S&P cuts SCF rating to B-; sees Hubbard eroding investor confidence

Standard & Poor's has cut South Canterbury Finance's long-term credit rating two notches to B- and placed the company on CreditWatch Negative saying owner Allan Hubbard being placed in statutory management by the Government and investigated by the Serious Fraud Office is likely to erode investor confidence.

(Update adds SCF statement).

S&P also said the rating could be cut further, to CCC, if general debenture investor support were to materially weaken. Meanwhile, S&P also cut South Canterbury Finance's short-term rating to C from B and placed it on CreditWatch Negative as well.

“The downgrade reflects our view that news surrounding SCF’s key shareholder will likely erode debenture investor confidence, which is critical to SCF’s ability to manage its liquidity and its significant debenture reinvestment requirement," S&P credit analyst Derryl D’silva said.

"We are also now concerned that the company’s recapitalization efforts could be compromised or delayed. In our view, SCF’s recent momentum of improvement in its management of forward maturities and new debenture inflows will materially weaken because of this announcement.

"Additionally, SCF’s cash balance has not increased as rapidly as factored into the previous rating, and there is now greater uncertainty around the support from SCF’s key shareholder, Mr. Hubbard."

South Canterbury finance chief executive Sandy Maier said the downgrade reinforced the determination of the directors and management to build on the good progress already achieved to turnaround the company's business.

Read S&P's statement below:

Standard & Poor’s Ratings Services today lowered its long-term rating on New Zealand finance company South Canterbury Finance Ltd. (SCF) to ‘B-’ from ‘B+’. At the same time, the rating was removed from CreditWatch Developing, where it was initially placed on May 28, 2010, and placed on CreditWatch Negative.

The short-term rating is lowered to ‘C’ from ‘B’ and is also placed on CreditWatch Negative.

“The downgrade reflects our view that news surrounding SCF’s key shareholder will likely erode debenture investor confidence, which is critical to SCF’s ability to manage its liquidity and its significant debenture reinvestment requirement. We are also now concerned that the company’s recapitalization efforts could be compromised or delayed,” Standard & Poor’s credit analyst Derryl D’silva said.

In our view, SCF’s recent momentum of improvement in its management of forward maturities and new debenture inflows will materially weaken because of this announcement. Additionally, SCF’s cash balance has not increased as rapidly as factored into the previous rating, and there is now greater uncertainty around the support from SCF’s key shareholder, Mr. Hubbard. SCF’s steady new debenture inflows and its recent success in building balance-sheet liquidity—through managing forward maturities for the July-to-October period—support the ‘B-’ rating.

“SCF’s experience of managing forward maturities for the months leading into October 2010 has improved from previous months but will likely be more difficult to maintain from now on. SCF’s ability to raise new debentures could also be at risk. Supporting the rating, however, is the New Zealand Treasury’s announcement that eligible SCF depositors remain covered under its guarantee,” added Mr. D’silva.

The CreditWatch Negative listing by Standard & Poor’s will be reviewed over the next few weeks after some additional clarity is gained around debenture investor reaction to recent shareholder news. The rating could be lowered to the ‘CCC’ category if general debenture investor support were to materially weaken.

Specifically if: 

The momentum of improvement in SCF’s management of forward maturities for coming months was not maintained.

SCF’s ability to raise new debentures weakened materially from recent experience.

The rating could also be lowered if: ·

The likelihood of success in recapitalization efforts was materially delayed or compromised.

Further new credit concerns emerged. Even if SCF were able to address these negative rating pressures, the rating—after the CreditWatch is resolved—would likely remain at ‘B-’ with a negative outlook until SCF restored stability to its financial profile and its underlying business prospects became more evident.

Equally important to the rating is evidence that SCF is able to build up its cash balance to comfortably cover monthly debenture maturities and meet ongoing working capital needs.

Read SCF's statement below:

South Canterbury Finance Limited acknowledged today that Standard & Poor’s has revised the Company’s long term credit rating to B-, the short term rating to C, and placed both ratings on Creditwatch Negative. 

"South Canterbury Finance Chief Executive Officer Sandy Maier says the Government’s appointment of statutory managers in respect of Mr & Mrs Hubbard had created uncertainty for the rating agency. For eligible investors, nothing has changed regarding the Crown’s extended retail deposit guarantee scheme which remains in place through to 31 December 2011.

Investors should note that the Government has stated that South Canterbury Finance is specifically excluded from the statutory management order concerning Mr & Mrs Hubbard and certain of their business interests.

Further, the Treasury has reaffirmed that the extended retail deposit scheme continues to apply to eligible investors in South Canterbury Finance. If anything, the rating action reinforces the determination of the directors and management to build on the good progress already achieved to turnaround the business of the Company. As a consequence of the change in credit rating, a memorandum amending the Company’s current prospectus will be registered as soon as possible.