Soured property deals of more than $200 million ultimately brought South Canterbury Finance to its knees. Senior business reporter Simon Hartley looks at South Canterbury's demise, in the wake of findings this week from the country's largest alleged fraud case.
The truth behind South Canterbury Finance's spectacular crash died with company founder Allan Hubbard, in a car accident on a North Otago road in September 2011.
The 85-year-old South Canterbury Finance - with $1.75 billion in largely agricultural loans spread mainly across the South Island in early 2010 - was seen as simply too big to fail.
Ultimately, it would cost the taxpayer about $800 million.
Despite glaring and mounting warning signs in losses and impaired assets during 2009-10, South Canterbury would have gone into receivership by March 2010 had it not just barely scraped in to the Government's extended retail guarantee scheme on April 1, 2010.
While the US subprime mortgage lending crisis prompted the global financial crisis, New Zealand's subprime crisis came in the form of the dozens of finance company crashes, costing billions of dollars in lost investments.
The loans ranged from boutique finance companies lending overextended families cash to buy a second, over-valued home, to the spectacular Queenstown collapse of the $1 billion Kawarau Falls Station, which had the backing of major overseas banks.
South Canterbury was the South Island's largest finance company lender, with a high percentage of loans in the agricultural sector, dairying in particular, and also had a growing book of land-development related loans.
It was a relatively new sector for the company, and its growth was reported to have bounded from $750 million in 2004 to almost $2 billion in 2008.
International ratings agency Standard and Poor's (S&P) lowered South Canterbury's rating a notch, from BB+ to BB, albeit with a negative outlook, but that was the bare minimum required for inclusion in the guarantee scheme - the saviour for tens of thousands of investors.
Within about 11 weeks of formally joining the Government's deposit guarantee scheme, and amid massive restructuring and capital-raising efforts by new management, South Canterbury would find itself under Government-imposed statutory management on June 20, 2010.
That move was swiftly followed by announcement of a Serious Fraud Office investigation, before receivers were appointed to wind up the sprawling company on August 31, 2010.
The bill to taxpayers, via the guarantee scheme, stood at $1.75 billion to investors and other lenders to South Canterbury. The exact value and ownership of the labyrinth of assets was far from clear. About $800 million has been clawed back by the Government to date.
Aside from statutory management over both Allan and Jean Hubbard, also initially included were 10 trust and two separate private investment Hubbard-controlled companies, several of which have not had their respective receiverships fully concluded, and later, a slew of holding company entities.
South Canterbury had initially been denied acceptance into the guarantee scheme in December 2008, because instead of 8%, it only held 6.73% of capital against its loan book, but in January 2010, South Canterbury reapplied to the recently extended guarantee scheme.
Treasury documents post-collapse said subsequent information from directors, auditors, the trustee, the Reserve Bank, Companies Office and Securities Commission were considered, and the application for inclusion signed of on April 1, 2010.
Following the appointment of a statutory manager, when news broke of the Serious Fraud Office interest in Mr Hubbard, Timaru rallied round and about 500 people braved a cold day in South Canterbury to offer the couple support, reflecting his almost legendary status in the region.
The public support for Mr Hubbard was not only heartfelt but vociferous, and those seen to be attacking or questioning Mr Hubbard were publicly taken to task by supporters.
However, on September 2, 2011, Mr Hubbard and Jean were involved in a two-car accident north of Oamaru, which killed Mr Hubbard (83).
With Mr Hubbard's untimely death, also lost was any opportunity for him to defend and answer the mounting questions over his actual control, knowledge and role in South Canterbury's lending and accounting practices.
Cracks began to appear publicly in the South Canterbury facade in early 2009, when two tranches of its bonds slid from their $1 purchase value to 92c. Its bonds and term deposits were the two crucial components of its capital raising.
Investors were exiting the bonds, at a loss, because their bond redemption time was outside the Government capital guarantee scheme South Canterbury was then part of.
It was a sign of the times, with finance companies falling on an almost weekly basis, alongside property developer-borrowers.
