South Canterbury Finance owner Allan Hubbard announced late on Friday night he would step down as chairman and director later this year as Standard and Poor's also warned of liquidity problems at the struggling Timaru finance company and cut its credit rating one notch to B+.
The ratings agency also warned it could cut the rating again within 3 months and said South Canterbury's cash on hand of NZ$106 million currently was less than the NZ$150 million it had expected.
Standard and Poor's left South Canterbury's rating at BB earlier this year with a negative outlook, allowing the finance company to stay above the BB threshold necessary for inclusion in the Government's extended deposit guarantee scheme until the end of next year.
Hubbard said he would still attend board meetings and he would assume a new role of President for Life role, which would allow him to be more focused on finding an equity partner.
Fellow Timaru resident and long time director Ed Sullivan also announced his decision to resign at the end of May.
South Canterbury Chief Executive Sandy Maier paid tribute to Hubbard and criticised Standard and Poor's decision to cut South Canterbury's credit rating.
Here is Hubbard's statement below on his decision to stand down.
Allan Hubbard, the Chairman and controlling shareholder of South Canterbury Finance Limited has decided to become President for Life and step aside as a director of the Company.
The position has been created to reflect his special role and contribution to the Company over several decades, and which continues to endure.
Mr Hubbard indicated at last year’s Annual Meeting of the Company that he intended to step aside as Chairman of the board sometime this year. Moving into his new position as President for Life will enable a greater focus on finding a new equity partner for the Company and assist the drive to improve liquidity.
Commenting on his decision, Mr Hubbard says: “Significant achievements have been made by the board and new management team in the last six months to put the business on a sound footing. I am confident the decisions being taken will restore South Canterbury Finance as a leading provider of finance for business development beyond the traditional banking sector”
“There are two important tasks ahead: to work with the board and management to overcome the short-term liquidity issues that have arisen as an unintended consequence of the initial Crown retail deposit guarantee and secondly to find an equity partner for South Canterbury Finance to achieve an orderly succession and underpin the long term future of the business.”
Mr Hubbard says South Canterbury Finance has impacted the lives of many people over the years by providing resources at crucial times to support their endeavours.
“It is essential to the New Zealand economy that firms such as South Canterbury Finance are able to continue in this role.”
In the years he has chaired South Canterbury Finance, Mr Hubbard has transformed the business from a small local finance company into one of the country’s leading players in the non-banking finance sector.
“The South Canterbury Finance story is remarkable, and a tribute to the dedication of Allan, his wife and co-owner Jean and the people who have worked with him over the years,” Chief Executive Officer Sandy Maier says.
“He has made an enormous contribution by his far-sighted decisions to support the growth of New Zealand’s backbone industries. An acknowledgement of that was the recent presentation of the Ron Cocks Memorial Award for his contribution to the irrigation schemes that are now the basis of much of Canterbury’s wealth. But critically, Allan has used the resources of South Canterbury Finance to help people and to help them achieve their ambitions. He has worked tirelessly for a very long time and he continues to do so despite being in his eighties. This is a change in his role and not a retirement.”
As President for Life, Mr Hubbard will continue to attend South Canterbury Finance board meetings. The directors will convene in the near future to appoint a new Chairman of South Canterbury Finance.
In a separate development, Mr Edward (Ed) Sullivan has announced his retirement as a director of South Canterbury Finance with effect from 31 May 2010. Mr Hubbard thanked Mr Sullivan for his contribution over many years.
Meanwhile, South Canterbury issued a statement about Standard and Poor's decision to cut South Canterbury's rating, criticising several aspects of the decision and reiterating its confidence about a turnaround in its prospects:
South Canterbury Finance Limited today confirmed that the ratings agency Standard & Poor’s has affirmed its short term credit rating of B, removed the Creditwatch Negative outlook and adjusted the long term rating to B+.
The outlook for both ratings has been set at Creditwatch Developing. Commenting on the ratings action, Chief Executive Officer Sandy Maier says Standard & Poor’s goes some way towards acknowledging the progress South Canterbury Finance has achieved but in the Company’s view does not give full credit for the real progress made, particularly the recent momentum in building liquidity.
“The Company started its turnaround months ago and is achieving significant results. Our cash balance has increased substantially, the investor retention rate is improving and the programme to reduce the debenture maturity profile between now and October is proving highly popular with investors and is making excellent progress.”
