Standard and Poor's affirms South Canterbury Finance's BB+ rating for now, but outlook negative on weak liquidity and loans

Standard and Poor's has affirmed South Canterbury Finance's BB+ long term credit rating, removing the Timaru-based finance company from its immediate CreditWatch Negative list. But Standard and Poor's left the outlook for the rating as negative and said South Canterbury's liquidity (cash position) and asset quality (loan quality) remained weak. South Canterbury would need to find new sources of cash, deal with related party investments and rebuild its capital to keep the current rating, which is necessary for the Alan Hubbard-controlled firm to retain its government guarantee beyond October 2010. The Standard and Poor's statement also raised the prospect of a more urgent sale of non-performing and related party assets by South Canterbury Finance, along with further unspecified governance issues. South Canterbury Finance now has an interim chief executive and an interim chief financial officer. South Canterbury has repeatedly referred to an upcoming capital raising and a possible float on the NZX, but has yet to announce the detailed plans or progress. "The negative outlook reflects immediate pressures on SCF's financial profile, principally liquidity, asset quality, and governance issues, and medium-term uncertainty concerning restructuring and recapitalization initiatives," Standard & Poor's credit analyst Derryl D'silva said in a statement. South Canterbury Finance said the Standard and Poor's statement was an endorsement of its progress and described the action (removing the CreditWatch Negative status, but keeping the negative outlook) as an upgrade. Interim CEO Nigel Gormack said "the upgrade from Standard & Poor's was an acknowledgement that South Canterbury Finance was making good progress following the appointment of its new directors, who together with the senior management team were continuing a major restructure of its business." "Whilst we still have a lot of challenges ahead of us, this is an independent endorsement by Standard and Poor's that we are making progress on our current path", Gormack said in a statement. Standard and Poor's full statement is below. My view Every South Canterbury investor (and the government) should read the Standard and Poor's statement below in detail. It raises a number of questions that I believe Alan Hubbard should answer by the time the summer holidays are over in mid-January. They are:

• Who are the new private placement investors that South Canterbury has found and are referred to in the Standard and Poor's statement as having being 'retained'? I haven't seen any statements that they had been obtained in the first place.
• How much have they invested and how much extra capital does South Canterbury need to raise through a public share offering to keep the BB credit rating needed to retain a government guarantee until 2011?
• What is South Canterbury's current cash position and its near term cash outlook, which still seems to concern Standard and Poor's?
• What is Standard and Poor's talking about when it refers to a possible need for a "more urgent and assertive approach in reducing nonperforming assets, and related party investments, and noncore assets". Is this a potential fire sale of assets and could they include Hubbard's South Island dairy farms? Is this necessary without a successful NZX flotation?
• How much 'alternative liquidity' does South Canterbury need from another supplier and when does it need it?
• What are the 'governance issues' referred to by Standard and Poor's in its statement? What is the extent of Alan Hubbard's personal involvement in South Canterbury on a day-to-day basis and what is the state of his health? (It was reported earlier this year that the octogenarian was on dialysis several times a week)
• What influence do the new independent directors have over the day-to-day running of the business, if any?
• What is the current state of the plan to sell Southbury's assets (Hubbard's personal company that is intertwined with South Canterbury in various related party transactions) in a stock market offering?

Standard & Poor's Ratings Services said today that it had affirmed its 'BB+' long-term and "˜B' short-term counterparty credit ratings on South Canterbury Finance Ltd. (SCF). At the same time, the "˜BB+' rating was removed from CreditWatch Negative, where it was initially placed on Sept. 20, 2009. The outlook is negative. "The rating affirmation reflects SCF's success in ameliorating specific concerns raised when we placed the rating on CreditWatch Negative," Standard & Poor's credit analyst Derryl D'silva said. Specifically, SCF has been able to again access to the debenture-investor market; it has sourced three new independent directors to assist in the management of the company; it has been able to retain the confidence of its new private placement investors as well as its debenture investors; and its audited financial statements for fiscal 2009 have revealed nothing of concern. That said, SCF's financial profile"”particularly liquidity and asset quality"”is weak at the current rating level. With no debenture prospectus in the public domain for longer than six weeks, and no access to a banking facility, SCF's liquidity position has weakened. Our rating also factors in the ongoing pressure of negative asset quality trends, which, on further deterioration, could increase lending losses. Additionally, SCF is in the early stages of formally addressing matters concerning related-party investments. These pressures, against a backdrop of a nascent restructuring and recapitalization initiative, give us cause for uncertainty in the near and medium term. To contend with these negative pressures, SCF is taking remedial steps, which, if successful, will probably ameliorate our concerns. SCF is looking to steadily rebuild its internal cash position. Further, it is looking to source an alternative liquidity provider, and is also evaluating strategic options, including a more urgent and assertive approach in reducing nonperforming assets, and related party investments, and noncore assets. "The negative outlook reflects immediate pressures on SCF's financial profile, principally liquidity, asset a quality, and governance issues, and medium-term uncertainty concerning restructuring and recapitalization initiatives," said Mr. D'silva. Our immediate concern is that SCF maintain higher liquidity, leading up to its recapitalization plans; its failure to do so would likely to lead to the company being downgraded. An equally important but slightly less urgent concern is that SCF's restructuring and recapitalization initiatives restore financial strength to a level that we believe is consistent and sustainable at the current rating level. Failure to do this would likely to lead the finance company being downgraded. Conversely, negative pressure will abate if SCF is able to moderate liquidity pressures, manage its credit loss experience, eliminate related party investments, and successfully restructure and recapitalize the business to a level that is consistent with the "˜BB+' rating level.