In January 2009, South Canterbury called in a $5 million loan on a proposed, but failed, $50 million hotel development of Dunedin's former chief post office, which separately left other private, southern investors hundreds of thousands of dollars out of pocket.
In that trail of broken promises, bankruptcies, unpaid creditors and investors and mortgagee sale, South Canterbury was at one point left holding claims for $7.5 million.
During the rest of 2009, events went from bad to worse for South Canterbury.
It booked a first loss in 75 years of $37 million, followed by revelation of related party loans estimated at about $130 million, then suffered the subsequent malaise from an S&P investment rating downgrade to junk status in July.
With $750 million, or 23%, of its loan book in property, Mr Hubbard pumped $40 million into the company to help alleviate the deteriorating property loans, but a non-cash provision of $58 million was made for non-performing loans and doubtful property assets.
However, looming on the horizon was a $US100 million ($NZ165.5 million) private placement facility from the US which could be withdrawn if the S&P rating fell. Fortunately, South Canterbury was able to negotiate to pay that back over almost six months, albeit with a further $20 million penalty payment.
At the same time, it lost a $100 million New Zealand credit facility, but picked up a $75 million credit facility, one of two George Kerr Torchlight funds offering cash, which ultimately grew to $100 million. Both funds were fully repaid under the guarantee scheme.
Torchlight has been referred to as a ''type of vulture fund'', offering distressed companies finance at higher interest rates and holding securities. Its $75 million fund was a syndicate of New Zealand and Australian investors.
South Canterbury had canned a float option in 2005, but under restructuring plans, it now revisited the scenario of listing on the stock exchange. Estimates at the time were it would seek to raise more than $200 million, given its loan portfolio was $1.6 billion.
While a prospectus was released in August, ultimately the planned float was shelved by the following May, as the company became mired in problems and investor sentiment was considered to be on the wane.
In October, South Canterbury booked a $63 million before-tax loss, compared with $73.6 million profit a year earlier, then later that month announced the sale of shares in 78 South Island farms, mainly dairying interests. For its six months trading to December, South Canterbury posted a loss of almost $155 million, higher than market expectations.
Although it was included in the Government guarantee scheme on April 1, 2010, as if more problems were not needed, it was revealed South Canterbury had about a $1 billion ''wall of maturities'' coming due during 2010, requiring payments of $491 million in June and $640 million by October.
Having already appointed brokers Forsyth Barr and Harmos Horton Lusk as restructuring/capital raising advisers, South Canterbury in October appointed new independent directors, including Dunedin professional directors Stuart McLauchlan and Bill Baylis, as well as Denham Shale.
Following the resignation of chief financial officer Graeme Brown in December, corporate fixer Sandy Maier replaced chief executive Lachie MacLeod.
In April, South Canterbury's general manager of funding resigned, then in May Mr Hubbard resigned as a director, followed three days later by South Canterbury businessman Edward Sullivan.
The new executives rounded up $152 million in new equity, and acquired Helicopters NZ Ltd and Scales Corp Ltd, ''purged'' the loan book, and increased provisioning for bad debt to $203 million, but an analyst at the time estimated the provisioning was more like $408 million.
Incredibly, even at this time, during January, investors were ploughing $1.7 million on average, daily, into South Canterbury, according to Mr Maier, while Forsyth Barr had raised a private placement of $27.5 million.
In respect of the $1 billion ''wall'' of debentures coming up, South Canterbury hoped to roll over many of the investments, and offer longer-term debentures with attractive interest rates, which would be underpinned by the Government guarantee, to avoid a run on repayment demands.
Mr Maier and company decided next to carve South Canterbury into three divisions.
About three weeks after gaining acceptance for the Government, they created a ''good bank'' to hold about $1 billion, of secure loans which would be repaid; a ''bad bank'' holding $500 million of distressed loans (of which 95% was property), with $292 million to be sold short term and the rest over three years.
The third division was ''private equity investments'', about $400 million in loans, including the cash-positive businesses Scales Corp and Helicopters NZ.
In subsequent interviews with the ODT, Mr Maier said ''South Canterbury is a complex beast, with a lot of arms and legs''.
