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SCF lingers on past Treasury's expectations

Friday 15th October 2010

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South Canterbury Finance, the failed financier that made the biggest call on the government’s retail deposit guarantee, survived for two months more than what Treasury’s boffins were expecting.

As early as December last year Treasury officials were picking the Timaru-based lender to collapse in June, according to a swathe of official documents published on the department’s website in relation to SCF’s collapse. The documents included monitoring reports from the Reserve Bank, which was similarly more pessimistic about other failed lenders, such as Allied Nationwide Finance, Mutual Finance, Vision Securities and Viaduct Capital.

SCF ultimately collapsed into receivership on August 31 having got through a big chunk of maturing debentures and rolling over some $490 million of investments after it failed to bring on a new investor to inject fresh equity into the ailing company. Deposit and debenture holders will receive their guaranteed money next week, almost two months after the firm collapsed.

The government stumped up $1.775 billion immediately after the firm’s collapse to become the sole creditor and control an orderly wind-down of the company’s affairs. The collapse of SCF, Allied Nationwide and Mutual Finance cost it about $745 million, according to the government’s financial statements released yesterday.

The documents show Treasury officials trod carefully around SCF and its potential liability on the government. Admitting the lender into the extended scheme, which cost finance companies a lot more than the original scheme, would keep the firm alive and prevent a rapid death that could put stress on the government’s books.

SCF pushed for the department to make a public statement giving it implicit acceptance into the extended scheme, something the Treasury didn’t agree to do.

“There is a risk that, without a signal from Treasury that SCF will be accepted into the extended guarantee, SCF may not be able to complete the recapitalisation proposal and find itself under severe liquidity pressure as depositor confidence would desert,” it said in a report to Finance Minister Bill English on February 23 this year.

“In such a scenario SCF could fail relatively rapidly, either through action by the trustee, or at the request of the directors of SCF. This would crystallise the fiscal risk for the crown.”

Still, the documents don’t show whether Treasury advised a removal of the guarantee from new investments in SCF, something the department did with failed lender Viaduct Capital last year.

In a sign of the increasingly desperate attempts to salvage the company and bring in new capital on to SCF’s books, it tried to acquire Strategic Finance, which was already in moratorium, for $220 million worth of cash, debentures and preference shares. The deal was to be part of February equity injection, when owner Allan Hubbard poured in his ownership of Helicopters NZ and most of Scales, but didn’t get across the board after Perpetual Trust, Strategic’s trustee, turned down the bid and sent the firm to the receivers.

When considering the best way to deal with a collapse by SCF, Paul Dyer from English’s office asked Treasury for generic information comparing statutory management with receivership. The Treasury provided an August 15 2009 aide memoire, recommending statutory management over receivership in unwinding a firm’s failure to minimise the government’s expense.

In a meeting between Treasury and Companies Office officials in July this year, the Companies Registrar Neville Harris said “it would be feasible to extend statutory management to incorporate SCF if that were considered appropriate and that may offer the potential for an improved outcome,” according to a file note from the meeting.

The Treasury officials said nothing under the guarantee scheme indicated there were grounds to recommend statutory management, and that it wasn’t up to them to make such a decision.

The government faces a hefty bill from the failure of the finance sector, the biggest of which was SCF. The Treasury expects the net cost of the retail deposit guarantee to cost some $800 million.

The collapse of SCF, Allied Nationwide and Mutual Finance in July and August will make up the bulk of this cost, at about $745 million. Prior to that, the government faced a $43 million bill as a result of failed financiers.

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