An epic failure

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 provincial sector.

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 $1.6 billion.

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 guarantee.

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 conversions.

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 their rescue.

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 economic recovery.

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.