The property investment arm was South Canterbury Finance's problem, Mr Maier said. The company had moved too far from its traditional rural/farm-base lending and ended up with more than 30%, or about 3000 loans, worth $477 million in property, he said.''
We have got to liquidate what doesn't fit,'' he said of exiting property loans.''
It [bad bank] has to be managed for an exit,'' he said of the loans, which were made outside South Canterbury Finance's usual lending base.''
Property investment was a graveyard for a lot of people; a boom-and-bust industry which absorbs capital for a long time. It was not a traditional activity for us,'' Mr Maier said at the time.
With South Canterbury having up to $1.1 billion to pay back to debenture and bond holders during the next seven months, Mr Maier was hoping at least 50%-55%, in line with traditional patterns, would be rolled over by the investment holders.
Similarly, Mr Maier wanted an ''at least'' 55% uptake from the company's recent prospectus, which was offering $1.2 billion in registered debenture stock and $50 million of unsecured deposits, the former covered by the Government's guarantee scheme, the $50 million unsecured deposits not.
As at late April, Mr Maier said the plan was to deliver an updated prospectus by September, and just weeks later booked an operating profit for the quarter to March of $4 million, albeit dragged down by one-off costs to a $1.2 million loss.
County-wide roadshows ensued for Mr Maier, and by the third week of May he had investment agreement that about $500 million of the soon-to-be-outstanding almost $1 billion of debenture payments would be rolled over.
While Mr Hubbard was at that point credited with having injected more than $150 million into South Canterbury, events were about to unravel.
Tellingly, despite his positive news, Mr Maier had told Dunedin investors a week earlier that there was ''a possibility'' of further impairments and asset write-downs in the future, but he was otherwise confident the company was on track to a successful restructuring.
Just two days before statutory management was announced, Mr Maier confirmed to the ODT that South Canterbury had entered into formal due diligence with more than two interested parties to take a multimillion-dollar stake in recapitalising the company. It had whittled down a list of 15 to a shortlist of five.
But within about 48 hours then commerce minister Simon Power ordered the Hubbards, and a multitude of trusts and companies, into statutory management, saying the Serious Fraud Office was to investigate ''potential breaches of the Crimes Act''.''
Loans to related parties have not been properly secured and documented, and it was felt statutory management was the only option,'' Mr Power said.
It was reported South Canterbury had just $7 million cash in the bank.
Despite more 11th-hour efforts to secure recapitalisation, on August 31, the South Island's largest lender was placed in the hands of receivers, ultimately triggering the Government to pay out $1.775 billion. That included investors and the Torchlight funds and loan made to the receivers - but long forgotten are investors in $100 million of South Canterbury tradeable preference shares, from 2006, who got nothing.
The Government secured 100% control because it immediately released $100 million to the receivers to repay Mr Kerr's Torchlight funds, rather than risk facing protracted legal challenges to the myriad assets and those who may have held charges (claims) over them.
The full South Canterbury story spans thousands of pages in hundreds documents since the receivership, from company archives, Government, Treasury, Serious Fraud Office, receivers and now the courts. The extent and explanation behind multiple, complex, related-party loans, company ownership, oversight and responsibility may never be fully known.
Receivers Grant Thornton, only a month ago, released its 17th and final report on the non-guarantee covered Hubbard-controlled Aorangi Securities Ltd. Aorangi's investors got 99c in the dollar, totalling about $101 million, while the also-private Hubbard Management Fund still has $17 million of assets to sell, its investors having so far got 50c in the dollar.
Mr Hubbard's supporters can always highlight decades of successful lending, investments and returns achieved by him, and his humanitarian championing of the futures of thousands of South Island people.
However, there was not just a failure of Mr Hubbard to move with the times in accounting practices, but also in the way he represented and reported to investors how their money was being used.
It has been reported up to $200 million was under Mr Hubbard's direct control in order to keep loans liquid, and to easily control their renegotiation.
Although Mr Hubbard knew how to successfully juggle tens of millions of dollars on the back of an envelope, when it came to juggling almost $2 billion, one pot of cash was always going to come up short.simon.hartley@odt.co.nz
