Liam Dann: Investors and public need to know what they're exposed to

The Government's Retail Deposit Guarantee Scheme is in place to protect investors. It is not there just to stop companies from failing.

Yet as South Canterbury Finance goes to the public seeking $1.25 billion, the guarantee seems to be their strongest marketing tool. Without that guarantee what chance would the company have of raising this money - or for that matter convincing current debenture holders owed some $1.7 billion to roll over their term investments? It is playing a vital role in keeping South Canterbury viable as a going concern.

Bizarrely, the Government gave South Canterbury an extension on the guarantee before it had a chance to view the company's audited accounts.

The auditors say even with substantial provisions South Canterbury has already made for bad debts there are substantive risks around the viability of the company if the valuations directors have put on their property portfolio are still too high.

In other words if the property market slides again things could get very ugly.

This is a portfolio that includes a development in Fiji - a red flag for finance company investors if ever there was one.

But let's be fair, in this particular case should we be worried about a Fijian development? We don't know - because the company does not feel it has an obligation to disclose specific details of its property investments - where these development are, at what stage they are at, and so on.

Neither investors nor the public are being given a chance to make their own judgment on the viability of these projects.

The deposit guarantee has taxpayers setting aside some $850 million for potential finance company failures until the end of next year. Although Treasury won't comment it is safe to assume a large chunk of that money has been included specifically to cover a South Canterbury meltdown. Surely that buys the right to more disclosure.

Meanwhile South Canterbury is advertising interest rates of up to 8 per cent, terms which run through to December 2011, right before the guarantee ends.

It's pretty galling. It seems the Government has pegged South Canterbury as too big to fail. The company has admitted it is in difficulty because it did not stick to its knitting. It got drawn into the big money-go-round of commercial property investment in the boom years. Now it plans to unwind those investments and get back to basics.

One problem is the unwinding will be very difficult in a property market swamped with dozens of troubled finance companies, property investors and developers all seeking to do the same thing at once.

The commercial development sector is unlikely to be anything other than a buyers' market for the foreseeable future.

The second problem is that getting back to that knitting - lending in the agriculture, tourism and manufacturing sectors - is by definition low-risk, low-return stuff. It doesn't offer a quick path to big profits.

How can South Canterbury make enough money to steel itself for the enormous wave of debenture redemptions that will surely come when the guarantee ends?

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