Marac Finance credit rating downgraded to 'junk' rating of BB+ (Update 2)

Pyne Gould Corp said Standard and Poor's had downgraded Marac Finance's credit rating to BB+ from BBB-, meaning its status was downgraded from investment grade to 'junk'. (Updates with details from Standard and Poor's release, including that the BB+ rating is on review for further downgrade, which was likely if PGC could not raise fresh capital) PGC chairman Sam Maling said the rating downgrade was unexpected and disappointing, although it wasn't all bad news. PGC said Standard & Poor's noted in its report: "We retain our view that Marac is one of the stronger finance companies in New Zealand, despite the company's recent asset-quality pressures. Other factors that remain supportive of the rating include Marac's sound business profile, underpinned by its market position as one of the largest domestically owned finance companies in New Zealand. Also supporting the rating is Marac's sound funding and liquidity positions, and its parent's financial flexibility as a public listed company." Maling said Marac, like others, was active in the property development financing sector, which had been particularly hard hit in recent times. Whilst representing less than 20% of Marac's total book, property development financing had now ceased, it said. Last month PGC announced an impairment of Marac's property loans of NZ$65 million after tax. "Steps have been being taken to strengthen MARAC's position. The recent appointment of Jeff Greenslade as CEO brings extensive banking experience which will be invaluable to MARAC." PGC said Marac had tightened its credit process and refocused its lending on plant, equipment and vehicles. Repeating comments last month, PGC said it intended to raise fresh capital in support of its banking and asset management strategy, as well as the creation of a new asset management company, Perpetual Asset Management. Perpetual Asset Management would develop a real estate credit fund, Torchlight Credit Fund, which will acquire the property development loans of Marac that are subject to the impairment. PGC said it expected to announce details of its capital raising in mid September after the release of PGC's annual result on August 28. "The Directors currently anticipate it is likely that all shareholders will have an opportunity to participate in the capital raising. George Kerr has reiterated to the PGC board his strong support for the capital raising. A number of other longstanding shareholders have also indicated their strong support in principle," PGC said. PGC has mandated First NZ Capital as an adviser for the capital raising. The credit rating change provides Marac banking syndicate with the right to review Marac's existing bank facilities. PGC said Marac was in discussions with the banks about this and the overall capital and structural initiatives it plans to take. New Zealand's big five banks, which includes ASB, BNZ, ANZ, National and Westpac, are owed up to NZ$480 million by Marac in a loan facility. As at December 30, Marac said it had borrowed NZ$178 million in New Zealand from the banks and had NZ$769 million of debenture borrowing. PGC and MARAC CEO Jeff Greenslade said: "We know what we need to do to earn back the investment grade credit rating for MARAC and to ensure that it is not put in this position again." "We are well advanced with a range of operational and structural changes to rectify our performance. Once the capital raising process is completed it should have a positive impact on the outlook and any future rating for MARAC." Standard & Poor's said in a later statement it had cut Marac's short term outlook to B from A minus. It said it had also revised the outlook to negative from stable, which implied a one in three chance of a further downgrade. "The downgrade reflects our view that MARAC's credit profile has weakened because of the greater-than-expected deterioration in the company's asset quality over recent months within the property development sector," Standard & Poor's credit analyst Derryl D'silva said. "In our view, this deterioration is outside our tolerances of the "˜BBB-' rating and has occurred in the context of a weak industry environment, where the prospects are for further growth in non-performing assets given the continued softening in the New Zealand economy," D'silva said. "The property development sector is currently experiencing very low business confidence and faces reduced investor demand and limited refinancing options," he said. Standard and Poor's said PGC's decision to absorb the property portfolio at face value supported Marac's credit quality. "The negative outlook reflects the ongoing pressure on MARAC's financial profile, as continued challenging domestic economic conditions are expected to put further pressure on the company's asset quality," D'silva said. "In addition, if PGC's plans to absorb the loan-related losses and raise sufficient capital are not executed successfully, the ratings are likely to be lowered. Conversely, if MARAC is able to contend with negative pressures on its credit profile in prevailing difficult market conditions, the outlook could be revised to stable." Standard and Poor's subsequently also cut South Canterbury Finance's credit rating from BBB- to BB+.