S&P downgrades Broadlands Finance's credit rating from B to CCC, and warns of possible further downgrade following decision to cease debenture funding

Fresh from a decision to stop accepting debentures from the public, Broadlands Finance has had its credit rating cut from B to CCC by Standard & Poor's with a warning of further cuts due to uncertainties about the company's ability to pay creditors past a 12-month period.

Broadlands this week decided to exit the debenture market, partly due to the cost of paying for a credit rating from S&P. See more in David Chaston's article here.

Broadlands currently has NZ$7.4 million owing to retail debenture investors and independent chairman Nigel Smith told interest.co.nz on Monday that all those investors will be repaid in full, including the current interest terms agreed with each of them. There are 258 investors involved in this phase-out.

Approximately NZ$6.3 million will be outstanding at March 2012 and the book runs down quickly after that, with only NZ$1.3 owing at March 2013. Investors in Broadland's debentures typically took a 15 month maturity. The final payment is scheduled for 2015, although the company said it will probably seek to defease the debenture payment obligations to the trustee in order to end the regulatory obligations and those related costs.

Smith stated that running a local debenture marketing campaign was "just too expensive" pointing out that it cost "just under NZ$1 million" for the audit, credit rating, and trustee requirements, and that was too high a load on a book of only NZ$7 million.

Downgrade, negative watch

Standard & Poor’s Ratings Services said today that it has lowered its counterparty credit ratings on New Zealand finance company Broadlands Finance Ltd. (BFL) to 'CCC/C' from 'B/B'. "We also placed the ratings on CreditWatch with negative implications."

"BFL has announced its withdrawal from the debenture investor market, management changes, and that it is reconsidering its business strategy. The company has ceased to issue debentures in New Zealand since Oct. 19, 2011, due to a decline in appetite from investors," S&P said.

"BFL's funding challenges have caused the company to reconsider its business position and strategy. BFL has decided to curtail lending activities and downsize business operations while considering new funding and business strategies. Downsizing initiatives include retrenchment of staff, including the company's recently appointed CEO, and general manager funding," it said.

“In our view, BFL's decision to cease issuing debentures brings into question BFL's ability to meet its creditor obligations beyond 12 months - a level of confidence required to support a 'B/B' rating,” said Standard & Poor’s credit analyst Gavin Gunning.

“We note, however, that BFL's key shareholder, Mr. Anthony Radisich, continues to strongly support the company, including through his investment in debentures and extension of credit. Company and shareholder measures are being progressed to assist the prospects of debenture holders and creditors being repaid in full and on time. But our ratings have not factored in any potential shareholder support or new company initiatives. Further clarity on these aspects could affect our ratings,” Gunning said.

Standard & Poor’s expected to resolve the CreditWatch after a fuller assessment of BFL's liquidity position and future business strategy.

“We could lower the rating to 'CC/C' should BFL's ability to meet its liquidity needs beyond six months become uncertain. We could lower the ratings to 'D' (default) if any creditor is not paid in full and on time or the company is put into receivership. The rating could be lowered to 'SD' (selective default) should BFL's key shareholder suffer any principal write-down or economic loss via a restructuring on liabilities that the company owes,” Gunning said.