Standard and Poor's cuts South Canterbury's BB+ rating to 'Creditwatch negative' (Update 1)

Standard and Poor's has placed South Canterbury Finance's (SCF) already reduced BB+ credit rating on a formal review for a possible downgrade of one or more notches within three months unless it can reissue its prospectus and show its shareholder Allan Hubbard can raise fresh funds. (Adds comments from South Canterbury and Hubbard saying the delay in the prospectus was normal and Standard and Poor's concerns would be addressed soon.) "This rating action follows our concern that SCF's risk profile has increased since we lowered the ratings on the company on Aug. 13, 2009. A CreditWatch Negative listing by Standard & Poor's implies a one-in-two likelihood of the rating being lowered within the next three months," Standard and Poor's said. "Our concerns center on increasing pressure on liquidity; still-weak asset quality; and governance matters including, but not limited to, related party exposures," it said.

South Canterbury Finance told advisors on Friday it had withdrawn its prospectus while its audit for the financial year to June 30 was being completed and said it expected to produce a new prospectus once its results were out by the end of September. South Canterbury cannot raise fresh funds without a prospectus and has not been able to access funds since August 13 when it stopped allotting fresh funds to debentures. These funds are stuck in a trust. "The CreditWatch action reflects our view that, with no debenture prospectus in the public domain, SCF's funding flexibility and liquidity are undermined at the "˜BB+' rating level, at least in the short term," Standard & Poor's credit analyst Derryl D'silva said. "The ratings may be lowered by one or more notches should SCF's debenture prospectus remain out of the market on or soon after Sept. 30, 2009, or should the confluence of actual or potential liquidity concerns that affect the company cause us to consider that SCF's financial strength is no longer congruent with our "˜BB' category rating," said Mr. D'silva. "Negative ratings momentum could also occur if the company were to announce any new adverse developments that could affect its audited 2009 financial statements." Standard and Poor's said if SCF's credit profile deteriorated, evidence of Allan Hubbard's support would be required to keep the rating at "˜BB+'. "If support is not forthcoming, or is not sufficient to afford debenture- and bond-holders' confidence, it is likely the company will be immediately downgraded," it said. Meanwhile, South Canterbury issued  a statement saying the delay in the audit and the new prospectus was normal and it would soon address Standard and Poor's concerns. "The Company is very determined to see the audit process completed as quickly as possible. This will enable us to be in a position to announce details of our restructuring and capital-raising plans to investors, and to address issues being raised by Standard & Poor's," Hubbard said in a statement. Here is the full S&P statement below

Standard & Poor's Ratings Services said today that it has placed its "˜BB+' long-term rating on New Zealand-based finance company, South Canterbury Finance Ltd. (SCF) on CreditWatch with negative implications. This rating action follows our concern that SCF's risk profile has increased since we lowered the ratings on the company on Aug. 13, 2009. A CreditWatch Negative listing by Standard & Poor's implies a one-in-two likelihood of the rating being lowered within the next three months. Our concerns center on increasing pressure on liquidity; still-weak asset quality; and governance matters including, but not limited to, related party exposures. Since its ratings were lowered, SCF has ceased allotting securities under its existing debenture prospectus (unrated by Standard & Poor's), provided market guidance of an increase to its unaudited net after-tax loss for fiscal 2009 to NZ$69 million, and had two of its four directors resign with pending replacements. These negative developments have occurred against a backdrop of a major restructuring and recapitalization initiative that SCF has said it will announce in coming weeks. "The CreditWatch action reflects our view that, with no debenture prospectus in the public domain, SCF's funding flexibility and liquidity are undermined at the "˜BB+' rating level, at least in the short term," Standard & Poor's credit analyst Derryl D'silva said. Technically, SCF does not have access to the new and reinvested debenture funds, which reside in a trust account. This increases pressure on SCF's funding and liquidity. Furthermore, SCF's liquidity levels are modest after the company's decision to shift its holdings of liquid assets from cash to higher-risk and higher-yield investments, and in related-party entities of uncertain credit-standing. Additionally, U.S. private placement (facility is unrated by Standard & Poor's) investors continue to review their funding support for SCF, which, if resulted in a requirement to repay the facility, has the potential to significantly exacerbate liquidity concerns and cause a downward revision of the rating by multiple notches, potentially into the "˜B' rating category. Should U.S. private placement investors continue their funding support for SCF, downward rating pressure is likely to be less severe. "The ratings may be lowered by one or more notches should SCF's debenture prospectus remain out of the market on or soon after Sept. 30, 2009, or should the confluence of actual or potential liquidity concerns that affect the company cause us to consider that SCF's financial strength is no longer congruent with our "˜BB' category rating," said Mr. D'silva. "Negative ratings momentum could also occur if the company were to announce any new adverse developments that could affect its audited 2009 financial statements." The "˜BB+' rating continues to reflect our view that SCF's primary shareholder, Mr. Allan Hubbard, will remain committed to providing timely support to SCF if required. If SCF's credit profile deteriorates, evidence of the shareholder's support would be required to keep the rating at "˜BB+'. If support is not forthcoming, or is not sufficient to afford debenture- and bond-holders confidence, it is likely the company will be immediately downgraded. The ratings could be taken off CreditWatch Negative within a matter of weeks if: · SCF is able to demonstrate its ability to re-access the debenture-investor market with no long-term negative effects impacting on its debenture profile; · Its audit and subsequent fiscal-2009 audited financial statements reveal no new material adverse findings concerning its financial strength; · It is able to source two or more highly qualified independent directors to help address weaknesses in SCF's financial strength profile and guide the company through a major restructure and recapitalization; and · More generally, Standard & Poor's gains greater confidence that the support of private placement investors and bankers as well as debenture investors will be retained. The CreditWatch could be longer lasting if Standard & Poor's has uncertainties regarding SCF's restructure and recapitalization plans after they are announced. Even so, Standard & Poor's expects the CreditWatch to be resolved in no more than 90 days. Even if SCF were able to satisfactorily address these rating pressures, at best"”after the CreditWatch is resolved"”it is likely the rating would be affirmed with a negative outlook, reflecting near-term pressures on SCF's financial profile, and medium-term uncertainty concerning restructuring and recapitalization initiatives. An alleviation of negative rating pressures is not likely until SCF can address liquidity, asset quality, and governance concerns.

Here is the full statement from South Canterbury below.

South Canterbury Finance Limited acknowledged today that rating agency Standard & Poor's had put the Company on negative credit watch. Chairman and principal shareholder Allan Hubbard says the change in status should quickly be resolved as it is a matter of timing arising principally from a delay in finalising the Company's audited accounts for the year to 30 June 2009. The Practice Review Board of the NZ Institute of Chartered Accountants has chosen this year to require a peer review of the company's auditors which has slowed the normal audit process. It is anticipated that the review and the audit will be complete by the end of September, if not before, allowing registration of a new prospectus, following which the Company will be able to allot new securities. "Since the global financial crisis, there is less tolerance shown by the rating agency over matters such as this," Mr Hubbard says. As previously announced, the Company had suspended the acceptance of subscriptions were suspended on 21 August 2009. Subscriptions received since then are being held in trust until the new prospectus is issued. The Company's trustee has been kept informed on these audit matters as well as progress regarding the restructuring and capital-raising process underway. Eligible depositors are reminded they remain covered by the Crown's retail guarantee for sums up to $1 million for investments maturing  before 12 October 2010. "The Company is very determined to see the audit process completed as quickly as possible.  This will enable us to be in a position to announce details of our restructuring and capital-raising plans to investors, and to address issues being raised by Standard & Poor's," says Mr Hubbard.