South Canterbury Finance Limited

**Alan3285** · 02-03-2010, 10:25 PM

Well, since it is highly unlikely that [Un]Balance[d] will post this, I'd better do it:

http://www.interest.co.nz/ratesblog/index.php/2010/03/02/south-canterbury-downgraded-to-bb-may-be-cut-below-guarantee-threshold-within-3-months/

Positive: It meets the requirements of the Extended Guarantee Scheme

Negative: It is a downgrade from BB+ and is on creditwatch negative with a potential downgrade in the next period

See now - its not so hard to be objective is it?

Alan.

**winner69** · 03-03-2010, 02:40 AM

Originally Posted by Balance

So what is SCF after this?

It's an investment company - not unlike Equiticorp in the old days. It derives the bulk of its funding from investors - lends some out but invests in companies and lends to them as well??????????

Let's hope it does not become another Equiticorp.

Spot on - SCF is now more of an investment company than a finance company and that is major shift in direction.

Convenants in trust deeds are put in for good cause and it does seem to be a big decision (punt? or giant leap of faith?) by te trustee to allow these breaches which allows SCF to become an investment company instead of a finance company.

All I can think of why is that he knows more than most and that there is an impending huge cash (yep real money) injection on the horizon or that they have somebody lined up to buy Helicopters and Scales ..... possibly a deal already on the table but not consumated

After all drastic and quick action was necessary last week as with the writeoffs SCF was technically broke .... all shareholder equity (and those perpetual things) wiped out .... negative equity .... noy good for a finance company eh

**minimoke** · 03-03-2010, 07:54 AM

Originally Posted by Alan3285

Positive: It meets the requirements of the Extended Guarantee Scheme

Negative: It is a downgrade from BB+ and is on creditwatch negative with a potential downgrade in the next period
Alan.

Yes Alan the retention of the Extended Guarantee Scheme is a positive - but boy, was that by the skin of SCF's teeth. S&P say:

"Further, SCF’s financial flexibility and, in particular, further shareholder support of SCF, is diminished following the capital injection. That said, but for strong shareholder support evidenced in SCF’s announcement concerning high loan-loss provisions of late yesterday, it is likely that the rating would have been downgraded by more than one notch.”

So if Hubbard hadn't moved what would have happened?

So thats the beacon of hope. But what else did S&P say which should raise flags of warning:

"Liquidity is currently weaker than many New Zealand nonbank deposit takers’ in the ‘BB’ rating category, and should it deteriorate further it is likely to result in the rating being lowered."

Well the hope there, is that debenture investor loyalty has been loyal - but for how much longer? The negative watch can be removed IF investors and liability stakholders continue to back SCF.

What about:

"A further concern is that the announcement of high loan-loss provisions by SCF could retard or even scuttle further recapitalisation initiatives being considered by SCF. If further capital is not injected—should liquidity or further asset quality pressures emerge—it is likely to cause the rating to be lowered."

It seems Hubbards cupboard is now bare and what are the chances of a NZX listing? Slim now I'd say.

S&P have flagged not only a one notch down grade (and thats teh Guarantee Scheme stuffed) but also a two notch downgrade:

should liquidity deteriorate it is likely that the rating will be lowered—and potentially by more than one notch—depending on the severity of the deterioration.

Colin may be sleeping well but I reckon there are those within SCF that won't be.

**Balance** · 03-03-2010, 08:57 AM

Originally Posted by Alan3285

Well, since it is highly unlikely that [Un]Balance[d] will post this, I'd better do it:

http://www.interest.co.nz/ratesblog/index.php/2010/03/02/south-canterbury-downgraded-to-bb-may-be-cut-below-guarantee-threshold-within-3-months/

Positive: It meets the requirements of the Extended Guarantee Scheme

Negative: It is a downgrade from BB+ and is on creditwatch negative with a potential downgrade in the next period

See now - its not so hard to be objective is it?

Alan.

