Standard and Poor's cuts South Canterbury Finance rating to 'junk' rating of BB+ (Update 1)

Standard and Poor's has cut Timaru-based South Canterbury Finance's credit rating from an investment grade BBB- to a 'junk' rating of BB+, South Canterbury said. (Updates with comments from Standard and Poor's statement about US lenders potentially withdrawing their loan and the potential for multiple further downgrades if owner Allan Hubbard does find extra capital) "New Zealand has been in recession far longer than most other OECD countries and the current environment is challenging, particularly for property development," said South Canterbury Chief Executive Lachie Mcleod. "This appears to have had some bearing on S&P's thinking." South Canterbury said it was likely to announce an already signalled capital raising within the next four weeks.

"The re-rating will not impinge on those proposals nor affect the ability of the group to make scheduled interest payments and redemptions to debenture and bondholders," McLeod said. "All debenture holders with deposits up to $1 million are, and will remain, covered by the Crown guarantee," he said. South Canterbury Finance said it would continue working with Standard & Poor's to re-instate the investment grade credit rating over the next six to 12 months. Standard & Poor's said the outlook on its new BB+ rating was negative, which implied a one in three chance of a second full downgrade. However, the rating had been removed from the full CreditWatch negative position. "The downgrade reflects our view that SCF's credit profile has weakened because of asset quality pressures within the New Zealand property development sector," Standard & Poor's credit analyst Derryl D'silva said. "The property development sector is currently experiencing very low business confidence and faces reduced investor demand and limited refinancing options. With this downgrade, a rating trigger on SCF's US$100 million private-placement facility may be invoked," D'silva said. "Private placement investors have an option to review their funding support for SCF after the downgrade, which if it resulted in a requirement to repay the facility, has the potential to exacerbate SCF's already modest liquidity position," he said. "The removal from CreditWatch negative is based on our view that SCF's primary shareholder, Mr. Allan Hubbard, will remain committed to providing timely support to SCF if required." Standard and Poor's said South Canterbury was on track to complete its proposed underwriting agreement, which was expected to be used as security for any additional impaired loans. Management remained focused on steadily reducing SCF's related-party exposures, although a significant reduction was not expected in the near term. "Despite these challenges, it is our view that SCF is one of the stronger finance companies in New Zealand. The ratings remain supported by SCF's market position as one of the largest domestically owned finance companies in New Zealand. The market position is underpinned by SCF's sound business profile and the broad geographic coverage of its operations. In addition, SCF's funding profile is reasonably diversified, comprising debentures, bonds, preference shares, bank lines, and the U.S. private placement facility." Standard and Poor's said the negative outlook reflected the short-term pressures on South Canterbury's finances. "In our opinion, continued challenging domestic economic conditions are placing pressure on SCF's asset quality with a heightened risk of additional credit losses expected in the short-to-medium term. If SCF's underwriting agreement with its major shareholder is not executed successfully, the ratings could be lowered to reflect diminution in key shareholder support," Standard and Poor's said. "The ratings may also be lowered by one or more notches should SCF fail to address pressures concerning its liquidity. Conversely, if SCF were able to overcome these challenges and significantly reduce its related-party exposures, negative pressure may be alleviated and the outlook revised to stable," it said. Earlier on Thursday Standard and Poor's also cut Marac Finance's credit rating from BBB- to BB+