S&P review of its sovereign credit rating methodology - on its own - 'shouldn't see NZ downgraded'

By Gareth Vaughan

The government's best efforts to avoid a sovereign credit rating downgrade as it moves to ramp up borrowing to help rebuild Christchurch after the devastating February 22 earthquake could be rendered redundant by at least one of the big three international credit rating agencies.

Standard & Poor's (S&P) is reviewing its sovereign credit rating methodology in a move that could, potentially, see New Zealand's rating cut.

However Philip Combes, Treasurer of the New Zealand Debt Management Office (NZDMO), told interest.co.nz that the NZDMO, which is responsible for managing the government's debt, doesn't expect S&P's proposed changes  as they stand to lead to a ratings downgrade of New Zealand's AA+ foreign currency rating on their own.

 Combes said the NZDMO, which successfully raised NZ$250 million in its latest bond tender yesterday, was "heavily" involved in the S&P review. It has made a submission that's now under consideration by the international credit rating agency and is continuing to have discussions with S&P.

The NZDMO had suggested S&P make some changes to its proposed new methodology, Combes said, although he declined to elaborate on what the suggestions were. But, based on S&P's methodological changes as proposed, without considering any other factors, Combes said the NZDMO believed New Zealand's sovereign rating should be "broadly consistent" with where it's currently at once the changes are implemented.

"At the moment we’re rated AA+ (with a) negative outlook, so therefore we’re on the cusp of AA+ or AA," Combes said. "And when you go through the (S&P) methodology there’s nothing in our assessment that’s inconsistent with that particular couple of rating notches."

"We’ve made some specific comments (including proposing changes), but I don’t think it’d be appropriate to go through those at this stage and I would stress other sovereigns have made comments and so on. So clearly they (S&P) will go back and weigh some of that stuff up," Combes added.

However, he noted his comments on the unlikeliness of a downgrade was based on the NZDMO's assessment and it was clearly S&P's assessment that counts.

"There is still a degree of interpretation that's available to them (S&P) even having outlined their criteria in more detail,' Combes said.

New ratings criteria due 'in coming months'

S&P issued a request for comment on its proposed changes late last year. The deadline for submissions was February 28. An S&P spokeswoman said the credit rating agency was now working through the feedback and expected to finalise the new criteria "in coming months."

The credit rating agency says the proposed changes would see greater explanation provided on how it assesses and scores the five main factors it analyses to evaluate a sovereign foreign currency rating. The five are; - institutional effectiveness and political risk, economic structure and growth prospects, external liquidity and international investment position, fiscal performance and flexibility, and funding and monetary flexibility.

S&P also plans to introduce a new step to explain how it combines scores from the five categories on a one to six scale - with one the strongest and six the weakest - to determine a foreign currency rating, develop specific considerations for rating sovereigns in monetary unions, and proposes to cut the maximum notching differential between a sovereign foreign currency rating and a local currency rating to two notches from three.

The proposed new S&P criteria also aim to incorporate information derived from the 2008-2009 credit crunch, especially regarding the potential impact of financial sector difficulties on governments' fiscal profiles.

S&P currently has New Zealand's domestic currency rating at AAA with a stable outlook. The two other major international credit rating agencies, Moody's Investors Service and Fitch Ratings, have New Zealand's domestic currency ratings at Aaa with a stable outlook and AAA with a negative outlook, respectively.

Moody's and Fitch have Aaa with a stable outlook and AA+ with a negative outlook, respectively, on New Zealand's foreign currency rating. See full details on New Zealand's sovereign credit ratings and the country's credit rating history here.

Meanwhile, S&P is also making changes to the way it rates banks, which it says could potentially see credit ratings on New Zealand banks lowered.

Latest bond tender results 'good in the circumstances'

The NZDMO's latest bond tender, completed yesterday, succeeded in raising its NZ$250 million target. It has now raised NZ$11.6 billion of the NZ$13.5 billion it plans to raise this financial year. Combes said market conditions were quite difficult this week given the events in Japan with explosions and fires at a nuclear power plant following a magnitude 9 earthquake and tsunami last Friday.

"From our point of view the most pleasing aspect was we cleared the volume, we got all the NZ$250 million done that we set out to do," Combes said. "The cover was low and the range of successful bids was relatively wide."

The NZDMO sold NZ$75 million worth of eight year bonds that will pay investors interest of between 5.19% and 5.25% per annum and NZ$175 million worth of 10 year bonds paying between 5.39% and 5.45%. See full details of yesterday's government bond tender here.

Based on the NZDMO tender metrics it wasn't a particularly good one, Combes added, but under the circumstances he was "pretty happy." Based on actual absolute levels yields were about 20 basis points better than last week having rallied on the back of global growth uncertainty.

Being ahead of schedule on its planned 2010-11 debt raising, the NZDMO now had the option raising more than planned, said Combes. And following the Christchurch earthquake, he expected the NZDMO would look to raise more money in the 2011-12 year than the current forecast of NZ$13.5 billion, which Finance Minister Bill English acknowledged yesterday.

Earlier this month Combes told interest.co.nz that the earthquake had added about 20 basis points to the cost of New Zealand government debt and led to a tranche of government bonds receiving no bids whatsoever for the first time ever.

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