SCF ratings dip based on cash shortfall

SFC's credit rating had been downgraded from BB to B+. Photo / Dean Purcell

South Canterbury Finance says its cash position has been far worse than that which contributed to its rating downgrade.

The Timaru-based firm announced late on Friday afternoon its long term credit rating had been downgraded from BB to B+ by Standard & Poor's.

While it remains covered by the government's extended retail deposit guarantee scheme which runs through to December 31, 2011, if it had sought a rating now it would be below the qualification level.

It has been taken off creditwatch negative to "creditwatch developing" and had its short term rating affirmed at B.

Chief executive Sandy Maier said S&P's requirement to have a $150 million cash balance was "arbitrary".

"They get very arbitrary about these things and they let us know last month they wanted $150 million in cash. We're projecting $106 million - with some slippage so it's a matter of a couple of weeks here or there," he said.

"We've been to BB with $7 million in the bank so it's all pretty odd. People have to look at the whole thing as a journey - their thing is to spread it out against international metrics."

Standard & Poor's said the reduction of refinancing risk for October had not progressed as quickly as anticipated.

Credit analyst Derryl D'silva said despite its relatively weak financial metrics for a 'BB' rating, SCF's 'BB' rating was previously supported by strengths around its business profile and the financial flexibility stemming from its key shareholder.

"In our opinion, however, the balance sheet liquidity build-up, to date, has not been as strong as we anticipated; we have observed delays during the past few months."

Maier said on Friday that in essence Standard & Poor's was now saying it was not moving fast enough.

"With all due respect to Standard & Poor's, we believe this misses the point of the turnaround we are pursuing. All along our aim has been to restructure the business in an orderly way to underpin its long term sustainability."

The creditwatch developing listing implied a one-in-two likelihood that the rating may be raised, lowered, or affirmed within the next three months.

The rating could be dropped if general debenture investor support were to materially weaken due to factors including:

* The momentum of improvement in SCF's reinvestment experience during May-July 2010 is not maintained in coming months.

* SCF's management of forward maturities for August to October was not as successful as its efforts to manage forward reinvestment maturities for June and July.

* SCF's ability to raise new debentures weakened materially from its good experience in recent months.

* SCF's cash balance did not increase to $150 million by June 2010 and head toward $200 million a few months later.

Standard & Poor's said the rating could also come under downward pressure if support from founder Allan Hubbard materially diminished and new credit concerns emerged.

Directors will soon appoint a new chairman following the announcement that Hubbard, the 82-year-old chairman and controlling shareholder, would step down to become president for life and also step aside as a director.