South Canterbury Finance Limited

[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.

[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.