By Greg Niness of the Sunday Star Times: South Canterbury Finance did a huge debt for equity swap at the end of 2008 after loans it had made on two large Fiji resort developments turned sour.
The extent of South Canterbury's exposure to the Fiji resort market, which has been a graveyard for investors, has never been revealed, but documents obtained by the Sunday Star-Times show that by early 2008 it was owed $37.6 million on two resorts being developed by Auckland businessman Neville Mahon.
One of these was the Denarau Island resort which is now managed by the Hilton Hotel chain, and the other was a development on Nananu Island.
By February 2008, South Canterbury was so concerned about its Fiji loans that its then chief executive, Lachie McLeod, and director Edward Sullivan wrote to Mahon suggesting a debt for equity swap.
In regard to Nananu, the letter said: "This is clearly a current disaster. It is a non-performing loan."
The letter also expressed serious doubt about the viability of the Denarau development.
"In light of the ongoing interest commitments, the potential for this property to repay its debts and retain a surplus really does depend upon the value of the goodwill of the business rather than its assets," the letter said.
At that time, Denarau's main funder was Strategic Finance, which is believed to have tipped more than $70m into the project, rumoured to have been a major contributor to Strategic's failure.
In their letter, McLeod and Sullivan proposed a deal involving another of Mahon's projects in which Strategic was a major funder.
The deal's main points were that South Canterbury would take ownership of a residential project Mahon was developing at Scotts Head, near Coffs Harbour in Australia. In doing so, South Canterbury would have taken over a $9m mortgage Strategic held over the property.
South Canterbury would also take over the Nananu Island project for $20m. Any outstanding debt owed to South Canterbury would be added to the mortgage it held over Denarau.
Mahon's companies' total debts to South Canterbury were believed to have been around $40m by the time the debt for equity swap was concluded towards the end of 2008.
Problems with the Fiji loans are understood to have precipitated the asset shuffling between South Canterbury, its parent company, Southbury, and its major shareholder, Allan Hubbard.
This resulted in the Fiji loans being removed from South Canterbury's books, which shored up its balance sheet and helped it maintain its investment grade credit rating.
But the asset shuffling involved is also believed to have started the financial tremors which quickly spread throughout Hubbard's business empire and would ultimately result in South Canterbury being placed in receivership and the rest of Hubbard's assets being placed under statutory management.
The coast of Fiji is littered with the bones of failed resort developers and financiers.
Fijian loans were also a major contributor to the collapse of Bridgecorp.
Many mum and dad investors who purchased units in Fiji resorts from their developers have also come to grief.