In effect, the Government has decided to allow South
Canterbury Finance to go into receivership believing it to be
the best of the few options available to it.
There is no question of the considerable political and
economic fallout for this is the biggest finance company
failure in many years, and certainly the biggest failure of a
South Island company inextricably linked with the rural and
The consequences for some individuals will be grave,
particularly those with high indebtedness, and those
investors with unsecured preference shares in SCF will also
be facing losses, some on a relatively large scale.
For the company's founder, Alan Hubbard, and his wife and
family, the failure will be catastrophic to their personal
fortunes and reputations.
The Government's decision will prove to be correct since
putting more borrowed public funds into supporting the
company beyond the end of its Retail Deposit Guarantee Scheme
could not seriously be contemplated.
However harsh the consequences for some - and taxpayers may
be billed for at least $600 million - the guarantee means a
payment to investors, and back into the economy, of about
This is an enormous sum and the assurance that debenture,
deposit and bond holders will be paid their full entitlement
of principal and interest, regardless of their eligibility
under guarantee, will provide confidence in a situation
potentially of great concern to investors.
But they, after all, chose to take what was a private
investment risk so the decision also raises questions about
the fairness of the guarantee scheme, especially since those
who gambled and put money into SCF after the scheme was
announced in 2008 will now get back both their principal and
interest, thanks to taxpayers.
Claims of the core business of SCF being retained and that
the restructuring during the past nine months, together with
a new chairman, directors and senior management, mean the
company can continue functioning as a successful private bank
once the terms of the guarantee expire remain fanciful.
To continue, SCF would seem to need a new brand identity, a
far better credit rating, a credible financial backer, and to
attract new investors prepared to risk their money without a
Realism suggests the company failed for exactly the same
reasons as many other finance companies in recent times: poor
management, over-confidence in the property boom, the
acquisition of non-performing assets and the investment in
non-core assets; and, in this particular company, more than a
suspicion that sentiment influenced investment decisions.
The longer-term effects on the South Island rural economy
could be grievous.
Farms, businesses and property owners in debt to SCF may face
forced sales unless alternative sources of funding can be
found or guarantees achieved.
It seems SCF gave some farmer creditors interest-free loans
and much of the lending appears to have been at discounted
rates for the costly purchase of dairy farms or for farm
Whether a satisfactory return to the receivers can be made
without depressing land prices remains arguable; certainly, a
fire sale must be avoided.
The remaining SCF assets may be poor, too, since the
restructured company has been disposing of its better
mortgages to other lenders and assisting its better debtors
to re-finance from other lenders.
This, some will assert, is the real reason SCF could not find
a white knight.
Investors left hanging out to dry by other investment company
failures, especially some of the very large ones such as
Hanover Finance, will ask why the Government did not come to
But why should it?
Investing carries with it risks and responsibilities on the
part of investors to do their homework.
It becomes much more complicated if fraud has in some way
been involved, deceiving investors, but in general terms,
risk is risk.
But with SCF's investors largely covered by the guarantee
scheme, the Government chose to see it go into receivership
at least in part so that it could have some degree of control
over the impact of the company's failure on the core South
Island economy - and so the fallout could be managed, as far
as possible, in an orderly manner.
SCF may be regarded as the biggest single South Island
casualty of the recession, and without the greatest care by
the receivers and the principal debtor - the taxpayer - the
long-term consequences may be a chief cause of slowing the
Everyone in the South will hope that prospect can be avoided.
On the brighter side, some sensible reduction of rural land
prices may eventually result from this failure, just as it
appears to be occurring in the urban property market once the
speculative bubble burst.