Hubbard flags modest capital raising for SCF

On Saturday the Timaru Herald reported on an interview with Allan Hubbard about his plans for recapitalising South Canterbury Finance. The article gives some insight into the thinking at SCF, and the likely strategy for recapitalising and restructuring SCF.


The article's title is Hubbard Targets $100m capital, and in it Hubbard dismisses talk that the company could need up to $500m, and the thrust of the article and Hubbard's strategy is that things at SCF aren't too bad, and that they intended to make only modest changes to capital levels and lending strategy, as illustrated from this quote:

He reassured investors SCF was a good bet.
"We are going on as usual. It's a very good company. We had our second loss in 80 years and we are able to survive it. Their money [debenture holders and depositors] is guaranteed by the Government.
"We are making a few changes to make it more profitable and continuing on our merry way. So I would say stick with it."

What can be inferred from this approach?

1. Mr Hubbard seems very averse to significant dilution of his stake, and to raising capital at a significant discount to book value. But PGC, whose shares were trading at $2.03 on 30 June (then well below book value), ended up raising capital by issuing 6 times the existing shares at an issue price of $0.40, a very steep discount. Mr Hubbard would appear willing to risk the company to avoid realising such losses.
2. This strategy has a substantial risk of being too little ($100m), too late (March 2010 float). What if the company's capital goes below the requirements of the trust deed before then? What happens if more loan write downs and losses emerge faster than the new capital arrives?
3. Although this amount of capital could probably keep the trustee off SCF's back until Oct 2010, to retain or recover a BB credit rating or better, more decisive action is likely to be required to clean up the balance sheet, more significantly improve capital levels, and take control of the company further away from the existing shareholder/chairman. Thus the company risks being unable to fund repayment of its wall of liabilities maturing Oct 2010.
4. Why did PGC, a smaller and less troubled firm raise approx $250m to capitalise, while SCF is raising only $100m? And why does Hubbard say if he could raise $500m, he would? It doesn't quite add up.

Draw your own conclusion. Please leave your comments, discussion is welcome, and thanks for visiting.