SCF related-party lending faces severe prune under draft rules

Monday 13th July 2009

South Canterbury Finance (SCF), the finance group whose investment-grade credit rating is being supported by its biggest shareholder, would face a severe pruning of related-party lending under the central bank’s draft rules for non-bank deposit takers.

The draft, put out for submission in December, proposes capping aggregate exposure for NBDTs at 15% of Tier 1 capital. That would require SCF to reduce related party lending to just $14 million from $170 million, according to Forsyth Barr analyst Luke Angus.

Based on the firm’s accounts for the first half ended December 31, related party lending soared 165% from six months earlier, with the biggest gain to parent Southbury Group, founder Allan Hubbard’s investment arm.

SCF announced a $58 million impairment on non-performing investments and doubtful property assets for the year ended June 30, resulting in a loss before tax of $37 million. Hubbard is injecting $40 million of new capital into SCF and is finalising an underwrite agreement to cover any further impaired loans.

Hubbard is regarded as a key strength for SCF, as evidenced by Southbury’s decision to acquire $89.6 million of loans from the firm in the first half. Still, Forsyth Barr’s Angus said related party lending “needs to be significantly reduced.”

“We generally view related party lending as a negative from a credit risk perspective due to the lack of independence,” he said.

SCF’s total equity at June 30 was $236 million, made up of $120 million of preference shares and $116 million attributable to Southbury, according to the report.

Hubbard is “a strong and supportive shareholder, though there is a limit to the owner’s ability it support SC,” Angus said. “We also believe a succession plan would provide additional comfort, given the reliance on an individual shareholder.”

Hubbard, reportedly 80 years old, is chairman of SCF and one of four directors.

Standard & Poor’s last week affirmed SCF’s BBB- credit rating, which it placed on Creditwatch negative. That means there is a one-in-two chance the firm will lose its investment grade rating in the next three months, which may place further strain on its balance sheet.

S&P credit analyst Derryl D'silva cited SCF’s decision “to shift its holdings of liquid assets from cash to higher risk and high-yield investments has increased the risk profile of the company and weakened its liquidity.”

Under the terms of its $125.2 million US private placement, a credit rating downgrade could trigger a repayment demand.

SCF chief executive Lachie McLeod this month said the company is considering external sources of new equity to strengthen the company’s position over the next six months.

Submissions on the central bank’s draft rules closed in February and work is continuing on the final version, according to spokesman Mike Hannah.

Businesswire.co.nz

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