Standard and Poor's cuts Equitable Mortgages rating to BB from BB+

Standard & Poor's downgraded Equitable Mortgages to "˜BB' from "˜BB+' on Friday and kept the outlook on negative because of a bigger than expected deterioration in loan quality over recent months. "In particular, we believe Equitable's credit quality has been adversely impacted by the rapid growth in the group's nonperforming assets and the slippage in the realization of the group's poorly performing loans," Standard & Poor's credit analyst Mark Legge said in a statement. However, Standard and Poor's said Equitable had some protection against higher lending losses from credit insurance provided by sister company Equitable General Insurance Co (EGIC). EGIC was able to absorb up to NZ$10 million of lending losses, including capital losses on lending activities, and interest accrued but not paid by borrowers up to 90 days. "Equitable is believed to have access to additional support, including capital and liquidity support, from its principal shareholder; although these support mechanisms are largely untested in the current market downturn," Standard and Poor's said. Equitable's principal shareholder is the wealthy Spencer family. " If support mechanisms, such as from EGIC or the shareholder, to absorb loan losses are not working or proved inadequate, the ratings will likely be lowered, potentially by two or more notches, to the "˜B' category," it said. "Conversely, negative rating movement could ease, or potentially reverse, if the Board and the principal shareholder demonstrate additional support for Equitable to contend with negative affects on its financial profile in prevailing difficult market conditions." Equitable's debenture reinvestment rates and new funds received had markedly improved since the introduction of the government's guarantee. "While this short-term improvement supports credit quality, Standard & Poor's will continue to monitor any indicators of investor confidence, as well as the continuing support and confidence of bankers and other stakeholders, including Equitable's principal shareholder." * This article was first published on Friday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.