Finance firms face forced ratings

Lianne Dalziel

The Government is considering compulsory credit ratings for finance companies - something which may have warned investors off failed ventures National Finance 2000 and Provincial Finance.

However, the only company qualified to perform such a rating has withdrawn from New Zealand because of a lack of demand for its services.

A spokesman for Commerce Minister Lianne Dalziel yesterday confirmed that mandatory independent credit ratings were among ideas being canvassed in discussion documents to be released soon as part of the Ministry of Economic Development's Review of Financial Products and Providers.

The review began in March last year so the inclusion of the issue in the discussion documents was not a reaction to the collapses of National Finance 2000 and Provincial Finance, the spokesman said.

But calls for mandatory credit ratings for finance companies have grown in the wake of the two high-profile collapses.

A lack of independent information about the degree of risk involved in debenture stock is believed to have contributed to investors losing millions in the National Finance 2000 and Provincial collapses. There is also a feeling in the sector that others have been tarred with the same brush.

Chairman of KPMG's banking group Andrew Dinsdale, advocated compulsory independent ratings for finance companies in KPMG's Financial Institutions Performance Survey. He first recommended such a regime to the Review of Financial Products and Providers last year.

Richard de Latour, chief executive of Instant Finance has also called for "a comprehensive and credible system" of assessing finance companies.

Instant Finance has a B3 "Investment Grade" rating from Rapid Ratings. That was the only company properly qualified to rate New Zealand companies, de Latour said.

"One of the very reasons we got that rating was to ensure that at times like we find ourselves in now we were better positioned than some others."

However, Rapid Rating decided earlier this year to withdraw its New Zealand finance company services due to a lack of demand.

The big international ratings agencies - including Standard & Poor's, Moody's and Fitch - had models and methodology unsuited to the relatively small scale of the average New Zealand finance company.

"Unless you have at least $100 million in shareholders' funds, you don't even rate on their screen," de Latour said.

Rapid Ratings' founder and managing director Patrick Caragata said his company - whose core business is software based ratings for about 15,000 companies globally - had rated about 15 New Zealand finance companies since 2001.

"Many of them would not release their rating into the market because we were very tough."

He said Rapid approached Provincial Finance, "they turned us down".

"The non-bank finance companies were just too tight with their money, anxious to make profits but not anxious to minimise risk."

KPMG's Dinsdale said the lack of a suitable agency was a "vexed question". That aside, he didn't believe the Government had the appetite for a mandatory regime anyway.

Both Dinsdale and de Latour believed a voluntary regime overseen by the Reserve Bank was a strong possibility. Dinsdale pointed toward the Australian model of "approved deposit takers".

"It would be similar to what the Reserve Bank has for registered banks, with credit ratings, minimum capital ratios, enhanced disclosure and more regular reporting," said Dinsdale.

"Then the investing public can make their own judgment whether they want to got to a registered bank, have a slightly enhanced return with an approved deposit taker, or they want to be a little bit more risky and go to that third tier."

However, de Latour said that model would still leave a dilemma.

"What sort of rating, who's going to do it and how meaningful will it be?"

Meanwhile, Caragata said Rapid was not closing the door completely on New Zealand.

"We're prepared to utilise our technology and have a rating service delivered to New Zealand but we have to have an organised, professional response from the non-bank finance companies and it has to be done soon."

Review

* The Government is looking at compulsory credit ratings for finance companies.

* At present there is no agency in New Zealand suited to rate them.

* Industry commentators say a voluntary supervisory regime for finance companies is more likely.