Dairy Holdings’ shareholders takeover SCF shares

Shareholders of Dairy Holdings Ltd, which owns 58 dairy farms in the South Island, have bought shares in the company which were owned by the collapsed South Canterbury Finance (SCF) and others.

Chairman Bill Baylis said earlier that transactions were due to settle on Thursday and that Overseas Investment Office approval would not be needed. Companies Office records on Friday show that SCF has been removed as a shareholder. It previously had a 33.6 percent stake.

Three UK entities, Pals Plus LLC, NZ Cow Company LLC , and Little Cow Company LLC, have also been removed as shareholders and holdings for existing shareholders Colin Armer and Alan Pye have been amended.

SCF receivers had been trying to sell the Dairy Holdings stake jointly with four other shareholders, creating a 62.5 percent controlling stake but there has been speculation that the existing shareholders had preemptive rights and that the company, rather than the receiver controlled the sale process. . .

Most of Dairy Holdings, farms are in North Otago and Canterbury and unlike the Crafar farms are regarded as being well run.

This news contradicts the rumour circulating earlier this week that the Government Superannuation Fund would buy the shares.

Guarantee scheme payout is insurance premium

Finance Minister Bill English made a Ministerial Statement to parliament  on South Canterbury Finance yesterday in which he explained the background to the Deposit Guarantee scheme.

While the Crown has had to make good its guarantees to depositors, it will recover some of the proceeds out of receivership. Once the receivership is finished, this will largely complete the cycle that began in October 2008.

When the fees collected from the wholesale and retail guarantee schemes are included, the net cost is likely to be between $300-$400 million.

While this cost to taxpayers is considerable, this expenditure did help prevent the potential collapse of the financial system.

In the light of ongoing bank bailouts around the world, this net cost is the premium our economy has paid to avoid potential catastrophic losses to the taxpayer over the last 18 months.

In other words it was like paying insurance.

It’s easy to forget just how fragile the international economy was when the Deposit Guarantee Scheme was put in place.

Once Australia had one, New Zealand had to follow to forestall a run on banks here. Once we had the scheme the government had to honour the commitment first made by Labour when it introduced it and it’s done it in a way to minimise the cost and damage to the wider economy.

As this week’s Listener editorial says:

SCF went broke for all the usual reasons that companies go broke – bad management, weak governance and hubris.

In fact, confronted with the inevitability of SCF’s collapse, the Government’s response has been deftly focused on settling investor fear and limiting the economic fallout.

The government is now in control and that means there will be no fire sale of assets which is important to maximise the return from the companies and farms SCF owns.

What I said, what I meant

In the Bloggerheads spot on Q&A this morning I said:

It’s not a taxpayer bail out. It’s not north saving  south, urban paying rural.

People who lent to and borrowed from South Canterbury Finance came from all over the country. Only those covered by the Deposit Guarantee scheme will get their money back.

Receivership will enable an orderly sale of assets to minimise the eventual cost and damage to the wider economy.

 The government made the right decision over a business that went badly wrong.

 When I said it’s not a tax payer bailout I meant that the company wasn’t being bailed out.

But the depositors are and the taxpayer will end up paying under the Deposit Guarantee Scheme.

Fees – taken from the big banks not finance companies – will cover some of the cost. The return on the sale of the company assets – as a whole or n pieces – will recoup a lot of money but no-one is expecting that to cover all that’s owing.

John Armstrong asks:

Was it fair that finance companies were included when the scheme was rushed into existence in October 2008 during the darkest hours of the global banking crisis and the last days of the Labour Administration?

Was it fair that finance companies still afloat then got protection while investors in those that had already crashed got nothing? Was it fair that some people had subsequently invested money in finance companies to exploit the Government guarantee?

Possibly not to the first question and definitely not to the second.

The exposure of flaws in the deposit guarantee scheme provoked demands they be called to account for failing to rectify them. . . .

While much has been made of the approval of that extension, it is essentially irrelevant. The Government was obliged to pay out the $1.6 billion to depositors because South Canterbury Finance is still covered by the original two-year scheme which has run from October 2008.

The Crown could have withdrawn its guarantee earlier if it considered there was misconduct on the part of the company or a material change in its financial position for the worse.

But the Government would still have had to pay out investors after the company inevitably defaulted as a result of the guarantee being withdrawn. Some money would have been saved. However, the Government gambled on the appointment of restructuring guru Sandy Maier as chief executive to get large portions of the company back on a sound footing. The gamble failed. But it was surely worth a go.

The simple truth is that once South Canterbury Finance was under the umbrella of the deposit guarantee scheme, the taxpayer liability was there for as long as the scheme was in place.

