Taxpayers could be left liable for loans that South Canterbury Finance will not give details about.
How worried should taxpayers be about Government backing for South Canterbury Finance, which already owes nearly $2 billion and is seeking to raise a fresh $1.25 billion from the public?
The finance company has its heaviest loans in the troubled real estate sector. But it won't give investors - or the public - detailed information about the state of the property developments it depends on to get its money back.
This week, the troubled Timaru-originated business launched its prospectus for the $1.25 billion recapitalisation scheme.
Professional institutional investors rejected it as a rescue attempt, refusing to even look at it, and one watchdog has said it will potentially expose the Government and taxpayers to big liabilities.
South Canterbury Finance is part of the Government's Retail Deposit Guarantee Scheme, which will be extended to December 31, 2011. Under the extended scheme, if a participating company fails investors will be repaid up to a total of $250,000.
Shareholders Association chairman Bruce Sheppard is sceptical about the call for funds.
"I wouldn't recommend anyone invest in it. We, as taxpayers, are going to have to pay for this and I told [former Finance Minister Dr Michael] Cullen that at the time it was launched. They want $1.25 billion new, hard money? Yawn, laugh ..."
Sandy Maier, South Canterbury Finance chief executive, says people will be prepared to invest the $1.25 billion for two reasons.
First, most investors trusted the business. They had a long relationship with it, were loyal and felt engaged with a business so much part of the community.
Secondly, the Government guarantee gave comfort in turbulent times, Maier said.
South Canterbury is one of the largest finance companies still standing. Sheppard says he fears a national financial disaster, predicting the guarantee will result in Finance Minister Bill English running the business. "I've told English 'you're going to own all the properties and you are going to become the biggest landowner, debt funder and mezzanine financier in New Zealand. Under the Reserve Bank, you will have to roll it all up, manage it down and flog it off as a new and reinvigorated finance company'."
Sheppard has called for more equity contribution from the business and fears extensive bad debts from real estate.
"The business should be putting in at least $300 million to $400 million equity and if their property loan book is nearly $500 million, you would have to write at least three-quarters of that off," Sheppard said.
"How will investors be repaid?" said Sheppard. "You should ask, 'what am I lending to?"'
South Canterbury's $1.25 billion offer is to offset a looming $1 billion-plus "wall of maturities" due this year. The troubled company's inclusion in the Government's extended retail deposit scheme leaves the taxpayer exposed.
South Canterbury only just met the Government's minimum criteria with a BB credit rating from rating agency Standard & Poor's.
The 85-year-old company is about to start roadshows to drum up investor interest. Maier admits the business has a huge real estate exposure, mainly in New Zealand properties but some "tens of millions" had also gone to a Fijian resort and into Australia.
Asked why the big prospectus named not a single property, Maier suggested journalists might "go to the movies rather than read the prospectus".
Bridgecorp, Hanover, St Laurence, Strategic and a string of other financiers were brought down by real estate lending after the downturn and Maier said it was to his regret that South Canterbury had loaned so extensively to the same sector.
That had not traditionally been its core business and he predicted that not all the money owed to South Canterbury would be repaid.
The company has provisioned $209.4 million in its latest accounts for bad debts. But its auditors Ernst & Young this week said they had concerns about some of the assumptions the directors had made in those accounts. They warned that they did not appear to include adjustments that might be needed if property values deteriorated. South Canterbury disclosed that the biggest portion of its loan book had been poured into New Zealand, Australian and Fijian real estate.
"As at June 30, 2009, South Canterbury had property loans totalling approximately $414.2 million. South Canterbury Finance's property-based loans are mainly in respect of commercial, residential and rural property developments and investments. Negative movement in the New Zealand property market may lead to a decline in the value of the properties," the prospectus said.
The property sector's fall has dragged down many of the now-collapsed finance companies which collectively owe investors about $6 billion. Whether Bill English has more information about the details of the property investments is not known. His office says the guarantee scheme is run by the Treasury and it will make no comment on individual finance companies.
Maier, asked whether he was confident about all property loans being repaid, said he had taken a dim view.
"I'm absolutely not confident about getting it all back. But I have got good property managers and really good specialised lenders but I'm not an astrologer and can't say what the future holds for property. Next year, things might start to bounce back."
Inquiries about where South Canterbury's biggest loans had been made were legitimate, he said, and he understood why those questions were asked. But he refused to answer, saying he would not name any single borrower or real estate project because that would be unfair.
