Hubbard faces a wealth wipe-out

Allan Hubbard

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Allan Hubbard is likely to get nothing from a government-backed restructuring of South Canterbury Finance expected to be announced in the next few days.

The loss of the company, in which the Timaru businessman is ultimately the major shareholder, will wipe out most of his wealth, estimated at $550 million in last year's NBR Rich List.

Although the final details of a rescue package to save South Canterbury from collapse are still being finalised, they are likely to include an arrangement for the government to take over more than $500m of the company's impaired loans.

The Sunday Star-Times understands the amount of bad loans on South Canterbury's books has been a sticking point in negotiations to find new investors willing to pump urgently needed capital into the company.

Its accounts to December 31 show it had total loans of $1.5 billion, of which nearly $600m was impaired.

The government has been looking at a plan whereby it will take over the troubled loan portfolio, probably at its face value.

South Canterbury has already taken steps to facilitate this, putting its impaired loans under the control of a separate administrative unit which has been nicknamed "the bad bank".

Last month the company said the bad bank was administering about $500m of loans.

Under the proposal, the government would effectively buy those loans from South Canterbury, immediately giving the company a $500m cash injection.

A new owner could then take 100% control of the remainder of the company by injecting another $200m or so of cash into it, although it is believed negotiations are continuing around those numbers.

That would leave South Canterbury with around $700m in new cash and about $900m to $1 billion in "good" loans, significantly allaying concerns about the company's ability to repay investors as its debentures fall due.

However, in the medium term, additional cash could come from the sale of various assets which Hubbard sold into South Canterbury in a desperate attempt to shore up its balance sheet. These include Helicopters NZ, a majority stake in Scales Corp and various property assets.

The sale of those assets might release another $200m in cash.

The company would also have the cashflows from the interest and capital repayments from its good loans.

If more cash was needed in a hurry, the better-quality loans should be readily saleable to other financial institutions.

The advantages of the plan are that it would not only solve South Canterbury's pressing cashflow crisis, it would also leave the company sufficiently well capitalised to begin writing significant amounts of new business.

And new owners, particularly if they were part of a larger group, perhaps with overseas connections, might be able to source institutional funding, making the company less reliant on the mum and dad investors the company has traditionally depended on.

The controversial part of the plan is the initial $500m or so the government will need to stump up, although the ultimate cost to taxpayers would be less than that because the government would eventually recover some of the money from the bad loans, possibly as much as half.

But if South Canterbury is not recapitalised and is eventually tipped into receivership, the government could be liable for $250m anyway under the Deposit Guarantee Scheme.

The proposal may not be any more expensive, and, as well as protecting retail investors, would prevent the possible contagion effect from a major financial institution's failure, while ensuring the economic benefits of having a substantial finance company lending into the business sector.

- © Fairfax NZ News