Er .. it's actually a negative.

Note that the statement was issued well after market close?

And no, SCF has not received an extension of the govt guarantee scheme yet - it qualifies from a rating s point of view but there are other requirements like related party transactions etc which SCF still does not meet.

Irrational exuberance - this is the kind of PR nonsense which SCF is infamous for. Now we have posters here doing the same!

**Alan3285** · 03-03-2010, 10:41 AM

This is my simple analysis of the current situation with respect to SCF:

Basically, they need around $1b in cash by mid Oct 2010 when the govt guarantee runs out.

That appears to be roughly the amount that is maturing from debentures between now and then, heavily weighted in the week the guarantee runs out.

So, if they have outstanding loans maturing between now and then of about $1b AND if those loans are substantially repaid in full, AND if they don't re-lend it (or lend it very short and secure), then SCF will be fine irrespective of whether the EGS is approved.

If they don't then they have to raise the funds elsewhere by:

1) Borrowing materially past Oct 2010 (I think we can rule out retail deposits for the most part here, so we are talking about wholesale borrowing).

2) Selling 'non core' assets (e.g. HNZ or Scales) or selling off some of the loan book.

3) Capital raising (equity)

4) Debt for equity swap with another stressed finance company

Number (1) looks very difficult without incurring very high interest costs, which would push the medium to longer term position further downhill - not impossible by any means though.

Number (2) has to be on the agenda and I think they'll be pursuing that as fast as possible.

Number (3) is on the agenda too as they have already said. Difficult in the current market, but if Hubbard is willing to 'lose' substantial amounts of his investment, and I think he has clearly demonstrated already that he is, then this could work quite well.

Number (4) would improve the equity position of SCF and improve cash flow by whatever amount(s) they could recover from the additional loan book between now and Oct 2010, but I think that the debenture holders in the third party finance company would not go for it having seen what they believe to be a bad deal from Allied Finance (naively perhaps, but it is perceptions that count).

If they can't do any of the above (or all / some of them in combination), then everyone except the debenture holders are looking at almost total wipeout come Oct 2010.

Apologies if this has been asked before, but does anyone know if the bondholders are covered by the govt guarantee scheme? I assume not, in which case they would likely lose eveything too, but they may be?

Please update with any more specific numbers if you have them.

Thanks,

Alan.

**minimoke** · 03-03-2010, 11:42 AM

Originally Posted by Alan3285

Basically, they need around $1b in cash by mid Oct 2010 when the govt guarantee runs out.

I htink its around $490m in June and $650m in Ocotber

1) Borrowing materially past Oct 2010 (I think we can rule out retail deposits for the most part here, so we are talking about wholesale borrowing).

Agree retail borrowing can't be relied upon. After October the Guarantee scheme will be tougher to get into (and SCF is trending down at the moment) and costs of entry will be higher. As for wholesale borrowing - isn't that just delaying the inevitable for a bit longer. There seems so much borrowing and giving to in order to repay investors and new capital coming in to shore up current investors and so much shuffling of the assets and jiggling with trust deeds its going to get harder to know just what is what what. How are Fonterra's cash reserves - they might be interested to keep the multitude of diary farm exposures afloat and asset values high.

2) Selling 'non core' assets (e.g. HNZ or Scales) or selling off some of the loan book.

Agree Helicopters and Scales have to go on the block - but at fair value, a discount (distressed seller) or a premium (great forward order books and long term contracts)? And can they sell in time?

3) Capital raising (equity)

I don't see this as an option anymore - too many yellow and red flags flying now.

4) Debt for equity swap with another stressed finance company

Doubt this will occur. Which stressed finance company? Can it be done by October? As you point out there will be reluctance after the ALF experiences.

What about Option 5) government intervention. Governements in the past have bailed out banks, railways and airlines where it is politically or economically expedient.

**Alan3285** · 03-03-2010, 11:51 AM

Hi Minimoke,