South Canterbury accounts could trigger new demands

Allan Hubbard (front) and Lachie McLeod are encouraged by the group's underlying trading profit. Photo / Supplied

The release of South Canterbury Finance's audited accounts yesterday clears the way for the issue of a revised prospectus which will in turn give access to badly needed funds from debenture investors.

However the company, which is formulating recapitalisation plans, appears to be in an even more precarious position. The new numbers trigger a potential for key US investors - owed $153 million - to demand immediate repayment and a freeze on a bank loan facility.

The accounts, which the company said were delayed because of a peer review undergone by its auditors, were an improvement on the interim numbers released a month ago.

South Canterbury's audited June year loss was $50.4 million against the $69 million previously reported. Chief executive Lachie McLeod commented that the revision was mostly due to the impact of fair value adjustments required under International Financial Reporting Standards.

Chairman and major shareholder Allan Hubbard said while the losses and provisions on loans and investments, totalling $122.9 million, were disappointing, "we were encouraged that the group made an underlying trading profit of $32.3 million".

However, in a statement, the company said it was now in breach of certain terms of its US$100 million private placement. "As a consequence, noteholders now have the right by majority vote to require repayment of the notes immediately."

Previously those investors had the right to demand repayment within three months after South Canterbury's credit rating was downgraded in August.

"South Canterbury is in discussions with the noteholders seeking a favourable resolution," it said.

The downgrade also gave rise to "an event of review" for a so-far undrawn standby bank loan facility.

"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 This facility may be withdrawn if events leading to the review cannot be addressed satisfactorily," the company said in its annual report also released yesterday.

McDouall Stuart analyst John Kidd said the company's core operations "appear to remain both profitable and cash positive, although operating margins are substantially lower than recent years".

However the level of impaired loans, which along with past due loans comprise more than a quarter of the company's book, was "a worry and is likely to be the main issue currently bringing pressure to liquidity". "That said, the value of security held against those loans appears good at [greater than] 80 per cent of face value."

McLeod was not returning media calls yesterday, but told the Business Herald last week that the release of audited accounts was a crucial step in alleviating South Canterbury's problems.

"We need to get the money coming back in again obviously and get on a firm footing then we can announce our capital raising, new directors and the game plan but we can't do that until the prospectus is up and live."

McLeod indicated a new prospectus, to replace the one that was suspended in August, was likely to be registered this week.

However a spokesman for the company yesterday indicated it would probably now happen next week.

The company has engaged Forsyth Barr and Harmos Horton Lusk to advise on its recapitalisation plans which are said to include a potential sharemarket float.

However, information flow from the company has been scant, providing a fertile environment for speculation and rumours about its future.

"If, as media reports suggest, SCF is heading down the listing route ... there will need to be a very significant improvement in the quantity and quality of information made available to investors," said Kidd.