Govt's $60m plan to rescue SCF

John Key. Photo / Mark Mitchell

The Government was prepared to lend South Canterbury Finance $60 million at 24 hours notice after "ruthless and aggressive" US investors threatened to sink the company.

The demand was agreed to in late 2009 as Finance Minister Bill English fought desperately to stop it drawing on the Crown Retail Deposit Guarantee in the event of failure.

Documents made public yesterday by the Treasury show Prime Minister John Key and Mr English ended up authorising the loan after the investors demanded repayment within 24 hours. The documents show the Government was prepared to lend up to $125 million to stave off the company's collapse.

By August 2009, less than a year after SCF had been accepted into the guarantee scheme, the company was in imminent danger of failing.

Its financial position had deteriorated to the point where it was in breach of the terms of a US$100 million ($126 million) loan from a group of US investors, which meant they had the right to demand repayment.

At the end of that month SCF head Allan Hubbard wrote to Mr English asking the Crown to provide capital to support a restructuring plan.

But the Treasury was not convinced the plan was sound and said that if the US investors were not repaid quickly "SCF will almost certainly fail".

The Herald understands SCF then approached officials to seek a loan to repay the US investors.

One document released yesterday suggests the Treasury was preparing to make the loan.

The paper analyses a "$125m debt facility provided by the Crown to SCF" to repay the US investors and found such a loan could have reduced Government losses by $85 million.

SCF's advisers, Forsyth Barr, made an official request for a $60 million short-term loan on October 21.

The Treasury said Forsyth Barr was trying to secure private funding, but if that did not come through in time, "SCF has no other way of making the payment to the US investors, apart from a temporary Crown facility".

The company would run out of cash and "this would trigger the Crown guarantee on SCF's deposits, with a net cost to the Crown of an estimated $667 million".

In an October 23 email Forsyth Barr's managing director told Treasury the investors had been "fairly ruthless and aggressive in their dealings".

The documents show Mr English had secured Mr Key's approval for the loan and necessary arrangements were made but the Herald understands it was never drawn.

A few days later SCF said it had repaid US$50 million of the US$100 million owed with money from a syndicate of Australasian investors led by South Island businessman George Kerr.

Though the restructuring for which Mr Hubbard sought the Government's support never went ahead, he was grateful. Two weeks after the events unfolded he wrote to Treasury expressing his "personal thanks for what you have done ... working on our behalf during the last few weeks".

He goes on to request that Treasury "express my thanks to the Prime Minister John Key, and Bill English, as I understand they were agreeable to helping solving the problem ..."

The following August, after Mr Hubbard's other business interests were placed under statutory management and the Serious Fraud Office began investigating his affairs, the Cabinet rejected recapitalisation proposals and SCF was placed in receivership, triggering a $1.8 billion taxpayer funded payout to investors.

Last week Mr English said the Government expected a $1.1 billion loss once company assets were realised.

Last night Mr Hubbard told the Herald he could recall neither the loan arranged with the Government nor his subsequent letter of thanks to the Treasury.