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SCF struggles to get new cash fast enough

Monday 31st May 2010

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South Canterbury Finance, whose owner Allan Hubbard quit the board after 30 years as chairman, has been downgraded two notches to B+ after it failed to raise money fast enough for Standard & Poor’s.

Hubbard’s departure marks the end of an era for the financier, who has poured much of his personal fortune into keeping the company afloat. His exit is part of a “succession” plan for the firm, which kept its BB credit rating long enough to tap the government’s extension to the retail deposit guarantee scheme. When the scheme ends, SCF will be forced to raise funds in the open market, driving up its cost of borrowing.

“To stand on its own two feet after the crown guarantee, it needs to either increase its retained earnings or bring in new equity,” said David Speight, a director at Direct Broking. “Hubbard’s not going to be there forever.”

S&P credit analyst Derryl D’Silva said the finance company’s credit rating was cut to B+ from BB because the “restoration of its financial profile has not been quick or sufficient enough.”

SCF’s rating outlook is now Creditwatch Developing.

“The balance-sheet-liquidity build-up, to date, has not been as strong as we anticipated; we have observed delays during the past few months,” D’Silva said in a statement. “We believe that SCF’s exposure to future refinancing risks is no longer tolerable at the previous BB rating.”

The downgrade comes as octogenarian Hubbard stepped down from the board, taking on the title President for Life, to focus on getting the company get through its short-term liquidity crisis and find an equity partner for SCF to “achieve an orderly succession and underpin the long-term future of the business.” Hubbard will continue to attend South Canterbury Finance board meetings in his new role.

SCF chief executive Sandy Maier said S&P missed the point of the finance company’s turnaround.

“All along, our aim has been to restructure the business in an orderly way to underpin its long-term sustainability,” Maier said. “Doing so will protect the interest of all investors and stakeholders more effectively than striving to meet the short-term goals and expectations of the ratings agency.”

Maier stressed the downgrade didn’t impact on its position under the government’s extended retail deposit guarantee, nor breach the trust deed or other financial covenants. Treasury officials have confirmed to BusinessWire in the past that a downgrade in SCF’s credit rating wouldn’t result in it getting kicked out from the extended guarantee.

SCF director Ed Sullivan will also step down from the finance company’s board, marking a complete changing of the guard in place before October last year, with all other directors new appointees.

The shake-up at the finance company comes after Pyne Gould Corp. cornerstone shareholder George Kerr pumped $37.5 million into the Timaru-based finance company via the purchase of convertible notes in parent Southbury Corp.

Last week, SCF reported a net loss of $1.2 million in the three months ended March 31, including $5.2 million worth of investment losses, impaired loans and forex movements.

The results excluded contributions from the Helicopters NZ and Scales Corp. businesses Hubbard injected into SCF to shore up its performance, which Maier said will deliver a significant improvement in the company’s fortunes.

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