South Canterbury downgraded to BB; may be cut below guarantee threshold within 3 months

Standard and Poor's has downgraded South Canterbury Finance's credit rating from BB plus to BB and has warned of the potential for a further downgrade within 3 months that would stop the Timaru-based finance company's from being included in the government's extended deposit guarantee scheme from October. (Name corrected in fourth paragraph) South Canterbury's credit rating is now at the bare minimum of BB needed for inclusion in the scheme, which would extend the guarantee until the end of 2011. The BB rating is on CreditWatch with negative implications, which means there is a risk of a further downgrade within 3 months. The downgrade follows South Canterbury Finance's announcement of NZ$229 million of loan losses and writedowns for the six months to December 31 and the subsequent injection of capital by its founder Allan Hubbard. Standard and Poor's said the downgrade would have been bigger without the capital injection. Standard and Poor's analyst Derryl D'silva told interest.co.nz that the reaction of South Canterbury's retail debenture holders would be a key factor in the ratings agency's considerations in the coming three months, as would the ability of South Canterbury Standard and Poor's to raise capital from other investors. "The liquidity risk they will need to manage is the number one issue," D'silva said. "We've seen evidence of retail investors being loyal and we'd like to see that loyalty continue, and if it does continue it might lessen our concerns," he said. Standard and Poor's was not necessarily looking for a specific reinvestment rate. "It's about seeing evidence that they can get new money coming in on a weekly basis." Any further news of weaker loan quality or signs it could not raise further capital was likely to lead to a further downgrade, Standard and Poor's said. Here is the full Standard and Poor's statement below.

Standard & Poor's Ratings Services said today that it has lowered its long-term rating on New Zealand finance company, South Canterbury Finance Ltd. (SCF) to "˜BB' from "˜BB+', and affirmed the "˜B' short-term rating. At the same time, the "˜BB' long-term rating was placed on CreditWatch with negative implications. "The downgrade reflects our view that SCF's asset quality experience has deteriorated to a level that is not consistent with the "˜BB+' rating level," Standard & Poor's credit analyst Derryl D'silva said. "Although the capital injection into SCF will help absorb these bad debt charges, it does not, by itself, restore financial strength to a level that we consider is consistent with the "˜BB+' rating. Further, SCF's financial flexibility and, in particular, further shareholder support of SCF, is diminished following the capital injection. That said, but for strong shareholder support evidenced in SCF's announcement concerning high loan-loss provisions of late yesterday, it is likely that the rating would have been downgraded by more than one notch." Stakeholder reaction to SCF's asset quality difficulties will be integral to the resolution of the CreditWatch and forward direction of the rating. Liquidity is currently weaker than many New Zealand nonbank deposit takers' in the "˜BB' rating category, and should it deteriorate further it is likely to result in the rating being lowered. That said, debenture investors in SCF have remained relatively loyal to the company in recent times even considering the difficulties SCF has encountered prior to yesterday's announcement by the company. Should debenture investors and other liability stakeholders continue to show relative support for SCF it is likely that Standard & Poor's will become less concerned regarding SCF's liquidity, which could contribute to the rating being removed from CreditWatch Negative. A further concern is that the announcement of high loan-loss provisions by SCF could retard or even scuttle further recapitalisation initiatives being considered by SCF. If further capital is not injected"”should liquidity or further asset quality pressures emerge"”it is likely to cause the rating to be lowered. "The rating could be taken off CreditWatch Negative within a matter of months if liquidity concerns moderate such that SCF has sufficient excess cash to manage potential volatility given the confluence of negative developments affecting SCF, and, more generally, the continuing difficult market for New Zealand nonbank deposit takers," Mr. D'Silva said. Further, the rating could be taken off CreditWatch Negative if SCF is successful in further strengthening its capital base, and restructuring its business so that Standard & Poor's concerns regarding liquidity and other rating factors ameliorate. Initially, should Standard & Poor's concerns ameliorate, it is likely that the rating could be affirmed with a negative outlook. Conversely, should liquidity deteriorate it is likely that the rating will be lowered"”and potentially by more than one notch"”depending on the severity of the deterioration. Further, should new asset quality concerns emerge, or recapitalisation strategies prove difficult to execute or insufficient to placate Standard & Poor's concerns at the "˜BB' rating level, the rating is likely to be lowered. A downgrade associated with either asset quality or capital difficulties, absent an intensification of liquidity concerns, is more likely to be limited to one notch.