There are grounds for arguing the scheme has been in place too long. But that is from the benefit of hindsight.

. . . Both main parties – Labour in setting up the scheme and National this week in seeking to minimise both the cost to the taxpayer and the economic fallout – have sought to act in the national interest.

Yet, no one – apart from those who creamed it on the back of the Government guarantee – is happy. The Government is the convenient whipping boy.

It is and that’s why people accusing National of acting in the interests of supporters is tosh.

People who get their money back not only come from all around New Zealand they’ll have a variety of political persuasions and they are far fewer in number than the rest of the populace who are aggrieved. 

There are far more votes to be lost than gained from this.

But when you’re in government you don’t get to pick your fights. You have to deal with what comes up and make decisions based on the best information available.

Sometimes that will be politically popular, much of the time it won’t and this one definitely isn’t.

HP on TV

Q&A’s bloggerhead slot aims to give two different positions on the issue of the week.

Tomorrow it’s Keith Ng from Public Address, chosen because he’s young, urban and financially literate and me because I’m not so young, rural and . . . ?

The media release says:

On Q + A this Sunday:                                                                                                         

Paul Holmes interviews former South Canterbury Finance Chief Executive Sandy Maier about what went wrong and what chance taxpayers have of recovering the losses.

South Canterbury Finance’s collapse has its origins in the global financial crisis. Reserve Bank Governor Alan Bollard joins Guyon Espiner to talk about his new book, Crisis: One Central Bank Governor & the Global Financial Collapse and his battle to save our finance sector during the worldwide meltdown. Was the deposit guarantee scheme that saved SCF this week well conceived? Did anyone see this coming? And what does he really think of the government’s efforts to counter the crisis?

Paul and Martin Sneddon talk rugby.  One year from RWC kick-off, are we ready? Or are the critics right to be sceptical?

Dr Therese Arseneau is joined on the panel by 2025 Taskforce head, the former Reserve Bank Governor and National Party leader, Dr Don Brash and Waitakere mayor Bob Harvey, who’s soon to take over development of the Auckland waterfront.

@ Bloggerheads, are Keith Ng from Public Address and Ele Ludemann from Homepaddock.

Q + A is broadcast live 9-10am Sunday on TV ONE and repeated at 9.10pm on Sunday nights and 10.10am and 2.10pm on Mondays on TVNZ 7. 

 (TVNZ 7 screens on Freeview Channel 7 and Sky TV Channel 97). 

It’s not north saving south, urban paying rural

The government’s honouring the Deposit Guarantee Scheme which will return funds to people who lent money to South Canterbury Finance has unleashed a nasty stream of north vs south, urban vs rural vitriol.

It’s not supported by the facts and it may be partially fuelled by a failure to differentiate between depositors and borrowers.

The people who are getting their money back are the  depositors, the ones who invested funds in SCF. They came from all around New Zealand and overseas.

Timaru District Mayor Janie Annear said the guarantee had provided relief nationwide not just South Canterbury.

“South Canterbury Finance is a business which is much wider that just South Canterbury. The Government’s prompt response has minimised the impact of New Zealand’s shaky post-recession recovery.

“All investors, irrespective of where they live, will be pleased that the Government guarantee scheme has worked as promised.”

SCF chief executive Sandy Maier said only about a quarter of the investors were from South Canterbury and the rest of the country had benefited from the scheme.

“`Fifty five per cent [of the investors] are spread through the South Island, and around 40 per cent in the North Island and the rest in Australia and Fiji.

“Undoubtedly this has been a massive decision for the Government to pay the guarantee out and it will have let a lot of people, including those in South Canterbury, breathe easier. I am hugely thankful as well.”

If one group is likely to be under-represented among investors it is farmers. They don’t usually have much cash to  spare and if they do they generally put it back into their farms.

Then there’s the borrowers. They’re the ones who got loans from SCF. They too came from all over New Zealand and in an ODT interview  CEO Sandy Maier said:

South Canterbury was largely caught out by increasing its lending to property developers during boom time.

Many of those debts were never repaid, and it ended up booking losses of about $200 million.

Property development isn’t usually f arming. It’s much more likely to have been urban than rural and some of it was in the North Island, including Auckland.

In an interview with Interest.co.nz Maier said:

Speaking to interest.co.nz after SCF’s receivership was announced yesterday, Maier said he still believed the best value in SCF was as one. This includes its “Bad Bank” which holds about NZ$700 million worth of loans, and its “Good Bank” which holds about NZ$900 million of small ticket rural lending. Then there’s Helicopters NZ, a 79.7% stake in Scales Corporation and 33% stake in Dairy Holdings which were tipped in by owner Allan Hubbard earlier this year.

