In its weekly newsletter, the brokerage said McLeod's $15 million loan from SCF in 2008 to reportedly fund his acquiring of a 10% stake in Allan Hubbard's Southbury Group were written at an interest below the finance company's cost of funds, and gave depositors  a "reasonable cause" to question why a below-cost loan was offered to the chief executive.

"A cleaner and more defendable approach would have been for the Southbury Group to write those loans, thereby avoiding the perception of SCF depositors subsidising favourable and non-arms length lending to management," McDouall Stuart said in its update.

The Timaru-based finance company has much uncertainty about how it will recapitalise after Hubbard was forced to inject as much as a quarter of a billion dollars into the company over the past three years. McDouall Stuart said a public offering of Southbury appears to be the favoured option, though the timing has been pushed out to at least February next year.

Despite the uncertainty, the brokerage firm sees a lot of buying opportunity in South Canterbury's SCF010 and SCF020 bonds, which are "significantly oversold."

Yields of more than 19% and 15% respectively are still just too attractive to ignore as part of a portfolio," the firm said in its newsletter. Any chance of a default by SCF would most likely happen in the next few weeks or months and covered under the government's deposit guarantee, the brokerage firm said.