South Canterbury Finance facing credit downgrade

South Canterbury Finance chairman Allan Hubbard. Photo / Supplied

Ratings agency Standard and Poor's has put South Canterbury Finance's BBB- rating on CreditWatch negative, a move that could strip the Timaru based finance company of its coveted investment grade rating and unsettle many investors with NZ$1.7 billion of South Canterbury debentures.

The negative Creditwatch action followed South Canterbury Finance's announcement of a NZ$37 million loss for the just completed financial year to June 30 and its decision to look for fresh equity from a new shareholder. This followed a NZ$58 million provision for bad debts linked to the slumping property market.

A CreditWatch negative listing implied a "one-in-two chance" of a rating downgrade in the next three months, S&P said, adding a downgrade of more than one notch was possible.

"The CreditWatch action reflects our view that there is now an increased risk that some of the non-performing assets could translate into lending losses ultimately," Standard & Poor's credit analyst Derryl D'silva said in a statement.

"Further, SCF's decision to shift its holdings of liquid assets from cash to higher risk and high-yield investments has increased the risk profile of the company and weakened its liquidity," D'silva said.

"The investments have also resulted in an increase in related-party exposures, which have moderated SCF's capitalisation, and are a weakness at the 'BBB-' rating level."

Additionally, an existing rating trigger on SCF's US$100 million private-placement facility compounded the liquidity concerns, S&P said.

"The trigger specifies that if the rating on SCF were lowered to below 'BBB-', funding providers may review or withdraw their funding support for SCF," it said.

"Such a downgrade would likely exacerbate the consequent negative rating momentum, whereby a small negative ratings movement could magnify significantly because of liquidity difficulties that may emerge."

However, South Canterbury's "sound business profile and geographic diversity" were factors supporting the rate.

"The 'BBB-' rating is supported by our expectation that SCF's primary shareholder, Mr Allan Hubbard, will remain steadfast in his ability and willingness to support SCF if required," S&P said.

"The shareholder has injected NZ$40 million in capital to absorb the impact of the increased credit costs. At the same time, he plans to have a legal underwriting agreement (which is yet to be executed) that is expected to stand as security for any further specific loans that could become impaired."

"The ratings may be lowered by one or more notches should SCF fail to address pressures concerning its liquidity and its weaker capital adequacy position stemming from related-party exposures and rising credit costs," Mr D'silva added:

"In addition, the ratings may be removed from CreditWatch if SCF's underwriting agreement with its major shareholder were successfully executed, and if SCF reduced or eliminated its related-party exposures such that it decreases the pressure on its capitalization level."

- Interest.co.nz