Bailout may boost economy

The $1.8 billion government bailout going back to South Canterbury Finance depositors is the "talk of the market" and will be a big boost for the economy, with most expected to move into bank deposits or corporate bonds.

The bailout will see $1.6b go to more than 35,000 depositors in the next couple of months and $175m to receivers to buy out other creditors.

One market source said the $1.8b could be seen as a "massive fiscal stimulus" for the economy, with the Government pumping money into investors' hands, and professional advisers were already looking at ways to invest clients' money.

"There are more than 30,000 people about to get a dollop of cash way sooner than they were expecting," the source said.

There were a relatively small number of share investors who have lost out, so the rural community was unlikely to suffer because of the SCF collapse.

The source said most of the $1.8b was likely to go into bank deposits, or local or central government bonds, offering about 5 per cent.

It was less likely to go into shares or back to advisers who put investors' cash in the likes of South Canterbury in the first place.

There was still a risk the money could go back into another "dodgy finance company" just because it was covered by the government guarantee, and offering high returns.

The great bulk of the $1.8b was invested by "mum and dad" investors attracted to the high interest rate offered by South Canterbury Finance, while also being covered by the Crown deposit guarantee.

Forsyth Barr managing director Neil Paviour-Smith said investors were likely to want to put the bailout money into investments offering high security and attractive interest rates, including bank deposits and corporate bonds.

"Other issues coming to market [soon] would have the benefit of this $1.8b looking for a new home," he said, with two or three corporate bond issues likely to be on offer soon, though he would not name the companies involved. "Some of it may find its way into quality, high-yielding shares."

Meanwhile, some South Canterbury Finance bond investors appeared to make a huge profit on the back of the government bailout, according to Kapiti sharebroker Chris Lee.

"People have made a heck of a lot of money on those bonds, because if you could buy them for 60c in the buck two months ago, you're now getting a buck for a buck," he said.

There would have been a killing in the $125m tranche of SCF bonds that expired after the guarantee in December 2012, which were selling at 73c with a face value of $1 recently. Anyone who bought at 73c will get a payout of $1, which a source said was a "spectacular return" in a short time.

Market sources pointed out that Forsyth Barr's custodian companies for investors appeared to have bought millions of South Canterbury bonds between the end of June and the end of July, according to market trading figures.

However, Forsyth Barr's Mr Paviour-Smith said that while the figures appeared "intriguing", they were not right. There was little change between the holdings at the end of May and the end of July.

In other words, the June figures "appeared to be in error", he said. "It is curious and frustrating and it is misleading."

It appeared Forsyth Barr did some "smart buying", getting the bonds at a big discount and then getting the government bailout to make the investment up to $1, but that was wrong.

"We just have not been active buying millions of bonds in these securities," Mr Paviour-Smith said. Any actual changes were "pretty small".

Forsyth Barr was the organising broker for the SCF bonds several years ago and more recently was adviser to SCF in its efforts to gain new investors.

- © Fairfax NZ News