Related party loans helped sink SCF

BY MARTA STEEMAN

Prime Minister John Key was unusually direct this week when he turned to the television camera for the 90-second sound bite and blamed Allan Hubbard and the former management of the iconic lender South Canterbury Finance for its downfall.

Mr Key used his popularity and authority to sheet home the responsibility where he believed it lay.

From his dialysis chair the 82-year old founder, a child of poverty and the depression who rose to reign over a $2.3b financial empire, was still protesting this week that he could have saved his company if he had not been strait-jacketed by the Government's appointment of statutory managers in late June to his and his wife Jean's financial affairs.

From one perspective this is a fascinating public relations battle, Mr Key versus Mr Hubbard, both men with buckets of credibility among the public.

Mr Hubbard's version, in more detail, may emerge later and will be carefully scripted by his new public relations advisor, former National Party president Sue Wood. She was brought in by the equally heavyweight Russell McVeagh, Mr Hubbard's legal advisers.

They have advised Mr Hubbard to say nothing, infuriating and perplexing a band of loyal supporters who are stunned that Mr Hubbard is not defending himself and his reputation.

The supporters are ignoring Wood and company, at times taking their frustrations to the media.

There was the almost ludicrous situation on National Radio on Thursday. Mr Hubbard's friend, Timaru gynaecologist Albert Makary turned to Mr Hubbard in the background for answers to the radio interviewer's questions, though Mr Hubbard's voice could not be heard.

Back to the matter of the former management's responsibility.

Aside from Mr Hubbard, his closest associates and co-directors of SCF for many years are not well-known outside South Canterbury. Businessday approached the directors who ran the company for many years to seek their response to criticism of their governance of SCF over the past decade.

Long-serving SCF director, Bob White, a former partner at Hubbard Churcher, Mr Hubbard's accountancy firm, refused to comment. He was a SCF director from 1993 to 2009.

"I'm sorry I'm not prepared to have a discussion with you. Thank you and good night".

Mr Hubbard's friend and right-hand man, Timaru lawyer Ed Sullivan, was slightly more communicative. He was a director for 20 years, from 1990 to 2010.

"I'm not prepared to comment. I think it would be quite inappropriate for me to comment. Because as a previous board member I'm not prepared to criticise them nor am I prepared to criticise the current board members, who haven't done much better."

That sounds like a criticism nevertheless of the present team of directors.

Mr Hubbard, as chairman and owner of SCF, agreed to bring in three new directors in October last year when SCF's future was hanging in the balance. United States investors were demanding the repayment of US$100m in bonds after SCF's credit rating was cut.

Directors Bob White and Stuart Nattrass departed in August and three independents were appointed.

Christchurch-based Mr Nattrass appears to be the youngest of the former board, there for his skills as a director on several agricultural companies, rather than as a friend and associate of Mr Hubbard. Businessday was unable to contact him this week. Mr Nattrass was a director from 2002-2009. He has several directorships including Pike River Coal Company.

Mr Sullivan stuck with Mr Hubbard on the SCF board to the bitter end, which was late May this year when they both finally surrendered their board seats, on the same day the credit ratings agency Standard & Poor's delivered another ratings cut to SCF.

Former chief executive Lachie McLeod, a dairy farmer with a banking background and a top ranking rugby referee before joining SCF, is not responding to calls for a fuller explanation of where things went wrong.

This week he spoke briefly, saying he was gutted by the demise of SCF and had worked as hard as anybody to try and address its problems.

Mr McLeod said he repaid a $15 million loan from SCF and no longer held shares in Southbury Group which owns 80 per cent of SCF.

Mr McLeod, in his late 40s, was appointed by Mr Hubbard in 2003 to run the company.

Mr Hubbard's love affair with agriculture and his financial support for it is legendary. He even examined buying a 20 per cent stake in PGG Wrightson about 10 years ago.

Crucial to the SCF tale, according to Mr Makary, is Mr Hubbard's illness about three years ago when he was not at the helm daily and management began making too many risky loans. Mr Hubbard's cancer caused kidney failure and the need for dialysis three times a week.

One insider who used to work at South Canterbury said although there was bad lending, it could not be pinned on one individual.

Every loan of more than $1m had to have board sign-off, and Mr McLeod had personal discretion to lend only up to $1m.

Although there was one individual heavily involved in property lending about three to four years ago, he left to join another Christchurch firm.

