A law unto himself

by Rebecca Macfie / 18 September, 2010
Allan Hubbard thought only he could save South Canterbury Finance but insiders had been challenging him for years. Rebecca Macfie looks at what was really going on.

Every year, a member of South Canterbury Finance's inner circle used to ask Allan Hubbard what his succession plan was. The response was the same each time. The elderly financier would tell his challenger: "You might die before me."

But the evasive response of SCF's chairman and controlling shareholder didn't get rid of the issue of succession - business-speak for Hubbard's retirement and recapitalisation of the business. Instead, it became more urgent with each year of SCF's rampant growth.

Hubbard's dogged control of the company hadn't mattered so much in its earlier years. Up until the early 2000s, SCF was a fairly straightforward outfit, comprised of a "hard ledger" of rural and business loans managed personally by Hubbard, a network of small regional finance companies overseen by former SCF shareholder and director Humphry Rolleston, and a Timaru loan book managed by local man Tim Underdown.

But the world was changing. Globally, credit had become cheap and abundant, and lightly regulated finance companies were among the beneficiaries. "The debenture market was flourishing for all finance companies," says Neil Paviour-Smith, managing director of sharebroker Forsyth Barr, which has been involved with SCF on listed bond and preference share issues since 2004. With its "blue chip" reputation and Hubbard's long history of philanthropy and support for small business, SCF did especially well.

"He's a great marketer. It's a great story," says Paviour-Smith. Between 2000 and 2006, the flow of funds from retail investors turned from a $320 million stream into a $1.1 billion flood. Under chief executive Lachie McLeod, appointed in 2003, the company embarked on an aggressive growth strategy, with front-line lending staff incentivised to find loans to put the money to work. Increasingly, SCF found its way into property development, vineyards, hotels and subdivisions far from the company's South Canterbury heartland.

With Rolleston having sold out in 2004, this burgeoning empire rested on the stooped shoulders of a septuagenarian with failing kidneys and a lifelong habit of arriving at the office at 6.30am with wife Jean, opening all the mail and working on until late at night.

As the growth continued, it became increasingly plain the ownership base of the business needed to be broadened and deepened. In 2005 Forsyth Barr convinced Hubbard he needed to raise fresh capital from outside investors and float SCF on the stock exchange. This would have created a much wider pool of owners, and could have enabled it to quickly raise further capital if the economic environment became hostile - as Pyne Gould Corporation did last year when its finance company, Marac, hit strife.

But Hubbard pulled the pin on the float at the 11th hour. Paviour-Smith: "He felt that if the shares went down ... there would be little old ladies bailing him up in the supermarket. He was concerned that people would lose money."

An insider puts it more bluntly: "Allan doesn't take advice. He's dogmatic, stoic and stubborn. He listens to the advice that suits him." And it didn't suit him to dilute his control of a company he had painstakingly built up over half a century.

But the need for capital hadn't gone away, and in 2006 Hubbard agreed to an issue of perpetual preference shares. Unlike ordinary shares, these guaranteed investors a fixed dividend. The Forsyth Barr-organised issue was initially intended to raise $75 million, but Paviour-Smith says it was "swamped" with demand. Instead of turning away oversubscribers, SCF chose to accept $120 million from investors.

Perversely, the galloping success of the preference share issue can be seen in hindsight as a pivotal point in the history of SCF's decline. With the capital base supposedly beefed up, the company could now raise even more money from mum-and-dad debenture investors - an extra $300 million gushed through the door between mid-2006 and mid-2007. It would continue pumping this out to an exuberant property development market. And because it had to pay the preference shareholders a fixed rate of return, SCF's ability to accumulate cash to help it through the coming storm was compromised.

As long as the hype and optimism of the financial and property markets kept on, SCF could keep swimming strongly with the tide. But in October 2008 the tide went out. Instead of responding to the global financial crisis by hunkering down, it rode heroically to the rescue of several big corporates that couldn't get bank funding in the midst of the credit crunch - including loans to Hubbard's own companies, Helicopters New Zealand and Scales Group. The Government's Retail Deposit Guarantee Scheme, introduced in the midst of the financial crisis, triggered an even bigger wave of money from investors after SCF gained admission in November 2008.

But behind the scenes the place was plunging into chaos. In May 2009 the directors and key senior management told Hubbard - by then 81 and still SCF's chairman and majority owner - to remove chief executive Lachie McLeod. He agreed to do so. But it didn't happen.

By June 2009 the board had identified the need for $400 million in new capital to underpin what was by then a $2.4 billion company. A small subcommittee of directors and senior managers from the Hubbard empire (a group that did not include either McLeod or Hubbard) was authorised by the board to come up with an equity-raising plan. Wellington investment bank Cameron Partners was engaged, and discussions were held with the Treasury, which by then had accounting and auditing firm KordaMentha inside SCF and would have been increasingly aware of the extent of its problems.

The proposal was for a combined private sector and government recapitalisation. It is understood Sydney-based investor George Kerr would have been the key private sector player, and that senior Treasury officials could see the rationale for such a deal. The logic was that by rescuing the company at that stage, the Government would avoid the situation that unfolded on August 31, when SCF went into receivership and the Crown was forced to pay out $1.6 billion under the guarantee scheme.

