The Government's guarantee scheme has ratcheted up the stakes as companies strive to make the grade.
When you got a B grade in high school it was something to write home about.
But investing in a finance company with a B grade could mean you have a one in five chance of losing your money over a five-year period.
Ratings for non-bank retail deposit takers became compulsory on March 1 and results have shown what many knew already - that most of New Zealand's finance company sector is below what investment experts call investment grade or a BBB rating - a one in 30 chance of failing to pay up over a five-year period.
Most of the 30 companies now rated have an average of BB - a one in 10 chance of default.
Brook Asset Management's managing director Mark Brighouse says one of the main reasons institutional investors don't put money into anything below the BBB level is because the level of default rises steeply below there and gets higher as you go down the spectrum.
"It's simply not a risk they are interested in taking because they have got other risks in their portfolios."
But John Kidd, head of research at broker McDouall Stuart, believes there is a place for lower rating companies as long as people understand they are getting paid a higher level of interest because of the risk.
He says a large part of the problem is that the Government's retail deposit scheme has created a distortion.
From October 12 those with a BB rating can qualify for the extended guarantee but those who sign up will essentially by covered by the Government's rating of AA+.
Lower rated companies should pay investors a higher level of interest to compensate for the extra risk.
But the underlying rating won't mean anything until the Government weans companies off its guarantee.
Kidd says that has the potential to create confusion for people as the scheme winds down and they have to start thinking for themselves again.
At the moment finance companies can't price their interest payments according to their rating because that would likely see them flooded with cash.
"It really doesn't bring home the concept of credit risk."
The same scenario occurred when the guarantee scheme was first set up and finance companies were controversially included.
Companies had to drop their rates because of the high levels of investors wanting to sign up for 11 per cent with a Government guarantee backing it.
"In a healthy market risk is priced into the sale - that won't be possible until the scheme ends."
Kidd says the last couple of years has allowed investors to put the risk factor on hold. "The challenge now is to get people's heads around what will happen when the guarantee goes."
Only seven of the 30 rated companies have missed out on the minimum needed to qualify for the guarantee at this stage although they still have seven months to improve their ratings.
The seven comprise Asset Finance, Avanti Finance, Broadlands Finance, Geneva Finance, NZF Money, Vision Securities and Allied Nationwide, owned by Allied Farmers which is hoping to be eligible for the scheme once it adds its better Hanover loans to the books.
Kidd said he expected all seven to try for the guarantee.
"It is in the company's best interests to try and get the highest rating they can and it does cut down on their cost of borrowing as well."
But he doesn't rate the chances of survival for those that don't make the cut.
"The weaning off process that Treasury is trying to bring on to the sector - there will be some that don't make it."
Then there are others who are fighting to remain eligible. South Canterbury Finance was downgraded from BB+ to BB this week and is on credit watch which means another downgrade could be in the offing.
Kidd said South Canterbury had a number of loans due to mature around October - right before the scheme was due to roll over.
"For them not to be there [in the guarantee scheme] - and for investors to leave them would be disastrous."
Reserve Bank head of prudential supervision Toby Fiennes says the extended Government guarantee will give the Government and rating agencies a chance to help bring the public up to speed on ratings.
"Investors don't need to know what the underlying rating means at the moment they just need to know whether a company qualifies for the guarantee or not."
Fiennes says ratings are important so investors can have a single measure to use to compare companies.
"Without it investors would have to look at the individual prospectuses and compare them."
But he says they are not infallible. "They don't predict definite failures. All they can give is a likelihood. There are always shades of grey."
Fiennes says most of the controversy around ratings agencies that has occurred during the global financial crisis was linked to newer, more complicated products that were given higher ratings than they should have got.
"Nobody has criticised the rating agencies for their conventional ratings."
It's also not just anybody who can give a rating to a non-bank deposit taker.
"We have a criteria, we won't let just anybody in as an approved rating agency."
At the moment only Standard and Poor's, Moodys and Fitch make the cut.
But Fiennes says ratings shouldn't be solely relied on when investors are making their decision.
"There are limitations with ratings. Agencies don't assess them that frequently and can sometimes be a bit slow to react."
They also have to take the figures, usually audited accounts, provided by a company at face value.
There are also some exemptions on the companies who have to get ratings. Those already in receivership or moratorium don't have to and smaller companies - those with liabilities of less than $20 million - can individually apply for an exemption.
The Reserve Bank won't be doing any additional monitoring of the exempted companies which include many credit unions and church groups as well as FAI Money - a finance company associated with Mark Hotchin and Viaduct Capital which was booted out of the Government's guarantee scheme last year.
But Fiennes says there will be additional capital requirements for those that are exempt.
Those with ratings will have to have a minimum capital requirement of 8 per cent but those without will have to have 10 per cent.
While an extra 2 per cent doesn't sound like much Fiennes says it's an extra 25 per cent which can be a lot for a small company.
The main reason smaller companies are allowed to apply for an exemption is because of the cost of getting ratings.
The Reserve Bank says a ball-park figure on the cost of getting a rating is around $30,000 per company each time.
Fiennes says there are still auditors and trustees whose job it is to keep an eye on the exempt companies.
Other concerns over rating agencies include the conflict in it getting paid by the company it is rating.
But Fiennes says ratings companies also have to protect their brand which relies on their getting their ratings right.
"There is a strong incentive for them."
Standard and Poor's Anthony Flintoff, managing director of corporate and government ratings, which has undertaken most of the finance company ratings, says his company has a very analytical process.
While the Melbourne-based company does not have any New Zealand staff every assessment involves a personal visit to that company and that will be followed up with an annual meeting with the management to talk about the company's performance and expectations. Before going to meet the company the analyst will look at background information including financial data, the company's business plan, strategy, competition and economic conditions.
While the data is important Flintoff says a lot of weight is also put on the people that run the company and their processes.
"A rating is not just about financial ratios."
Although some of it is subjective Flintoff says a lot of it is objective. "We have a criteria, it's not just what one person thinks." A final rating is assigned by a committee of people.
And Standard and Poor's often draws on its analysts from around the globe to ensure the rating is comparative to similar companies in other countries.
Flintoff says many things can trigger a change like the one seen by South Canterbury Finance this week.
But they are not that common.
"A rating change is a big thing, it doesn't happen that often. It's a rare thing. It's not something we take lightly."
