SCF Update to Investors

Dear SCF Investor

The past few weeks have been incredibly busy for South Canterbury Finance Limited (“SCF”) and we thought it timely to update you again on progress within the business.

There has been a significant amount of media commentary on the current performance and future prospects of SCF and we want to ensure that, as an investor in the Company, you have the facts about SCF. We have made a number of announcements in recent weeks which demonstrate that real progress is being made in restructuring SCF, and improving our day to day operational performance. You can view those on our website at www.scf.co.nz.

Allan Hubbard – change in status
Perhaps the most significant announcement for many of you will be Allan Hubbard’s decision to step down from the Board and become SCF’s President for Life. This position reflects his special role and contribution to the Company and is a change, not a retirement. In fact this change was flagged at the last AGM as part of the succession planning process for SCF. Mr Hubbard recognises that he cannot go on forever even though he’s still usually at his desk by 6.30am every day. Moving into his new position as President for Life will enable a greater focus on finding a new equity partner for the Company and assist the drive to improve liquidity, while the Company will remain focused on the core principles instilled by Mr Hubbard.

Quarterly results to 31 March – a break-even result
From an operational perspective, the most pleasing result so far is our January to March 2010 unaudited quarterly figures which show a break-even trading result before one-off and non-recurring items. The figures demonstrate a substantial turnaround from our 31 December 2009 half year result and provide a strong indicator of the direction in which we want the business to be heading.

Additional debt funding for South Canterbury Finance
We announced on 4 June 2010 that we have reached agreement for an increase in the amount of our $75 million funding facility by $25 million, providing the Company with additional liquidity through a simple structure. The $75 million facility, initially with New Zealand Credit Fund Limited, has been taken over by Torchlight Security Trustee Limited which has agreed to increase the facility by $25 million to $100 million and to extend the term of the facility to 30 November 2010.

The increase in the amount of the funding facility to $100 million, in effect, replaces the previous agreement between Southbury Corporation Limited and Torchlight Fund No 1 LP for an additional equity injection of up to $37.5 million which is not now proceeding. The Trustee has granted SCF a further waiver, subject to certain conditions, from compliance with the risk weighted asset covenant in clause 16.1(c) of the Trust Deed which will expire on 31 August 2010.

The restructured facility provided by Torchlight Security Trustee results in an increase in the amount of prior charges under the Company's Trust Deed to $151 million which equates to 7.2% of total tangible assets and is within the Trust Deed limit. This increase in the amount of prior charges has been approved by the Crown under the Company’s Crown guarantee deed.

Credit rating downgrade has no impact on our Government Guarantee
While our long-term credit rating has recently been downgraded to B+ (CreditWatch Developing), S&P recognised our recent progress and took the rating off CreditWatch Negative. CreditWatch Developing means there is a one-in-two likelihood that our rating may be raised, lowered or affirmed within the next three months. Investors should note that the change in credit rating does not affect our ongoing participation in the Crown’s Extended Guarantee Scheme. We have confirmed that with Treasury.

For detailed information about the Crown retail deposit guarantee scheme we recommend you go to the Treasury website www.treasury.govt.nz, which contains both a question and answer section and a copy of our specific deeds of guarantee. We have highlighted some of the main areas on which we have received enquiries from investors below.

Addressing our “wall of maturities”
The focus of our recent activity in the market is on renewing investments which mature between now and 12 October 2010 – to address the so called “wall of maturities” created by the current Crown Guarantee. We’ve sent out reinvestment offers to all investors whose terms are coming to an end between May 1 and 12 October – about 20,000 letters. The renewal rate has been very positive to date with around two thirds of investors who have replied choosing to extend their term. Our ratings agency S&P set some very tough shortterm targets, especially around smoothing out the maturity wall, and that short-term view was probably the main contributor to the recently announced downgrade in our rating. Our focus is on restructuring and recovery over a longer term than S&P set for us. We are pleased with the progress we are making.

$200m realised from our loan book
We have made real progress in recovering funds from our loan book with slightly more than $200m being repaid since January. That is a result of the hard work being put in across all our business units, and has contributed substantially to our improved current cash position of around $80million.

Market Research
We have recently completed, with the assistance of UMR Research, a series of focus groups with investors to help us understand what you think about SCF, and the finance company sector. We also had a company called Pulse Business Solutions carry out follow-up interviews with some investors who decided not to renew their investment so we could better understand the reasons behind that decision and see what we can change. The aims of this research were to ensure we are providing the most attractive investment opportunity to investors and to help us communicate better with you. While research of this kind is a little unusual for SCF, it is fairly standard practice in business, and we thank all of you who have been involved.

Advertising campaign
As many of you will have noticed we are running an advertising campaign. We thank investors for their continuing strong support of the offer.

Restructuring and Investment Partner discussions continue
Finally we continue to have discussions with a number of parties around the restructuring of SCF and potential investment partners. Nothing has been agreed but we are working hard on a number of opportunities and we’ll let you know when we can.

So, we have been very busy trying to put the company to rights by finding, isolating and fixing the problems and demonstrating progress to advisors and investors.

Managing our current receivables book, maximising cash-flow from interest and principal payments, and addressing our renewals are our critical focus over the next few months as we re-shape the business for the long term.

As part of keeping our investors up to date we will be holding an ongoing series of public meetings starting from mid-June. Look for notices in the paper, advisories from us or on our website for details.

Thank you for your continuing support of South Canterbury Finance. We will be in touch again soon.

Yours sincerely
The Management & Board of South Canterbury Finance Limited