No bail-out discussions with govt: SCF boss

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South Canterbury chief executive Sandy Maier is adamant the government is not discussing any "bail-out'' option with the company, despite considerable speculation to the contrary.

He told BusinessDay this morning: "The only role I conceptualise and ever have conceptualised for government is in their role as guarantor under the retail deposit guarantee scheme. That's all that anybody on our side or the government side has ever talked about.''

While public statements can be a negotiating tool in complex deal making, Maier's words allow no room for misunderstanding.

They also have logic.

South Canterbury's impaired loans are said to be have a face value of about $700 million, quarantined in a "bad bank'' to make the rest of the business a cleaner entity for new investment.

The figure is $100m bigger than it was at December 31, when impaired loans before provisions were $598.2m.

A government purchase of the bad bank might entail the transfer of, say, $700m in cash from the taxpayer to South Canterbury, with the government taking ownership of the impaired assets.

The appeal of such a plan is the potential for South Canterbury to use the money to pay back debenture holders and have a more viable future as an operating business.

However, for the plan to work there would have to be contractual restrictions on how South Canterbury could apply the $700m - not an easy thing to achieve in practice.

It would also still leave the Government with the same overall liability as South Canterbury's guarantor.
Meanwhile the benefits for South Canterbury's owners - and potential owners - would be clear. The business would be rid of its most troublesome assets, freed from its cash flow crisis and requiring a much smaller capital injection.

No wonder some see it as a great idea. And while Maier is explicit that it has not been discussed, it is interesting to speculate on how it has gained so much currency in the last few days.

But if not a bail-out, what role could the government play in a rescue deal?

We know from South Canterbury's prospectus it is looking at selling the bad bank. The assets are mainly property loans, mostly first mortgages according to Maier, which would have appeal to some investors. The key issue, however, would be price.

Clearly, the buyer would be looking for a substantial discount, while the Government - and the trustee - would want to maximise the price. Every dollar off the book value of the bad bank is a dollar the taxpayer will ultimately have to fork out.

The trade-off for the government, therefore, is not necessarily between the collapse of South Canterbury and its own purchase of the bad bank.

Another realistic scenario is a trade-off between the Government accepting someone else's purchase of the bad bank for a big discount, and paying out the guarantee.

From the taxpayer's point of view, the best deal is probably to let someone else buy the bad bank at a discount, but only if the discount isn't too big.

A waiver from a breach of its trust deed expires tomorrow so South Canterbury's future hangs in the balance - and there's nothing dealmakers like better than a deadline.

As Maier, in Wellington today for talks, said: "it's going to be an interesting week.''

This is a commentary by Tim Hunter,  the deputy editor of the Fairfax Business Bureau.

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