Also discussed was the possibility of a government guarantee to shore up a US$100 million investment by private US investors, which, because of SCF's deteriorating situation, was likely to be called in. A condition of the arrangement would have been an entirely new board and senior management for SCF. Hubbard would have been made president for life.

Who knows whether the Government would have given the proposal the final sign-off - it certainly showed little interest in being party to a bailout for SCF in the company's dying days at the end of last month. But in any case, the deal was scuppered from inside SCF in August 2009 when Hubbard chose to back a plan for a Forsyth Barr-led float of Southbury Group - the holding company for SCF and Hubbard's interests in Helicopters NZ and Scales - to raise $100 million, a figure believed by many to be well short of what was needed.

One insider describes Hubbard's confidence in his ability to sort out SCF's problems at this time as "delusional. He had so much confidence in his ability to attract new capital, and he believed every­one else was making poor decisions."

Internally, the proposal for a float provoked a fresh crisis. The SCF board moved a vote of no confidence in Hubbard in August 2009, and two of the four directors - Stuart Nattrass and Bob White - abruptly resigned. Nattrass has since stated publicly he left because SCF's growth strategy was too ambitious for its capital structure, which was built solely on Hubbard's "resourcing capacity".

Meanwhile, assets were being frantically shuffled between Southbury and SCF, ostensibly to prop up the latter, but this did little to help the company's chronic liquidity problem. For instance, Southbury's one-third share in the 58-farm Dairy Holdings was plonked onto SCF's balance sheet, paid for by a bundle of "fully paid" SCF shares and $36 million of precious cash.

As it turned out, the $100 million float didn't happen. With SCF in breach of its financial covenants and struggling under a mountain of bad loans written between 2004 and 2008, its bank funding lines cancelled, its credit rating downgraded, and the US investors demanding their money back, the idea was rapidly buried.

A new board was installed in October 2009, and by the time Sandy Maier took over as chief executive on Christmas Eve, SCF was hanging on by its fingernails. In lieu of the investment capital that was still desperately needed, Hubbard tipped his two most cherished companies - Scales and Helicopters - into SCF early this year. This in turn enabled it to qualify for the extended retail deposit guarantee scheme in April, which meant Maier could keep attracting retail investors' money at a premium rate of interest, and he could keep paying out those who wanted their money back. The blood was still flowing, the body was still warm - just.

Yet even in the teeth of the crisis, Hubbard's stubbornly hands-on style was getting in the way. By the time Maier arrived on the scene, Hubbard was still running several hundred million dollars worth of loans in his separate "hard ledger", despite years of efforts by the previous board to prise it off him. Maier insisted every loan that SCF owned be assigned to a lending officer under his control. "Allan didn't qualify as a lending officer under my control. It was a point of tension," says Maier.

In May, the board issued a statement announcing Hubbard was stepping aside as a director and becoming president for life. It eulogised about his ongoing value to the business, but what it didn't mention was that Maier had laid down an ultimatum: either Hubbard went or he went.

Hubbard was by now both asset and liability to SCF: the company couldn't live with his law-unto-himself personality, but it couldn't live without the brand value of his rags-to-riches rise and philanthropic, modest-living, God-fearing story. Many of those who came with proposals to buy or invest in SCF during its final weeks were outfits known to Hubbard over his decades in the business. Some were intrigued by the Allan Hubbard legend and wanted to buy a slice of it.

Then in June the Serious Fraud Office's Adam Feeley and Government-appointed statutory managers stormed the little-known universe of Aorangi Securities and Hubbard Management Funds. For decades Hubbard had run these investment vehicles without a prospectus for hundreds of loyal clients of his accounting practice and others who came to him with their money after hearing he had the Midas touch.

Although Hubbard complained that the regulators' move against him came out of the blue, it seems he had realised for some time that Aorangi had a problem. In 2008 he was in discussion with trustee company Covenant Trustee about a new structure to comply with securities regulations, although these talks later ceased. More than once he had sought to merge Aorangi into SCF.

The picture that has emerged since June has shattered the Hubbard myth for all but the most devout followers. According to the statutory managers' second report, Hubbard used $59 million of Aorangi investors' money to lend to farms with which he is associated, and $24 million to his Te Tua charitable trust, which made interest-free loans to farmers he thought deserved a "helping hand". He mortgaged his own assets to pay the March quarter interest to Aorangi investors.

In Hubbard Management Funds, he recorded $13 million in investments that don't exist, and he put his investors' money into venture-capital deals and "penny dreadfuls". And he put $10 million from both Aorangi and Hubbard Management Funds into Southbury - now worthless after SCF's collapse.

Yet even as his empire lay in pieces, Hubbard's confidence in his ability to fix it was indestructible - a self-assurance no doubt underpinned by his belief, as he told the Listener in May, that "the Lord is on my side".

On August 6, with the statutory managers in control of his affairs and his finance company days away from collapse, he told a group of devoted followers in his office: "I am the only one who can save South Canterbury."

No one contradicted him.

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