The programme to manage the maturity profile is being done in two tranches. The first has been very successful with two out of three investors who have responded to date, with debenture investments totaling more than $110 million maturing between now and July, accepting longer dated maturities in advance of maturity.
“In essence Standard & Poor’s are now saying we are not going fast enough. With all due respect to Standard & Poor’s, we believe this misses the point of the turnaround we are pursuing. All along our aim has been to restructure the business in an orderly way to underpin its long term sustainability. Doing so will protect the interests of all investors and stakeholders more effectively than striving to meet the short term goals and expectations of the ratings agency.”
Mr Maier says the ratings downgrade does not affect South Canterbury Finance’s Crown guarantee under the retail deposit guarantee scheme which expires on 31 December 2011, nor does the downgrade constitute a breach of any covenants under South Canterbury Finance’s trust deed or other financial arrangements.
“South Canterbury Finance will continue to focus on the milestones it needs to achieve as it makes further progress towards its traditional role of supporting business growth. We acknowledge this will take time and the Company looks forward to regaining a higher credit rating as our milestones are met.”
Standard and Poor's issued its own statement below, expressing its concerns about South Canterbury's cash on hand:
Standard & Poor’s Ratings Services today lowered its long-term rating on New Zealand finance company South Canterbury Finance Ltd. (SCF) to ‘B+’ from ‘BB’. At the same time, the ‘B+’ rating was removed from CreditWatch Negative, where it was initially placed on March 2, 2010, and placed on CreditWatch Developing. The ‘B’ short-term rating was affirmed.
“The downgrade reflects our view that SCF’s financial profile is not consistent with its previous ‘BB’ rating and the restoration of its financial profile has not been quick or sufficient enough to stave off a downgrade,” Standard & Poor’s credit analyst Derryl D’silva said.
“Despite its relatively weak financial metrics for a ‘BB’ rating, SCF’s ‘BB’ rating was previously supported by strengths around its business profile and the financial flexibility stemming from its key shareholder. In our opinion, however, the balance-sheet-liquidity build-up, to date, has not been as strong as we anticipated; we have observed delays during the past few months. Specifically, we believe that SCF’s exposure to future refinancing risks is no longer tolerable at the previous ‘BB’ rating.”
The ‘B+’ rating, however, is supported by SCF’s recent momentum in building balance-sheet liquidity through: some success in management of forward maturities for June and July; good new debenture inflows; some success in loan resolution proceeds; and some progress in recapitalization plans. Although SCF’s reinvestment experience on forward maturities for June and July is an encouraging 57%, the reduction of refinancing risk for October 2010 has not progressed as quickly as we anticipated.
Additionally, SCF’s cash balance at end-May 2010 is NZ$106 million, which is less than the NZ$150 million we expected mainly due to delays in loan resolution proceeds.
A CreditWatch Developing listing by Standard & Poor’s implies a one-in-two likelihood that the rating may be raised, lowered, or affirmed within the next three months.
The rating could come under downward pressure if general debenture investor support were to materially weaken. Specifically if:
* The momentum of improvement in SCF’s reinvestment experience during May-July 2010 is not maintained in coming months.
* SCF’s management of forward maturities for August, September, and October was not as successful as its efforts to manage forward reinvestment maturities for June and July.
* SCF’s ability to raise new debentures weakened materially from its good experience in recent months.
* SCF’s cash balance did not increase to NZ$150 million by June 2010 and head toward NZ$200 million a few months later.
The rating could also come under downward pressure if:
* The likelihood of success in recapitalization efforts materially diminishes.
* SCF were excluded from the extended government retail deposit guarantee, or events led to problems with respect to its prospectus remaining in the market.
* Support from SCF’s key shareholder Mr. Hubbard materially diminished.
* New credit concerns emerged.
Upward rating prospects would benefit from:
* Continued debenture investor support.
* Ongoing improvement in SCF’s reinvestment experience in future months, such that the reinvestment requirement in October 2010 was to reduce to a level close to the average level of monthly debenture maturities.
* Good new money inflows being maintained.
* Ongoing balance-sheet liquidity being maintained at about NZ$150 million or higher.
* Any recapitalization plans materializing such that they reduced SCF’s liquidity and refinancing risks.
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