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Ratings agency Standard & Poor's has flagged concerns about Geneva Finance's liquidity and funding following the investor panic caused by the collapse of other finance companies in the past six weeks.
Standard & Poor's (S&P), one of the three largest international credit rating agencies, said yesterday it had placed Geneva's B+ rating on "CreditWatch with negative implications".
"We believe that there is a possibility that current financial market disruptions may lead to Geneva being unable to manage liquidity and funding pressures affecting the New Zealand finance company industry," S&P credit analyst Derryl D'silva said.
He noted plummeting debenture reinvestment rates had seen Geneva increasingly rely on a $50 million line of credit from the Royal Bank of Scotland.
"Geneva's ability to continue to draw down on this facility and more generally maintain support from its bankers are the most important rating factors in the short term," he said.
Geneva Finance chief executive Shaun Riley yesterday said the Royal Bank of Scotland line of credit was secure and the company had been reassured of that in recent discussions with the bank.
The facility had been obtained last year in order to see the company through exactly the type of scenario which was now unfolding. While the company had increasingly drawn down on the facility in recent weeks, it still had significant remaining capacity to fund its operations for some time yet.
The Business Herald understands many finance companies some time ago formulated contingency plans for dealing with the loss of investor confidence they foresaw developing in the aftermath of the widely anticipated Bridgecorp failure.
Despite flagging its concerns, S&P was not predicting Geneva's imminent failure. However, the company's creditworthiness now largely depended on it retaining the $50 million line of credit.
Since Rod Petricevic's Bridgecorp toppled in July, investors have been withdrawing millions from the $12 billion finance company debenture market. Further failures have seen the pace of those withdrawals increase to the point where commentators say that even well-managed companies have now been dragged into receivership because they cannot maintain liquidity to meet their commitments as debentures mature.
So far six finance companies have gone under this year, adding to the three failures last year.
Riley said that apart from the Bank of Scotland facility, Geneva had put in place other measures to manage the loss of investor confidence and he was confident his company would ride out the difficult market conditions.
Riley said the company was talking to investors to reassure them their money was safe and it had reined in lending activity to reflect the reduced inflow of investor funds.
Riley believed Standard & Poor's was being particularly rigorous in its approach to ratings at present because of recent criticism of its rating of sub-prime securitisation vehicles in America.
However Gunning dismissed that claim.
"This rating action is in relation to a New Zealand company in the context of the New Zealand financial services sector."
Geneva's current B+ rating meant there was about a 3 per cent chance of it defaulting within the next 12 months and CreditWatch negative is not in itself a precursor of rating downgrade but means there is a 50/50 chance of one over the next one to three months.
"Continuing support from liquidity providers and debenture renewals may sustain Geneva through the current market stresses," said D'silva.
