Editorial: The collapse of SCF

South Canterbury Finance's decision to call in the receivers yesterday had an inevitability about it.

Despite the best efforts of the company's chief executive, experienced corporate salvager Sandy Maier, it was always a long shot that SCF could recapitalise and manage to stave off receivership. Several companies, both foreign and domestic, are believed to have looked at buying SCF, but they were not prepared to purchase the whole company, apparently because of SCF's high level of bad loans.

Although the Government did not step in with a bailout plan for SCF itself, it did announce quickly that the company's investors would be repaid. All debenture, deposit and bond holders will get their money back, regardless of their eligibility under the Crown deposit guarantee, but preferential shareholders' investments, and company founder Allan Hubbard's stake in SCF, would be largely lost.

Repayments will cost the taxpayer $1.6 billion, although much of this may ultimately be recouped by selling SCF's assets. As part of the Government's decision, it will loan $175 million to the receivers to pay off prior-ranked SCF debt, meaning that the Crown as the first ranked creditor will effectively control the receivership process and SCF.

The failure of SCF will undoubtedly have an economic impact. It was the second-largest finance company in New Zealand, with strong links to the agricultural sector, especially in the South Island.

But the investor repayments, and the fact that the receivership process means there will be no fire sale of assets or fast call-in of loans, should limit the economic, and perhaps political, fallout. This might otherwise have been more serious at a time when the economy is still fragile, a strong reason for the Government to act.

That will be cold comfort, however, to investors in other finance companies whose failures had less broad economic impacts. They will get little of their money back.

SCF is a classic example of a company which should have stuck to the basic activities which had sustained it for most of its long history. Instead it deviated into heavy lending to property developers, many in the North Island, as did others on the lengthy list of failed finance companies. The advent of the recession and the slump in property prices meant that many of these loans turned bad.

SCF's receivership will be a bitter blow to South Canterbury and to Hubbard. He is respected in the Timaru community because of his philanthropy and his record, until now, of being the region's most successful businessman.

Many of Hubbard's supporters accept his argument that he could have saved the company had he not been removed from the board. They are also angry that his other interests, unrelated to SCF, have been placed under statutory management and that a Serious Fraud Office inquiry is under way.

Despite Hubbard's local popularity and his own insistence that, while his management systems might have been old-fashioned, he had never defrauded investors, it is important that the inquiries are completed to provide clarity over his business activities. If they do conclude that the businessman has been the author of his own misfortune, even his ardent supporters must, however reluctantly, accept that finding.

The Press