South Canterbury bond speculators reap fat reward as finance firm fails

Tuesday 31st August 2010 3 Comments

Bargain hunters who bet against South Canterbury Finance in the NZX debt market will be rubbing their hands with glee today with the guarantee covering the failed financier’s listed bonds plus interest.

The Timaru-based finance company called in the receivers today, triggering the government’s retail deposit guarantee which will pay out the face value for the firm’s debenture and bond holders.

Prices for the company’s listed bond maturing in 2012, after the extended guarantee, fell to a deep discount earlier this year, with the yield reaching 40% in March. That meant audacious punters could buy them cheap and get paid out in full if South Canterbury failed.

“There will be a lot of money made in the listed bonds with prices up to 20, 30 and 40 percent, which was all paid today,” chief executive Sandy Maier said in a conference call. “A lot of bets in the casino paid off big time today.”

The yield had abated in recent weeks, and was last at 24% before trading in the security was suspended. The government will have to pay-out $125 million on the bonds.

Maier said the guarantee, which many commentators claim distorts the market, gave him confidence to accept money from “widows and children” as he sought to save the company from collapse.

The failure of the finance sector has seen a number of low-ball offers for debenture stock, and prompted the Securities Commission to warn investors to make an informed decision before accepting bids significantly below face value.

Businesswire.co.nz

Comments from our readers

On 31 August 2010 at 1:41 pm Bruce Herdman said:

IMHO this shows why the government should not have guaranteed these finance companies using taxpayers' money. The people investing in high interest bonds initially are just as much speculators as these recent purchasers and they should have been left to the market to sort out. I'd rather see Government money spent on hospitals, education and transport.

On 31 August 2010 at 2:14 pm JP said:

I am continuously surprised at the comments from people as to why to government should not have had the guarantee. Do people really understand how the Government Guarantee works. I.e. the various banks and finance companies who have availed themselves of this guarantee have paid into the government coffers a considerable sum, since the inception of the program. Perhaps one of our astute financial journalists can do the sums and let us all know what the real cost is to the taxpayer in NZ. Certainly not the billion of dollars many are quoting. Perhaps some simple arithmetic also may help. Whilst some loans in SCF are impaired, many are good and paying their mortgage. Therefore these are not considered a loss. In fact the interest being paid on these loans is far greater than the cost of the money to the government Come on folks be real and thoughtful with your comments

On 31 August 2010 at 4:40 pm P said:

JP is not entirely correct, most finance firms are below a level where they paid any premium. Banks and large institutions paid, but the small firms, where most of the risk was paid NIL and got fantstic cover.

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