SCF news bad, but rates good

Allan Hubbard’s fall from grace masks the fact South Canterbury Finance is offering the fattest government-guaranteed returns anywhere in New Zealand.

Thursday, June 24th 2010, 4:15PM 7 Comments

The finance company, facing a $500 million "wall of maturities" of debentures coming due by October, needs investors to roll over their money. Some may be thinking twice after Standard & Poor's cut SCF's credit rating two notches deeper into junk at B- as statutory managers took over elements of Hubbard's empire.

On offer are debentures that mature within the extended guarantee that pay 8% annual interest. Existing investors who re-invest get even better - 8.25%.

To beat that from finance company paper, investors would have to turn to firms that are not covered by the guarantee scheme.

Among those ‘going naked' are Allied Nationwide Finance, with 8.75% for 12-month deposits and 9% for 18 months. By comparison, Marac offers a government-guaranteed 6% for 12 month terms and 4% for 18 months.

South Canterbury's offer "is the best thing since sliced bread," Financial Focus adviser Murray Weatherston. The deposits are backed up by "the credit-worthiness of the government - if you can't trust the government, who can you trust?"

South Canterbury's listed bonds show what investors think of the risks of the company if not for the guarantee. The buy yield on its NZX-listed bonds maturing in 2012 has risen to 33.5% from 27.5% last week. The bonds pay a coupon of 10.43%.

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Comments from our readers

On 24 June 2010 at 4:35 pm Alison said:

Today's headline story in the NBR Investors dump SCF bonds is typical of some of the confusion around SCF and how the government guarantee works. In fact, this confusion is throwing up some interesting opportunities. For example, the SCF June 2011 bond is trading on the secondary market today at 12% - yet it is covered by the government guarantee (which expires 31/12/2011)

Then there is the Dec 2012 bond, trading at a yield of 32% (a price of 64 cents). While it is only covered by the guarantee until Dec 2011, there must be a high probability that the SCF situation is going to be resolved - one way or another - long before then. And if SCF defaults prior to Dec 2011 then the investor who buys the bond today for 64 cents get back full principal repayment (100 cents) under the terms of the guarantee - a 56% profit !

If SCF manages to survive, then the investor earns his 32% thru until maturity. Because the bonds are listed (and quite actively traded) investors can sell out whenever they like. In a worst case scenario - where the investor holds the bonds past Dec 2011, the guarantee is not extended past that date, and then SCF defaults - the investor would be left owed 64 cents from the receiver.

On 25 June 2010 at 11:03 am Micks said:

Yes, but SCF has to stay afloat for you to earn the "12% government guaranteed return". If SCF go under, then you will have a period of time with no interest until you receive your payout and you then have to reinvest elsewhere. So maybe the 12% reflects the probability that SCF will go under in the next few months inspite of being government guaranteed on a large part of their funding.

On 25 June 2010 at 11:35 am David said:

One needs to consider that SCF still has over $100m of equity and has far less property exposure than the other finance companies. Whilst there is concern over SCF I would expect returns under a receivership situation to be far higher than other finance companies. $25M of new equity was recently introduced. I applaude Allan Hubbard for this unlike the Hanover shareholders who were only interested it getting as much out as fast as they could.

On 25 June 2010 at 12:27 pm Alison said:

How much interest will be paid to depositors/bond holders in the event of of a default is unclear. In the case of the recently defaulted Vision Securities and Viaduct Capital, interest will be paid up until the time of principal repayment. As the guarantee docs. are the same in all cases, it's reasonable to expect that if SCF defaults then the Treasury will pay full interest in its case as well. However, post Oct this year - when the extended gurantee comes into effect - the situation is less clear. My feeling is the fate of SCF will be decided - one way or the other - in the next 3 or 4 months.

On 25 June 2010 at 4:54 pm alan said:

do I assume from Alison's comments that she feels this is a good opportunity for her clients to make money and will recommend they buy into SCF securities? If this is what sound investment advice is all about, God help us!

On 28 June 2010 at 9:29 am Jo said:

For anyone intending to invest in SCF past the end of the initial guarantee period expiring in October, MAKE SURE YOU UNDERSTAND that the maximum amount falling within the guarantee is $250k per investor and NOT $1m.

On 28 June 2010 at 4:25 pm Alison said:

Alan. Not sure what you mean by "her clients". I don't have any clients; I am a private investor. An investor who knows a bargain when she sees it ......

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SCF news bad, but rates good

Allan Hubbard’s fall from grace masks the fact South Canterbury Finance is offering the fattest government-guaranteed returns anywhere in New Zealand.

Thursday, June 24th 2010, 4:15PM 7 Comments

Comments from our readers

Commenting is closed