S&P says Heartland Bank has the potential for an investment grade credit rating

International credit rating agency Standard & Poor's says the so-called "Heartland Bank' has the potential to obtain an investment grade credit rating, which it needs before applying to the Reserve Bank for a banking licence.

(Update adds links to other Heartland Bank stories).

The possibility for an investment grade rating is there, if among other things, the merger plans are effectively executed and integration risks and related costs are appropriately managed, S&P said.

S&P has also put Marac Finance's BB+ rating on CreditWatch Positive. Marac's parent, Pyne Gould Corporation, announced yesterday that it, Canterbury Building Society and Southern Cross Building Society had signed a merger implementation agreement as they push ahead with plans for a three way merger to create a new, bigger financial services provider and ultimately a bank.

Bruce Irvine, chairman of the Heartland Bank establishment board as well as of PGC and Marac, said S&P's swift action was an endorsement of the work already done by the three parties towards the creation of a financial services group with the ability to formally apply for a banking licence.

“The ratings action now confirms our view that the merged entity will meet the criteria for the investment grade credit rating regarded as a necessary step for an application to the Reserve Bank of New Zealand for a banking licence,” Irvine said.

The lowest investment grade credit rating is BBB-, one notch above Marac's current BB+ rating.

Also see: Heartland Bank CEO within a month & How Heartland Bank will fund lending & Seven votes to create one bank.

And read Standard & Poor's announcement on Marac below:

Standard & Poor’s Ratings Services today placed its ‘BB+/B’ ratings on MARAC Finance Ltd. (MARAC) on CreditWatch Positive following the company’s announcement that it has signed a merger implementation agreement to merge its business with Canterbury Building Society (CBS; BB+/Stable/B) and Southern Cross Building Society (SCBS; BB/Stable/B).

The ratings on CBS and SCBS are unaffected by this announcement. The ratings on CBS and SCBS will be withdrawn once the merger is completed, although we note that the creditors of both building societies will benefit from the potentially better credit profile of the newly merged group.

If the proposed merger is successful, MARAC’s creditors and merger partners are likely to benefit from a larger and more diversified financial institution with about NZ$2.2 billion in total assets and about NZ$285 million in capital.

Under the proposed merger, Pyne Gould Corporation (MARAC’s shareholder) will own 71% of the merged entity and CBS and SCBS will each own 14.5%. Completion of the merger is subject to a number of conditions including regulatory and stakeholder approvals.

“In our view, a higher rating on MARAC would be based on MARAC forming a core part of the proposed merged group. The proposed group’s credit profile would reflect its enlarged and improved business and financial profile,” Standard & Poor’s credit analyst Derryl D’silva said.

“Specifically, we believe that the group would benefit from increased scale, diversification, and geographic reach across New Zealand, being comprised of the combined operations of MARAC, CBS, and SCBS. Other potential benefits include: a stronger funding profile stemming from the merged group’s anticipated better access to retail and wholesale funding; a larger capital base with greater financial flexibility on the back of a plan to list on the New Zealand stock exchange; and improved earnings diversity.”

In our view, however, the group could also face challenges around the integration of branches, staff, IT systems, operational and management structures, customers, creditors, and possible cultural differences. We also view the proposed merger structure as relatively complex and requiring a number of approvals to proceed, all of which needs to be managed appropriately.

Standard & Poor’s believes that if the merger is successfully executed and underlying assumptions are met, the rating benefit is likely to be limited to one notch with a stable outlook.

The ratings could be taken off CreditWatch Positive and raised one notch with a stable outlook, provided there is sufficient evidence that:

· The merger plans are effectively executed and integration risks and related costs are appropriately managed.

· The merged group is able to meet board and governance expectations that are supportive of a higher rating.

· The merged entity is able to retain the support of its depositors, debenture investors, and providers of wholesale funding, and maintain a funding and liquidity profile that is comparable with other ‘BBB’ category peers. ·

The financial profile of the merged group progresses as expected and leads to a progressive improvement in operating performance.

· No new credit concerns emerge that undermine the merged group’s financial profile or our assessment of its risk management capability.

· The expectation that the recent stabilization and improvement in asset quality across merger partners will continue.

· The financial impact of the Christchurch earthquake does not detract from our assessment of the merged group’s credit profile.

· There will be no material divergence of strategy from current expectations such that it compromises our view of the benefits from the merger, or any strategic shift that increases the merged group’s overall risk profile.

In our view, new partners may join the merged group in the future. Our CreditWatch Positive rating action does not factor in any strategic moves to incorporate new entities.

And here's the announcement on CBS and SCBS:

Standard & Poor’s Ratings Services said today that its issuer credit ratings on Canterbury Building Society Ltd. (CBS; BB+/Stable/B) and Southern Cross Building Society Ltd. (SCBS; BB/Stable/B) are unaffected by the announcement that a merger implementation agreement has been signed by the two building societies and MARAC Finance Ltd. (BB+/Watch Pos/B).

Although creditors of both building societies are expected to benefit from being party to a larger, more-diversified merged group, we expect to withdraw the ratings on the building societies following the transfer of their businesses to the new merged entity.

The new group has the potential to be rated ‘BBB-’, subject to several factors.

These include:

· That merger plans are effectively executed and integration risks and related costs are appropriately managed.

· The merged group is able to meet board and governance expectations that are supportive of a higher rating.

· The merged entity is able to retain the support of its depositors, debenture investors, and providers of wholesale funding, and maintain a funding and liquidity profile that is comparable with other ‘BBB’ category peers.

· The financial profile of the merged group progresses as expected and leads to a progressive improvement in operating performance.

· No new credit concerns emerge that undermine the merged group’s financial profile or our assessment of its risk management capability.

· The expectation that the recent stabilization and improvement in asset quality across merger partners will continue.

· The financial impact of the Christchurch earthquake does not detract from our assessment of the merged group’s credit profile.

· There will be no material divergence of strategy from current expectations such that it compromises our view of the benefits from the merger, or any strategic shift that increases the merged group’s overall risk profile.