Sad times for SCF

BY CLAIRE ALLISON

No-one believed Chicken Little when he told everyone the sky was falling, and it wasn't so long ago that no-one would have believed the news that South Canterbury Finance had fallen.

But the headlines, complete with the black strap reserved for news of such significance, could not be ignored. On Tuesday, SCF was on the brink. On Wednesday, it had failed.

Midnight-oil burning by the finance company's chief executive and the board of directors had failed to pull a rabbit out of the hat, the rabbit being a new equity partner to inject $300 million into the business and pull it back from the brink.

South Canterbury Finance, New Zealand's second-largest finance company, was in receivership.

Suddenly, Timaru was the centre of national media attention. Television news and current affairs programmes invariably featured footage of the company's new Sophia St office and of Allan and Jean Hubbard trundling to or from work in the familiar mustard-coloured Volkswagen.

Business editors from publications throughout New Zealand wrote long pieces explaining how this would not have come as a surprise to anyone who knew anything.

Credit rating company Standard & Poor's quickly followed the collapse with yet another ratings downgrade, the third in a matter of months.

No punches were pulled in Wellington. Prime Minister John Key laid the blame for the collapse of the finance company squarely at the feet of Timaru's No 1 son, Hubbard.

Minister of Finance Bill English managed to raise South Canterbury's collective heckle by saying that he expected a thank-you from the region for the Government's bailout.

Timaru Mayor Janie Annear rose to the occasion, pointing out that SCF was a business much wider than just the South Canterbury region.

She was backed by SCF chief executive Sandy Maier, who said that only about a quarter of SCF's investors were from South Canterbury.

Hubbard came out fighting, saying that if he hadn't been removed from the board of the company, and subsequently placed in statutory management, he could have helped to save the business.

"Surely they realised that by freezing me out and taking over control of my affairs, they would be dealing a body blow to South Canterbury Finance?"

The 82-year-old has resolved to fight back to protect his and wife Jean's reputation.

"I cannot allow my reputation to be savagely attacked by this shameful process and all those who trusted Jean and me, over so many years, to allow this tragic set of events to go unanswered."

Hubbard's reputation has been a proud one. For many years, he has been considered a philanthropist, a man who gave millions of dollars to charity, and gave many a hand up in farming and business. His old-fashioned accounting practices were in tune with a man whose handshake was his word.

One cartoon pointed out that although the list of failed finance companies was long, Hubbard's was the only name on the list of finance company directors who lost their own shirt.

Last year, when SCF posted its first loss in 75 years, Hubbard poured his own assets and cash into the faltering company to ensure that investors didn't lose their money.

The public had their say. For many, nothing anyone said was going to change their view of Hubbard as a man in a thousand, completely trustworthy, and in no way to blame for the situation that had unfolded.

The Aucklander who wrote to The Timaru Herald and suggested to the people of Canterbury, "Boy, do you owe us" for the taxes that would fund the government guarantee, was gunned down in a hail of responses from locals who pointed out, among other things, how much SCF would have paid in taxes in its 80 years.

The company's failure has brought into play the Government's retail deposit guarantee scheme. The Government will put up $1.6 billion to bail out the company's depositors, who can expect to receive their money back within the next four to six weeks. It has also loaned the receivers $1.75m, so that they can pay creditors who have a higher priority than the Crown.

Both Key and English have said there will be no fire sale of SCF assets, ensuring the Crown gets the best deal for taxpayers.

The Government expects to recover about $1.16b from the receivership, resulting in a final bill for taxpayers of $600m.

By paying out deposit holders immediately, the Government believes it has saved about $100m, through not being liable for future interest payments.

The receivers, McGrathNicol's Kerryn Downey and William Black, have said it will be business as usual for those who owe money to or are owned by SCF.

With more debts than assets in the company, shareholders in SCF are the ones who will miss out. Those are the Hubbards and the other 25 or so largely South Canterbury shareholders in Southbury Group, the main owner of SCF, and several thousand preference shareholders who own 20 per cent of SCF.

The announcement that SCF directors had asked for receivers to be appointed was the latest in a string of shocks for the company and its "president for life", Hubbard.

In June, the Hubbards' private investment company, Aorangi Securities, and seven charitable trusts were placed in statutory management. A month later, the statutory managers' preliminary report said Hubbard had kept poor records, and had a previously unknown company called Hubbard Management Funds (HMF), worth $70m. Last month, a second report said the value of HMF had been overstated by at least 25 per cent.

The Serious Fraud Office also began an investigation into the Hubbards' business dealings, and just before SCF was placed into receivership, chief executive Adam Feeley said it would continue its probe into the couple's business affairs, saying there was still a sufficient number of questions that needed answers.

"It shouldn't be interpreted as evidence of fraud. There are just issues that need further investigation or proper explanation."

SCF's credit rating was under threat as early as July 2009, with that warning followed by a credit rating downgrade in June this year – despite SCF not being included in the statutory management order – another late last month, and then immediately after this week's announcement that it had failed.

Maier was brought in to SCF in December 2009 after Lachie McLeod's resignation. With decades of experience of corporate turnarounds under his belt, it was considered that if anybody could turn the faltering company around, Maier was the man.

But he knew he was fighting an uphill battle. On the day the receivers moved in, Maier said property loans made between 2005 and 2008 were key to the company's downfall.

"The board, Allan and management had made poor decisions, with $700m of bad loans and hundreds of millions of dollars lost. There were warning signs that should have been taken notice of."

Maier will remain chief executive until the end of the year.

He says that at the heart of SCF is a sound business supporting many successful small and medium-sized business enterprises, and that efforts to secure the company's future will continue.

Hubbard says he will provide his own analysis, with his team of professional legal and financial advisers. The receivers have taken control of the company's assets and will work to maximise a return, and the Serious Fraud Office will continue its investigation.

The failure of South Canterbury Finance is an unfolding story.

- © Fairfax NZ News