SCF 'bad' loans may rise

Speculation is rife that the $700 million of "bad bank" loans of failed South Canterbury Finance - now owned by the Government - may climb higher, adding to projected taxpayer losses.

After South Canterbury was placed in receivership, the Government moved quickly to assure investors it would pay out $1.6 billion, under its retail deposit guarantee scheme, taking ownership of about $1 billion of secure "good bank" loans and $700 million in higher-risk bad bank loans, which include many loan defaulters.

The Government has estimated that after the sale of the assets of the good and bad bank loans during the next three to four years, taxpayers would be out of pocket by about $600 million, of which the bad loans are at present expected to account for about $400 million.

However, Craigs Investment Partners broker Peter McIntyre believed there could be more debt in the bad loans to be accounted for, noting it had already grown over several months from $500 million to the $700 million, at receivership date on Tuesday.

Of that $700 million, he estimated $350 million-$400 million was in rural property loans, being "impaired or struggling" to make repayments.

"There is likely to be further deterioration on the property book, mainly for the lending in the rural sector... Given 60% of loans are in the South Island, a high proportion of that will be rural," he said.

A spokesman for Finance Minister Bill English said receivers McGrathNicol were working on such day-to-day matters, while the receivers had no comment on the speculation over the bad loans.

Farming leaders are already airing concerns that a rash of forced South Canterbury farm sales would further depress prices, and are calling on receivers to take a measured approach.

The statutory management of two of the companies and seven trusts associated with South Canterbury Finance's driving force Allan Hubbard (82), is entirely separate from and unconnected to South Canterbury's receivership.

However, the managers have disclosed in their latest report that of $83 million invested in farming-related loans, $59 million is in Hubbard-related farm businesses.

Managers GrantThornton have said of loans to 25 dairy farms, it was expected just 17 of 51 loans would have their September interest payments met; leaving a shortfall of 50%, or more than $1 million.

When announcing the receivership, South Canterbury chief executive Sandy Maier said its financial reports to June, which were also due for release on the recapitalisation deadline of August 31, were likely to reveal that "there will be more debts than assets".

When contacted yesterday, he said the bad bank loans carried about $700 million of soured loans, but he expected the receivers would realise "more than $300 million in cash" from bad loan sales.

He would not categorically rule out the possibility of there being more bad bank loans, saying only that in recent months these had not been updated often and he understood "that not much had changed on the [bad] loans book".

He was unsure if the accounts to June would be published at all, saying that was now a decision for the receivers.

National Bank chief economist, Cameron Bagrie, said the four major banks were ready to buy and take over some South Canterbury loans, which would result in a higher premium for some borrowers.

"There is a big portion of South Canterbury loans which are not good. [Our] savers expect their money to be lent out responsibly," he said.

There would be instances where rural borrowers, whose initial South Canterbury funding was for "rural loans which were speculative and carrying a high degree of risk," might find interest rates too high and could default.

Given the Government had signalled a $600 million loss to taxpayers, it would be selling South Canterbury loans or assets for possibly 65c in the dollar, he said.

"[However] in some form there may be sales of zero cents in the dollar. There are bad bank loans which will have to be exited."