South Canty deal in spotlight

BY TIM HUNTER
Last updated 05:00 02/05/2010

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SOUTH Canterbury Finance's scramble for funds has shone a beam upon its increasingly tight relationship with Pyne Gould Corporation and its main shareholder George Kerr.

By Friday, Kerr was due to decide whether to increase an indirect investment in South Canterbury shares from $22 million to $37.5m through a limited partnership structure called Torchlight Fund No 1, a private investment vehicle run by Pyne Gould subsidiary Perpetual Asset Management.

Last week South Canterbury CEO Sandy Maier was still unsure whether the extra money would eventuate, and further uncertainty surrounded his firm's involvement in money flowing the other way, from SCF to Torchlight.

According to financial statements, despite its desperate situation, South Canterbury in December invested $22m in Torchlight Fund No 1, becoming a limited partner. Torchlight's aim is to invest long term in distressed debt, particularly related to property development – an asset class well represented on SCF's books. At the time, it had $297.5m of impaired property loans on its books.

So there is the appearance of a circular transaction as South Canterbury lent $22m to Torchlight, which then invested $22m in South Canterbury. Nevertheless, this $22m purchase was described in the prospectus as "not linked to" Torchlight's indirect purchase of South Canterbury shares.

This is just as well, because financing the purchase of its own shares will be expressly forbidden from October under the government guarantee, "without the prior written consent of the Crown".

Maier and interim chief financial officer David Jarman, who both joined South Canterbury in December, said they were not involved in the decision to invest in Torchlight. Neither could explain the investment case for buying into the fund. "There's probably some good rationale for why it was done," said Jarman, "I'm not quite sure. My main concern at balance date was, was it at fair value?"

How the investment was valued is unclear, however. Jarman admitted he didn't know what the fund's assets were, how big it was, how many partners there were, or how liquid South Canterbury's investment was. "I haven't gone into that. Somebody may have but I haven't seen anything on that.

"Your best bet probably is to talk to Torchlight and ask them what they do, because they would have a wider view on their fund and how they're dealing with it."

Maier said the deal was probably aimed at building a relationship with Kerr.

"There were other transactions at that time where George was supportive of us and undoubtedly he probably came to us and said `I'd like you to participate in some of the things I do and I'll participate in some of the things you want.' That kind of mutuality is part of building these relationships."

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There was no link, however, with the share purchase, he said.

"There have been some other questions around this, to the extent we've gone and got a legal opinion around this very point."

"I would be concerned if there was any circularity that violated laws, but as far as I can figure out and ascertain, there wasn't."

If Kerr chose not to increase his investment to $37.5m, said Maier, a similar transaction would be done with someone else.

Beyond that, "I have interesting discussions with George, they are peacable, they are productive, they are civil. But at the end of the day, he's not us and I'm not him and his intentions remain pretty intensely private, I would say."

Describing Kerr, great-great-grandson of Pyne Gould co-founder FHPyne, as "a very good chess player", Maier shied away from describing the relationship as close. "It's a pretty important relationship to us at this time. A lot of other people have not been present or have any dialogue with us.

"Whether it's a close relationship, well, it's got a number of parts. George has often referred to it as second cousins so he has a sense of closeness to it. To me, it's a standalone straight-up commercial relationship that's been going on for a while. On a day like today, I'd exchange five or six emails with George. I've spent a couple of hours with him on the phone in the last couple of days.

"He's not linked to anything specific that I've mentioned as an option. But I think George could very well be a player in one of those, or a relationship with George may be a separate option in itself. We could do an [initial public offer], bring in a strategic shareholder in Southbury, sell helicopters, do a range of things, and George is clearly a runner in many of those things.

"Then there's the issue of what would George want to do and that all gets revealed in the fullness of time."

SOUTH CANTERBURY FINANCE INVESTMENTS

Debenture stock

The current offer of debenture stock is available on terms from 3 months to 19 months. The three- and six-month rates are 4.5% and 4.75%. Stock maturing between April and December next year pays 8%. The issue is guaranteed by the government, which means investors will get their money on time even if South Canterbury defaults.

Unsecured deposits

These don't qualify for the government guarantee and are available for terms of up to five years. A five-year deposit is offering 9.5%. Two years pays 9%.

Listed bonds

8% coupon, maturing October 2010. Covered by the government guarantee and currently trading at a small premium per $100 of bonds.

10.5% coupon, maturing June 2011. Covered by the extended government guarantee and currently trading at a premium to yield 8.9%.

10.43% coupon, maturing December 2012. Not covered by the extended government guarantee and trading at a big discount, implying investors see a high risk of default. At market prices the bond is yielding 25%.

Perpetual preference shares

Not covered by the government guarantee. Currently trading at a huge discount, reflecting high perceived risk of default and low security ranking. Shares with a face value of $1 are trading for around 30c.

- © Fairfax NZ News

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