Please do keep talking it down though ;-)

Alan.

[Balance]

Hi Colin,



Apologies - I did actually read that post, but I did not really recognise the extent of the opportunity.




My thinking exactly.

Yes - I agree that the prefs might see a higher yield on the next reset (1 Oct 2010 I believe), but you are still 'giving away' nearly 10% (roughly 20% minus 10%) of return in the meantime, so that cannot really explain it (at least in my opinion).

I am buying into the SCF010 bonds as they appear to be a bargain at current prices and I believe the chances of SCF defaulting on those is sufficiently low that the yield of 19.5% more than compensates for any risk and then some.


Alan.

The SCF010 are offered at 23.1% - even better buying now.

Get into them - QUICK!