SCF grew too fast, according to the insider, and Mr Hubbard was trying to run it like a provincial finance company when it needed full-blown bank systems. He was still "opening all the mail" and trying to control everything himself.

This accords with the analysis of other commentators like Brian Gaynor, who point to SCF being eight times larger in 2009 than in 2000 while not having the depth of systems and skills to run such a large empire. SCF has about 100 staff.

Its accounts show that it had $600m of gross "impaired" loans at the end of last year. That's about one third of the loan book in trouble. The $600m is the total value of the individually troubled loans. SCF wrote off $244m of that, expecting to recover the difference.

Half of the problematic $600m was property loans, another third was business loans and 11 per cent rural lending.

Mr Hubbard blamed the Australian banks last year, saying he had stepped into the breach when they had closed the doors on lending.

Instead of consolidating and running conservatively in the depths of the global credit crunch, SCF stepped up its lending – it made just over $200m in business loans and about $130m in loans to agriculture and rural businesses last year.

The recipients of SCF generosity were also companies connected to Mr Hubbard – "related party loans". There is about $300m worth of them and many are impaired.

SCF chief executive Sandy Maier, appointed last December to turn around SCF's fortunes, says Mr Hubbard would be asked if a loan was related party and he would answer: "Yes and no".

The two biggest groups of impaired loans in SCF's "bad bank" were property and related party loans.

"Loans to Southbury, loans to Allan entities where the value wasn't there. The best description is related party loans. You had directors making loans to themselves or subgroups of themselves." That was to maintain the related-party companies.

"Liquidity [cash] came into South Canterbury and went out to related parties," Mr Maier says.

SCF's accounts show it had $400m of cash investments at its June 30 2008 balance date. Mr Maier says when he stepped in on December 23 there was $7m in cash. "It's forensic accounting time. I'm a turnaround guy and not a turn-back guy."

He says related party loans are not illegal but there is typically doubt that the loan standards and interest rates are as objective as they should be.

Mr Hubbard was so entrenched in the company that it took Mr Maier five months to persuade him that having him on the board and as chairman was a risk for the future of the company.

How Mr Hubbard was finally persuaded to stand down from the chairmanship is a "trade secret".

On the day of the receivership Mr Maier praised Mr Hubbard for his effort and spirit – areas he deserves, Mr Maier says. Other areas of commendation were noticeably absent.

"At best the jury is out on other aspects of his business," Mr Maier says, alluding to the statutory management and Serious Fraud Office probe into the two companies, Aorangi Securities and Hubbard Management Funds, and seven charitable trusts.

It would be unusual to say the failure of such a large company was the fault of one person. Mr Maier has not gone back to look at who made what loans. It was irrelevant and he could not change anything. His job was to try to turn the business around, he says.

The former management and the board have to take responsibility for the collapse.

"They can scramble amongst themselves about who's most involved or least involved, maybe there was some competent, well-meaning people who did not vote for these things, I don't know. But the prime minister was absolutely right that those running the company, Allan and others, have to take responsibility at some level."

There's no dispute that Mr Hubbard has made big donations to charities over his lifetime and is revered for this generosity.

That's a different story, Mr Maier says.

"Nobody is doubting the fact that he's a nice man."

The Government placing the Hubbards in statutory management on June 20 sunk SCF's chances of raising capital.

While the companies placed under the control of statutory managers, who have widespread powers, were technically separate from SCF, in the eyes of the investing public there was little separation.

Mr Maier says SCF was on a trajectory to eliminate the "wall of maturities" of debentures and bonds in October until the statutory management decision.

"It certainly interfered with funding." That does not mean he disagrees with it.

Debenture reinvestment was $200m to $300m in June and then crashed to $5m in July. From then on the focus for him and the board was to find a buyer for the whole business.

Since the receivership on Tuesday the Government and receivers are directing that effort.

Supporters of Mr Hubbard are claiming there has been a conspiracy to destroy his reputation and grab the prize, SCF, and that statutory management, triggered by an anonymous complaint to the Securities Commission, is central to the plot.

Mr Hubbard's friends say he is now broke, though others have said he has shares in companies separate from SCF.

This is all the stuff of future stories. Mr Hubbard's version is still to come.

PAST CHIEFS

Former South Canterbury Finance directors and chief executives:

Bob White, Timaru accountant, director 1993-2009.

Ed Sullivan, Timaru lawyer, director, 1990-2010.

Stuart Nattrass, professional director 2002-2009.

Lachie McLeod, CEO 2003-2009.

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