Guarantee poses challenge for finance firms

October will be critical for non-bank deposit takers such as finance companies as the extension of the Government's guarantee scheme kicks in for providers rated BB and higher.

Rating services company Standard & Poor's said yesterday that the sector faced challenges, especially when the scheme started guaranteeing highly rated non-bank deposit takers (NBDTs).

Standard & Poor's credit analyst Peter Sikora said the exclusion of lower-rated deposit takers would be tough for the sector.

Another challenge would be its susceptibility to liquidity and funding risks.

"Liquidity remains a key risk. It's hard to be exact but the asset quality sector isn't immune to further credit pressures or another slowdown in the economy."

Sikora said firms not guaranteed by the scheme would have to offer investors attractive yields in order to entice an appetite for risk and loyalty.

While some non-bank deposit takers have attracted debenture investments beyond the initial guarantee period, most maturities fall within the period, which has now been extended to December 31, 2011.

"Some investors have long-standing personal relationships with their providers and will continue to invest, while others will need convincing."

In order to meet liquidity requirements most deposit takers were forced to rely heavily on loan principal, interest inflows and the active management of new lending outflows, Sikora said.

"Many also have material liquidity gaps in their maturity profiles that will need to be carefully managed to avert liquidity pressures in the future. These liquidity gaps also make some NBDTs even more sensitive to the emergence of any new industry or company-specific credit pressures."

The Government's retail deposit guarantee scheme, introduced in 2008, had played a critical role in adverting the sector's collapse after a sharp decrease in debenture investment, Sikora said.

These challenges were not unique to New Zealand but there was a higher concentration of non-bank deposit takers here compared with other countries.

Despite many firms with good positions across certain asset classes, the operating environment remained competitive, he said.

"Liquidity and refinancing continue to trouble our view of the sector's creditworthiness and are likely to result in further company failures and consolidations."