Meeting for 13,500 UDC debenture holders to vote on winding up the finance company's existing $1.6 bln debenture plan set to take place in coming months

By David Hargreaves

ANZ says it's still on track with its planned NZ$660 million sale of UDC Finance to Chinese conglomerate HNA Group.

Meanwhile, ratings agency Standard & Poor's, which downgraded UDC's ratings in October simply on the prospect of a sale, and again in January after the sale announcement, has reiterated its earlier comments that the UDC long term rating may drop as much as four notches to B+ from BBB after the deal goes through. UDC's credit rating has already been cut five notches since October when it was AA-, equalised with its parent. See credit ratings explained here.

However in an updated report out this week maintaining UDC's ratings on creditwatch, S&P has also somewhat beefed up the negative outlook for UDC post-ANZ ownership by saying in new comments that ultimately UDC's funding and liquidity profile "could diminish" as a result of the change in ownership.

And the Reserve Bank, as regulator of non-bank deposit takers (NBDTs) has confirmed it is required to approve the proposed new owners, but a spokesman would not say at what stage this process was at with the UDC deal.

The deal, announced in January, is expected to close sometime late this year.

It has attracted political attention, with Winston Peters saying he would block it if he is in Government after this year's election.

Debenture holders to meet

As part of the deal, there will be a meeting of debenture holders, who number about 13,500. Outstanding debentures as per UDC's 2016 annual report totalled about $1.625 billion, but the number has been going down since ANZ put the for sale signs on the business early last year.

Explaining what would happen at the time the deal was announced, a UDC statement said the change in ownership "presents an opportunity for UDC to modernise its financing arrangements which have been in place for almost 80 years".

"We intend to hold a meeting of UDC Secured Investment holders in 2017, seeking their approval to wind up the debenture programme. If that approval is received, investors are likely to be given the option to:

• Roll their Secured Investments into a comparable ANZ product
• Have their investment repaid along with any interest; or
• Apply the proceeds of their investment to subscribe for any new investment that might be offered by UDC under its new ownership."

An ANZ/UDC spokesman confirmed that: "UDC needs to call a meeting of debenture holders to approve the proposal to wind up the current debenture programme. This will enable debenture holders to choose whether they want to redeem their investment early for cash or roll it into a similar investment option at ANZ.

"We hope to update you on the timing of the meeting and next steps, in a couple of months, subject to agreement with the Trustee."

'A range of approvals'

The spokesman said in respect to the sale deal itself there are "a range" of standard regulatory approvals, including the need for Overseas Investment Office approval. "These are in train and we don’t foresee any difficulties."

One of these processes under way is HNA seeking approval from the RBNZ for the change in ownership of UDC.

Applicants in such circumstances are required to give the RBNZ detailed information about themselves and how they propose to structure the acquired business.

This includes providing the RBNZ with a business profile of the owner including:

• Current financial statements;
• Business history;
• Business performance;
• Business strategy; and
• Any financial commitments (including off balance sheet commitments) made to the NBDT.

The applicant must also provide detailed information, showing the impact on the NBDT of any proposed changes to the NBDT’s:

• business activities;
• business strategy;
• financial projections
• plans for merger or restructure;
• governance framework;
• senior management personnel;
• the risk profile of the NBDT;
• risk management plan;
• the funding model (including any change to the split between retail and wholesale funding); and
• other relationships such as Trustee or material third party providers.

The applicants are also asked whether they have acknowledged a breach of, or been proven to have breached, any legislation arising out of the applicant’s participation in financial markets whether in New Zealand or in another jurisdiction. Additionally they are asked if they have ever been been the subject of any formal warning, caution or censure issued by a regulatory authority or a securities exchange operator, whether in New Zealand or overseas.

Evolution of a giant

The privately-owned HNA, evolving from a regional airline founded in 1993, has close ties with the provincial government of Hainan Island, and has become a global giant - and a very hungry one, with assets under control of over US$100 billion. It announced at least US$34 billion of acquisitions in the past year, averaging more than two purchases a month, according to data compiled by Bloomberg late last year. Those transactions included the US$6.5 billion acquisition of a 25% stake in hotel chain Hilton Worldwide Holdings.

The deal-making has continued unabated, with the company taking a 3% shareholding in Deutsche Bank earlier this year - and it apparently wants to buy more of the banking giant, while just this week it's leading a group spending US$2.2 billion on a Manhattan skyscraper. In recent months HNA has also raised eyebrows with a series of aggressive, and much higher than expected, bids for land in east Kowloon, Hong Kong - spending a total of over US$3.5 billion. And there have been numerous other recent moves too.

The company has previously received criticism about the amount of debt it's taking on.

HNA has 'b+ credit-worthiness'

And S&P, when downgrading UDC's credit rating after the sale was announced, said that, while HNA is not rated, it (S&P) assessed the creditworthiness - group credit profile (GCP) - of the HNA Group at 'b+' and believed this could constrain UDC's overall creditworthiness. This is the full January S&P statement.

In its updated view issued this week, S&P has reiterated that it would lower its long-term rating on UDC to 'B+' and the short-term rating to 'B' "if, subsequent to the completion of the sale, we form an opinion that UDC is not significantly insulated from the HNA group from a credit perspective and UDC's SACP [stand alone credit profile] remains at or above 'b+'."

In its detailed credit ratings definitions, S&P describes a long term 'B' credit rating thus: "An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation."

S&P reiterated its earlier comment that it continues to apply a one-notch uplift to its current rating on UDC for likely support from the ANZ group.

"This is because, notwithstanding the likely sale of UDC in the short term, we believe that in periods of distress for UDC in the interim (should any arise, which we do not expect), there remains the potential for some limited support from the ANZ group. That is, we consider UDC to still be a moderately strategic subsidiary of the ANZ group until the sale is concluded. We understand that the ANZ group bears responsibility for UDC meeting its regulatory obligations and that a divestment of UDC is only possible with the regulator's prior approval."

UDC's 'moderate funding profile'

Then there was a new comment: "In addition, we consider that ongoing funding support from ANZ enhances the [stand alone credit profile] of UDC - although UDC's funding profile is of moderate strength in our view - because in our view similar ongoing funding support is unavailable to UDC's peers and competitors within the nonbank sector..."

Further down in the document and on a similar theme, S&P goes on to say that the ongoing parent funding support of similar nature and strength to that given by ANZ and which currently enhances UDC's SACP--may not be available to UDC under the new ownership.

"...Ultimately we believe that UDC's funding and liquidity profile could diminish as a result of the change in ownership--a profile that currently rests heavily on a combination of debenture funding and the committed credit facility from the strongly rated ANZ group."

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