If the small ticket rural lending is in the “Good Bank” those borrowers are paying their interest and are expected to be able to pay back what they’ve borrowed when their loans fall due.

The 33% stake in Dairy Holdings  is one of the assets which will be sold to help recoup some of the money the government is putting in to the company.

If farms are among the businesses with loans which turn sour the farmers will be treated like other debtors. Finance companies are always lenders of last resort . If the farms have to be sold the farmers will almost certainly lose any equity they had. 

Taxpayers should be grateful the campaign to prevent land sales to foreign owners hasn’t yet gained much traction because limiting sales to New Zealanders will depress the price and reduce the amount the receivers get back.

SCF was a victim of its own success as money poured in it moved from its traditional lending to more risky ventures.

South Island farmers weren’t  responsible for bad decisions made by the company and none will be getting anything from the taxpayer  unless they had deposits with the company. In that case they’ll be treated the same way as all other depositors.

This isn’t a case of the north saving the south, urban people paying for rural mistakes.

 It’s a business failure which won’t be quite as serious for the wider economy as it might have been. Depositors all over New Zealand and overseas will get their money back and an orderly sale of assets will realise more than the firesale which would have resulted had the company been left to fall over.

SCF requests receivership

South Canterbury Finance has requested the company be put into receivership:

SCF announced this morning that it has been unable to complete a recapitalisation and restructure.

As a result, the Company would have been unable to certify to its trustee, Trustees Executors, in accordance with the terms of its debenture trust deed that it was compliant with various financial covenants under the debenture trust deed for the financial year ended 30 June 2010.

The trustee acts on behalf of more than 35,000 debenture holders with $1.2 billion of debentures invested in the big lender.

Accordingly, South Canterbury Finance Limited has requested Trustees Executors to appoint a
receiver in respect of the whole of its undertaking and assets, and Trustees Executors Limited has done
so.

This is a sad end for what has been a flagship company which has been a sizeable lender in South Canterbury and beyond.

But there is no need to panic. Investors’ money is covered by the deposit guarantee scheme and the receivers will undertake an orderly sale of assets.

Much of the company’s money is tied up in mortgages on farmland. Forced sales of these would not only put SCF’s equity at risk it would have a very negative impact on farm values.

UPDATE:

Finance English Bill English said the government moved swiftly to repay investors, reduce the cost to taxpayers and ensure minimal disruption to the wider economy:

“Ensuring all depositors in South Canterbury Finance get their deposits back as quickly as possible will ensure a minimum of disruption to the economy.

“While this will incur an upfront cost, it will ultimately reduce the cost to taxpayers by about $100 million by ensuring the Crown is not liable for interest payments after the date of settlement.

“Furthermore, being in control of the receivership process takes the pressure off the receiver to quickly sell any assets.

“This ensures the Crown can get the best deal for taxpayers. Businesses that owe money, or are owned by South Canterbury, can continue to operate and there will be a minimum of disruption to both the local and national economy.

“The up front cost to the Crown of repaying South Canterbury’s depositors is about $1.6 billion, but we would expect to recover the bulk of that as the receiver sells the assets over time.

“The final expected net cost to the Crown is already provided for in the Crown Accounts within the overall provision of about $900 million for all companies covered by the scheme,” Mr English says.

The $1.6 billion upfront is a huge amount but the ultimate cost to taxpayers will be considerably less than this.

Paying out now allows the repayment of deposits to be mdae quickly, minimises disruption to the wider economy and gives government control of the receivership process. The taxpayer should recoup most of the money after an orderly sale of assets.

Risk and return

When the Finance Minister postpones an overseas trip to deal with a finance company investors it will not be to deliver good news.

High returns in investments are almost always matched by high risks.

People investing in South Canterbury Finance, Hubbard Management Funds and Aorangi Securities have had very good returns, now they’re being faced with the realisation that their investments were also high risk.

Apropos of this, Scott at Imperator Fish writes:

… I predict that many of Alan Hubbard’s supporters will turn on him, like sharks who’ve scented the blood of one of their own. He may be a well-meaning old gentleman, but nothing is quite as educational as the pain of losing one’s life-savings.

… we must remember to blame the Government. They acted too slowly. Or did they act too fast in putting Hubbard into statutory management? Does it matter? All this market stuff is confusificating me. . .

It will be more than confusificating for the the people who are concerned about losing money.

 Depositers are covered by the deposit guarantee scheme but they are not the only ones with something to lose if SCF falls over.

The uncertainty over SCF, HMF and AS has shown just how the threads of the various Hubbard entities are woven through rural and provincial South Island. There are valid concerns that if one thread is pulled a lot more will unravel.