"I salute your efforts to get as much information as you can," he said, but if he named the top three properties, demands would then progress to requests for the next three properties, he predicted, an exercise he would not engage in.
He agreed to broadly discuss the largest loan, declared in the prospectus at $42.3 million, saying it had been made "for a large commercial hotel refurbishment and redevelopment".
He refused to comment on speculation that the loan is in Auckland's Hyatt hotel/apartment project, finished some years ago.
Maier said the property loans were a concern to him because this was not South Canterbury's core business and he was steering the business away from the real estate sector. The prospectus reiterated this.
"The company is actively seeking to reduce its exposure to the property development sector over the next six to 12 months by proactively working with its existing clients to reduce their level of borrowing. Due to the current lack of liquidity in the property market, it is anticipated that this will be a gradual process."
Maier said Mark Thompson of South Canterbury's Christchurch office was running the property loan book. The business was receiving constant inquiries about whether properties were for sale, Maier said, and tremendous interest.
He also admitted lending to speculative property ventures had been an extremely risky area. "It's death row for a lot of people who don't know better and we clearly are paying the price," Maier said.
The prospectus to raise the money showed South Canterbury had 207 property loans with an average net loan value of $1.15 million.
"Ten property exposures are for amounts in excess of $10 million each," the firm said, disclosing that it also engaged extensively in the now much-discredited practice of allowing borrowers to suspend interest payments until the loan reached full term. That allows no cash flow during the term of the loan.
Hanover, whose high-risk property loan book is now with Allied Farmers, was found to have engaged in this practice along with other property financiers.
South Canterbury said it allowed this.
"Almost all the loans in the property sector are interest-only loans and for the majority of those loans, interest is capitalised during the term of the loan and only paid on maturity. In the company's experience, lending of this nature is not uncommon particularly in the case of loans for property developments," South Canterbury's prospectus said.
Extensive bad debts on the property loan book were also disclosed, reaching $126.6 million in the December 31, 2009 year and called "impairment provisions". Bad debts accounted for 34.8 per cent of the income which was due to South Canterbury from property last year.
South Canterbury also revealed that it loaned extensively to property's most risky end: development or even worse, planned development.
More worryingly, a large portion of its property loans are second or even third-ranking. That means South Canterbury would be standing in a line behind one, possibly two other lenders for money to be repaid.
The lending had been "secured by way of a first or second registered mortgage", South Canterbury said, disclosing that $136.4 million or 37 per cent of the book was "by a second or subsequent ranking mortgage". The business has loaned $225.7 million or 62 per cent in first-ranking mortgages on property.
South Canterbury described how it wanted out of many of its loans but was stuck.
"The company significantly reduced its lending of this nature in early 2008 but has been required to continue funding development costs for existing borrowers to enable the completion of projects.
"With the benefit of hindsight it now appears that the projects were typically optimistically viewed and valued based on assumed future growth and potential in a rising property market. With a major market adjustment [downward] as a result of the global economic downturn and no economic end use or demand, the peak market values that were initially attributed to non-cashflow properties suffered significant downward correction due to lack of liquidity."
South Canterbury was getting out of the loans where it could.
"The company through its asset management unit, now has a specific management focus on the recovery of its property loans. This involves ensuring that each asset is prepared, enhanced and presented in a manner and structure which will achieve the best potential realisation of that asset with an acceptable timeframe," it said.
South Canterbury hoped it could recover the current value of it property loans in full, over time, the prospectus concluded.
Properties worth over $20 million are extremely hard to sell or raise money for to buy, according to one experienced expert.
Peter Wall, a Blacksmith Property Fund director who on Tuesday ditched a $25 million offer, said the real estate downturn in the development and commercial sector was deepening and the sector was not climbing out of the abyss.
He sent out about 60 letters to investors who contributed about $5 million, saying that their money would be repaid with interest.
The fund had not raised enough for its directors to look at multimillion-dollar property deals and Wall said it was pointless playing around the $5 million arena where so many other investors were still buying.
The best deals were nearer the $20 million range, he said.
Meanwhile Sheppard has asked Maier to provide crucial information, which boiled down to a few words.
"You might get ma and pops to give you $1.25 billion but for the life of me, I can't imagine why.
"The words should include: What do I get? How will you repay me? Who the hell are you lending to?
"How will they repay you, so you can repay me?"
