Government ownership of the assets will give more clout to recovery of the debts, as compared to the struggle of previous finance companies in receivership or being liquidated.
While the taxpayer will stand the bill, the actual cost will be spread across many.
Recovery time will not be a factor where one creditor (the Government) seeks payment rather than 35,000 investors through the receiver.
The Government has already paid the trustee (Trustee Executors) the funds of $1.6 billion, so that no interest under the guarantee scheme would accrue as from August 31. However, the trustee has reinvested the funds with the Crown and investors will receive interest at the official cash rate (OCR), currently 3%, from September 1 until they are repaid their debentures and bonds. This is expected to be a wait of no more than six weeks which would be about the week ending October 15.
Unfortunately, preference shareholders are not covered by the guarantee, the difference being that the bond and debenture holders lent the company money to invest on their behalf, while preference shareholders bought part of the company, expecting a dividend payment from business activities.
The Government acted quickly when the company was placed in receivership to prevent any uncertainty and also save itself continued interest payments to investors.
The commitment to continue paying interest under the deposit guarantee scheme has always been in place since the scheme commenced in 2008.
The Government, in 2008, needed to act quickly to prevent a full New Zealand financial meltdown with overseas banks such as Lehman Brothers collapsing and runs on British banks such as Northern Rock and The Royal Bank of Scotland.
The payout from South Canterbury will be welcomed by all investors as it brings to a close a period of considerable uncertainty.
The next big decision is what to do with the funds.
There has been speculation for some time now that interest rates will rise steadily over the next two years and many investors requiring income have already been sitting on their hands waiting for it to happen.
Due to the devastating earthquake in Christchurch it would seem unlikely that the OCR will be raised in the foreseeable future, such that there will be no flow on increasing deposit and bond rates.
The earthquake is going to have long-term effects, psychologically, on the residents, and on the region, economically. We, in the rest on New Zealand, will need to support them in many ways.
It is likely that investors from the Canterbury region will need to use their repayment from South Canterbury to get their properties back in order.
Perhaps the Government should consider offering an earthquake bond.
I know Bill English has been quoted as saying the Government can borrow overseas cheaper than borrowing within New Zealand but a special security structure would get a considerable amount of support from throughout the country, at an interest rate of around 6% before tax.
I would expect that no former South Canterbury investor would seriously consider investing in another finance company.
Long term it is likely that the finance company structure will diminish to almost nothing except for those supporting consumer goods and contractors' plant and machinery.
The availability of mezzanine finance for property development looks dead.
It is possible that the major banks will consider setting up specialist sectors which would cater for such a need. Such structures would have to be ring-fenced from the banks' major activities, given the high risk, with high returns.
The best advice I can give to former investors in South Canterbury is put your funds into your normal day-to-day bank and take stock. Do not start chasing the media advertising that will be prevalent as soon as a payment date is known.
There will be good local body and corporate bonds coming on to the market over the next 12 months. Have patience.
Peter Smith is a certified financial planner and is the principal of Peter Smith Financial Services, Dunedin. Email: finance@petersmith.co.nz A disclosure statement is available on request and free of charge
