Banks turn off loan facility for Sth Canterbury finance

South Canterbury Finance chief executive Lachie McLeod (l) and company founder and chairman Allan Hubbard.

Timaru-based South Canterbury Finance (SCF) has released its audited annual report for the year ended June 30, 2009, revealing that its banks had turned off an unused NZ$100 million lending facility to the finance company while it hunted for new capital.

The annual report also included an opinion from SCF's auditors, fellow Timaru firm Woodnorth Myers & Co, that there was a "fundamental uncertainty" about South Canterbury Finance's status as a 'going concern' because of the risk that US lenders may withdraw a NZ$153 million private placement in the wake of South Canterbury's downgrade to a sub-investment grade BB+ credit rating by Standard and Poor's.

S&P subsequently put that rating on "creditwatch negative" review for possible further downgrades of mulitple notches because of concerns about liquidity and related party lending.

SCF, which is controlled by veteran South Island financier Allan Hubbard, said in the annual report it expected to make an announcement about its capital raising plans in mid-October. The release of the audited annual report was delayed because of a peer review by the NZ Institute of Chartered Accountants.

Auditor Woodnorth Myers said there was a "fundamental concern" about South Canterbury Finance's status as a going concern because of the risk that US lenders may withdraw their loans after the credit rating downgrade, although it said it believed South Canterbury could resolve the situation with a capital raising, due to be announced in mid-October.

"The validity of the going concern assumption on which the financial statements are prepared may depend on the successful conclusion of these matters. If the matters were unable to be satisfactorily resolved, this could have a significant impact on the liquidity of the group, and the recoverable amount of certain assets," Woodnorth Myers said.

The annual report shows SCF made a net loss after tax credits of NZ$49.6 million, which was revised from a previously reported net loss for the year of NZ$67.8 million initially reported at the end of August.

The release of the audited accounts means SCF can now lodge a new prospectus and investment statement so it can start taking in new money again. Following its credit rating downgrade from Standard and Poor's on August 13 from BBB- to BB+, new investments have not been allotted to debentures and have been held in a trust account controlled by Trustees Executors on behalf of investors. This means the funds have not been lent on by SCF.

The credit rating downgrade meant subscribers of a US$100 million bond placement in the US were able to request a repayment of funds. SCF said in the annual report that discussions were ongoing.

The downgrade also meant SCF's NZ$100 million banking facility came under review after it breached interest coverage covenants. "The banking facility has been placed on a stop draw. This facility may be withdrawn if events leading to the review cannot be addressed satisfactorily," SCF said.

"No request has been made of the banking syndicate nor has any commitment to provide ongoing facilities been made by any syndicate member. The Company has not drawn down any funds under these facilities since they were first entered into by the Company," it said.

SCF's total income for the year ended June 30, 2009, was up from its August report by NZ$39.7 million, to NZ$305.7 million, due to the inclusion of NZ$39.7 million of fair value gains on financial assets held for trading.

Meanwhile, expenses were also up by NZ$31.2 million. Bad debts written off were revised from NZ$16.5 million down to NZ$9.8 million (a fall of NZ$6.7 million), although allowance for impairments on advances rose from NZ$49.1 million to NZ$57.7 million (a rise of NZ$8.6 million). Provision for taxation writebacks was also increased by NZ$9.2 million to NZ$13.9 million.

SCF's loss before tax was revised down from NZ$71.9 million in its unaudited accounts to NZ$63.5 million in its audited accounts.

"The reduction in the reported loss is mostly due to non-monetary fair value adjustments made under NZ International Financial Reporting Standards. Loan losses and provisions against impaired loans are at a similar level to those included in the Company's preliminary announcement," South Canterbury said.

SCF said no related party loans had been written off or forgiven during the year.

However, SCF's impaired and past-due loans rose to NZ$445.9 million or 26 per cent of total gross loans by the end of June, up from NZ$85.2 million or 6 per cent a year earlier.

SCF had NZ$2.1 billion of borrowings at the end of June, including NZ$1.552 billion worth of debentures. Of that, NZ$919 million or 44 per cent of borrowings are due to mature within a year. This is down from 47 per cent due to mature within a year in the last year.

South Canterbury Finance's Chairman Allan Hubbard acknowledged that the result for the past year was very disappointing in an extremely challenging market.

"Completion of the audited financial statements has been a key step in our restructuring plans. We look forward to announcing details of our plans and the appointment of new independent directors as soon as we are able to," said Hubbard.


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