Teetering South Canterbury Finance, potentially facing receivership next week, is understood to be stitching together an 11th-hour deal with new equity partners this weekend, but the deal could hinge on the Government taking a $300 million or more stake in the company.
Sources have said the Treasury was briefed on Thursday about taking an equity stake. The Cabinet is reported to be meeting on Monday to discuss the issue.
If South Canterbury's recapitalisation is not resolved, its receivership could throw the South Island's economy into chaos because of the extent of South Canterbury loans.
Mr Hubbard's supporters have been pressuring the Cabinet to withdraw statutory management so as to release interest payments and capital to stricken investors.
Following the release of a critical report by statutory managers yesterday on the unassociated businesses of South Canterbury founder Allan Hubbard, South Canterbury went into a trading halt on the stock exchange, with market expectations a new equity partner was about to be announced. However, no announcement was made.
Critically, South Canterbury has a waiver from its trustees until Tuesday to operate outside covenants of how much cash it must carry, having been seeking a new equity party since June.
Failure to adhere to trustee requirements - and needing a major cash injection estimated to be at least $400 million - could see it placed in receivership on Tuesday.
If the Government were to pick up the $954 million provision it has of the entire $1.7 billion exposure it guaranteed after receivership, it could adversely affect its sovereign rating by Standard and Poors and Moody's.
A source close to the company yesterday said two potential equity partners were negotiating to buy almost $1 billion of its loan book, but the Government had to step in and take a stake.
There was a possibility the Government was being asked to take over part or all of the "bad bank" South Canterbury loans, as opposed to more secure "good bank" loans, two of three divisions South Canterbury has recently restructured itself into.
Craigs Investment Partners broker Peter McIntyre said months of rumour and conjecture "were coming down to the wire" and the Government would see it now had a role to play, as opposed to standing by and watching investors in South Canterbury lose much of their investments.
"The likelihood is South Canterbury is too big to fail. The Government will have to give consideration to a bailout," Mr McIntyre said.
Pro-Hubbard investor speculation yesterday that South Canterbury had agreed to the lower of two offers made on Thursday were set aside by the industry source.
He suggested there was "an element of truth" the Government was being offered "bad bank" loans, but Mr McIntyre said the Government would be wary of such involvement as it would be "unfair on the taxpayer", to be taking over loans with little likelihood of full repayment.
However, the industry source said Government exposure under its present, extended deposit guarantee scheme would diminish from $1.7 billion to around $300 million if new equity partners came on board.
South Canterbury, valued at $1.9 billion in loans and assets, is the largest remaining finance company lender in the country, with the majority of its loans spread around the South Island.
South Canterbury accumulated about $200 million on soured property deals during the past three years and had subsequently seen increased pressure on reinvestment rates, plus repeated confidence-sapping ratings downgrades.
In early April, South Canterbury escaped receivership when at the 11th hour it was included in the Government's extended deposit guarantee scheme.
