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Sometimes it pays to take some pain now rather than store up more pain later.
The government's decision not to support a recapitalisation plan for South Canterbury Finance was the right one. Receivership was the cleanest, simplest and ultimately safest option for both taxpayers and investors.
The government will now have to pay out around NZ$1.6 billion to 35,000 depositers in South Canterbury Finance that were covered under the extended guarantee scheme.
Some investors who owned preference shares will be wiped out. Allan Hubbard's equity in South Canterbury Finance will be wiped out.
But now the government will be in complete control of South Canterbury Finance's morass of lending and funding.
That is a good thing and avoids the sort of corporate no-mans land that proved so disastrous for Strategic Finance, Hanover Finance and St Laurence investors.
The government has done the right thing by choosing not to extend and pretend in the same way that depositers in those other finance companies did.
Now the receivers and liquidators can get under the hood of the South Canterbury empire and work out what Allan Hubbard was really up to.
They can join the dots with the other dealings, if any, he has done with Southbury Holdings, Aorangi Securities and Hubbard Management Funds.
It became increasingly clear with the second receivers report from Grant Thornton on Friday that Hubbard's affairs were a very complex intermingling of affairs that would take years to unravel.
Hubbard needed to be removed completely from the situation and for there to be no doubt about who owns or controls what.
A receiver and liquidator will protect the taxpayers' interests.
The Serious Fraud Office's decision announced yesterday to extend and deepen its investigation of Allan Hubbard's affairs may well have been the final nail in South Canterbury's coffin.
It was clear from Prime Minister John Key's comments yesterday about the administrative and institutional mess inherited by CEO Sandy Maier that he was no fan of the way Allan Hubbard had created and run the business as part of his own charitable small business empire.
Hubbard was making no interest 'helping hand' loans to young farmers and then mortgaging his own assets to make the interest payments.
He also ovestated assets in Hubbard Management Funds, including what had been invested where and how much cash was on hand.
Tough but correct decision
The government was right not to choose to extend the life of South Canterbury Finance and pretend there was something left to save after the expiry of the guarantee at the end of 2011.
At the end all that was left was a damaged brand and a very damaged loan book.
It certainly did not have a future as a traditional finance company backed by investments from Mums and Dads in debentures. That model is now broken utterly for any institution that is not a bank or investment grade company.
More than a third of South Canterbury depositers were Hubbard loyalists who were likely to have left the company once Hubbard was removed. He was never going to be a part of the company's future in the wake of the SFO investigations.
More than a third were 'rate chasing' government guarantee investors who jumped in after October 2008 to get hold of the 'free money' returns of over 8 per cent that were guaranteed by the government.
Some would argue the advent of the government guarantee exacerbated South Canterbury's problems because it triggered a flood of new money into the finance company.
CEO Lachie McLeod then deployed it in a rash of lending to property developers and struggling farmers. That was eventually disastrous for South Canterbury.
The final group of investors would have looked at South Canterbury as a CC rated finance company without a guarantee and decided it was too risky.
That would have left a much reduced institution without much to lend. Even with the backing of new private investors, South Canterbury Finance would not have been able to compete hard with the banks.
Rural land prices in the spotlight
Now, unfortunately, the pain will begin for the South Island rural economy.
South Canterbury owns a third of Dairy Holdings, which is New Zealand's largest dairy farm company with 72 farms that produce more than 1 per cent of Fonterra's supply.
It also owns fruit packaging and warehousing company Scales Corp and HNZ, which is New Zealand's largest helicopters company.
It also has close to NZ$2 billion of loans out there in the rural economy, backing farms, contractors and small businesses in provincial centres.
Hubbard's Aorangi also has around NZ$130 million of loans outstanding with 25 farms.
It is possible there will be a series of dairy farm sales, particularly of the heavily indebted marginal conversions on irrigated land.
That may slice prices sharply lower and force banks to look at the valuations of other similar farms.
But this was a process that had to happen.
New Zealand could not afford another zombie institution to stagger on allowing New Zealand's over-indebted rural sector to continue to extend and pretend that everything would be alright when land prices started rising again.
For these farmers, their dream of highly leveraged capital gains on converted dairy farms is over. Rural debt is now at over 500 per cent of rural output.
That is utterly unsustainable.
Rural New Zealand is about to start deleveraging in earnest. South Canterbury's demise may prove the seminal event in the history of New Zealand farming.
It has already extended the amounts owed to 239,000 finance company and investment trust investors.