Farm loans from SCF amount to $250m

06-09-2010 | Richard Rennie

Debtors owing the fallen company more than $250 million in farm loans will begin to assess the risk of loans being called in by South Canterbury Finance (SCF) receivers as the shock waves reverberate beyond Allan Hubbard's home base of Timaru and the rural heartland.

While the Hubbard empire is a tangle of subsidiaries, trusts and entities, the company's prospectus for its ill-fated capital raising exercise provides some insights to at least the scale of the funds tied directly in farm operations, if not the details.

Total farm loans were valued at $250 million at December 2009, and in May SCF chief executive Sandy Maier acknowledged the company's "bad bank" had included some farm loans. (see table).

The provision for impaired or poor paying rural loans was relatively small, estimated at $20 million or 8% of the rural portfolio. In May Maier told The New Zealand Farmers Weekly all the company's badly impaired rural debt had been sold. He said that as of then SCF had nothing left in inventory.

"By identifying the troubled properties and writing them down we have been able to move them off the books."

Sources close to the company's loan book say a third of the rural loans were interest only, one third interest and principal were being repaid, and another third were not being repaid in either interest or principal. The prospectus confirms this, stating 40% of the company's rural loans involved the interest being capitalised and repaid at the end of the loan term.

These could prove the riskier element in the rural portfolio, given the poor cash flow position many dairy operators have been in and low prospects of capital gains in the land market making disposal of property difficult. Such loans are likely to be the first to be scrutinised by receivers to determine their value, and realistic recovery.

New Zealand Farmers Weekly has established there are still some substantial and troubled property holdings with debt still outstanding as the company went into receivership last week (see summary).

Less clear are the risks to enterprises to which Allan Hubbard is a related party.

Hubbard is a director of Dairy Holdings and SCF is a 33% share holder. Alan Pye has a 20% stake in the company and Fonterra director Colin Armer 16%.

The operation oversees 42,000 cows across 18,000ha and includes 15,000 cows under 50:50 share milking management. Total asset valuation for Dairy Holdings in December 2009 amounted to $600 million.

The company suffered a $66 million loss in the 2008/09 season due to elevated farm operating costs and the rapid decline in milk solid payments. This loss also reflected a significant deterioration in livestock valuations that year and the decline in Fonterra share price.

However, Dairy Holdings general manager Colin Glass said the company had managed to refocus and move into profitable trading for the farm year ended May 2010.

Meantime it remained business as usual after SCF's receivership, he said.

"How things unfold from here all depend on the view of the receiver and how they come to terms with the company. SCF is not a controlling shareholder. It is extremely early days and we believe we have a sound financial model in place. Our interest will be on how the SCF share of the business is regarded."

Glass said debt levels held by Dairy Holdings were similar to the average debt levels of most operations within the industry. The average industry debt level is about $23/kgMS.

Hubbard subsidiary investment company Aorangi, under statutory management, has also had $83 million invested in 25 dairy properties. This includes investment in about $60 million of Hubbard-associated farming businesses.

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