KEY POINTS:
Three weeks after the collapse of the Bridgecorp property group, some analysts have questioned the value of credit ratings agencies that failed to warn of the group's demise.
The Government has already signalled that ratings will soon be required by law for all finance companies. But with ratings not a guide of guaranteed returns, the ratings agencies themselves are under scrutiny.
In the Government's proposals financial advisers will be regulated, financial service providers registered, and the Reserve Bank will become the single prudential regulator for banks, non-bank deposit takers (NBDT) and insurers.
The NBDTs will also have to undergo credit ratings. The RBNZ has said non-bank lending institutions have assets of about $29.5 billion -- about 7 per cent of total financial system assets.
One agency gave Bridgecorp an investment rating of 3.5 stars as late as February this year and there was an earlier B3 rating suggesting the investment was of "reasonably good quality".
But on June 29 New Zealand's Securities Commission suspended prospectuses for Bridgecorp Investments, and Bridgecorp Ltd dated December 21, 2006, because they had become misleading. It did not disclose to investors at that stage the companies' inability to meet their obligations to investors.
Three days later, they were placed in receivership owing about $500 million to 18,000 investors.
It appeared Bridgecorp had been in default since June 20 but had not told its trustee, commission primary markets director Kathryn Rogers said later.
Bridgecorp is the fourth NZ finance company to collapse in just over a year.
Greg Muir, chairman of finance company Hanover Group, has since predicted a "shakeout" for the sector, as proposed new rules for the non-bank finance sector come into force in 2010. Some less stable smaller companies, and possibly even some larger ones could be forced to amalgamate or get together in some way, Mr Muir told NZPA.
Separately, Standard & Poor's has said the Bridgecorp receivership unambiguously highlighted the need for strengthened regulations in the sector.
Bridgecorp highlighted positive recommendations in the selling of its products right up until its collapse.
While both ratings agencies stand by their assessments of Bridgecorp, one told an ABC journalist in Australia that there was no requirement to disclose reports that gave companies a negative rating.
Word of mouth and advertising played a big part in the selling of Bridgecorp, but its credit rating was promoted to investors as independent and transparent.
One recent rating came in February this year when Property Investment Research gave Bridgecorp 3.5 stars out of a potential five, valid through to November.
While the rating did highlight risks, Bridgecorp's then-chief executive officer Rod Petricevic said it distinguished the group from other finance companies in New Zealand.
"The retention of 'investment grade' sends a strong and confident message to the market that Bridgecorp has the determination and expertise to survive through, and face the challenges of, the current market," he said at the time.
But even after Bridgecorp collapsed, Property Investment Research managing director Richard Cruikshank said his company made the right call.
"We stand by our ratings ... ratings are a point-in-time evaluation," he said.
Mr Cruikshank said the rating was not based on a full due diligence of Bridgecorp's books, but an appropriate level of risk was disclosed for anyone who wanted to read the full Bridgecorp report.
"We pointed out clearly the risks of investing in funds that are involved in development; it does clearly give it an 'investment grade' rating, but you've got to remember that five stars is the top ranking," he told the ABC.
"You've got to really read the report, and it really is a high-risk investment and their are development risks," he said.
Bridgecorp also cited an earlier report from the international group Rapid Ratings that gave it a B3 -- just enough to make investment grade.
Rapid Ratings has since pulled out of New Zealand, citing low demand for independent ratings.
But the ABC reported that the assessments of Bridgecorp from PIR and Rapid Ratings raise some key questions for investors, who were now wondering if ratings agencies should not only deliver credible guidance but highlight companies heading into dangerous territory.
Mr Cruikshank said there was no requirement to make negative results public.
"We don't print reports that are not investment grade, and the market generally is aware of that," he said.
"There's legal issues with going public with a private report."
Investment analyst Brian Gaynor has said that bad reports on potentially unstable finance companies are not always in the public domain.
"Credit rating organisations are a bit like world boxing titles -- there seems to be all kinds of different world boxing titles and I think that tends to be what is happening with credit rating agencies," he said.
Mr Gaynor said the rules would lead to the public being misled.
"Companies can just go around to as many different credit rating organisations they can," he said.
"They may go to eight of them; the first seven may say, 'No, you're not worthy to be given an investment grade rating' and they may find the eighth that does, and that's the one that's published, even though seven previous ones may have said that there's no justification for giving an investment grade rating to this organisation.
"If credit rating organisations aren't prepared to publish negative as well as positive then the public can be misled, to quite a large extent."
- NZPA
