ANZ would now find it hard to convince the market place it is a future long term owner of the UDC Finance business, says David Hargreaves

By David Hargreaves

Having effectively put the 'for sale' signs up on its nearly 80-year-old finance arm UDC Finance, ANZ NZ seems in my view to be quickly getting itself beyond the point of no return to strike a sale deal.

The move, made public last week, to "explore strategic options" around UDC has already led to some disruption around the operations of a finance company that currently has the rare luxury of an AA- credit rating - the same as parent ANZ.

UDC has had to amend its current fund raising prospectus after ratings agency Standard & Poor's put the rating under review.

S&P sees a one-in-two chance it will cut UDC's credit rating.

Significantly, however, S&P says it might cut UDC's credit rating EVEN if ANZ decides to hold on to it.

So, having put UDC in play, ANZ might in my view need to go ahead with a sale now - or risk causing some harm to UDC in future through the lingering uncertainty over its ownership. Once the doubt is there over long term ownership then it tends to stick. And that would not do UDC any good long term. It might not do ANZ that much good either.

S&P thinks that a sale of UDC would "marginally weaken" ANZ's presence within New Zealand, and marginally strengthen the group's capital - but the overall impact on the ANZ group creditworthiness would be insignificant.

ANZ had previously indicated it wasn't a seller of UDC, even after the sale of its Esanda car dealer finance business to Macquarie Group last year.

UDC late last week issued an amended version of a prospectus that was originally issued in December. Many of the changes relate to the ANZ move and subsequent putting of the credit rating under review by S&P.

For example in the section regarding related party risk, there is this new paragraph: "...ANZ has a strategic focus on its capital allocations and resources, extending across its various businesses including UDC. This focus includes reviewing ANZ’s continued ownership in UDC. Although no final decision regarding the outcome of this review has been made, one consequence of the review could be that ANZ decides to undertake a sales process of UDC and ultimately sells its shareholding in UDC. As a result of ANZ reviewing its continued ownership in UDC, S&P has placed us on credit watch negative pending the outcome of this review until greater clarity emerges in relation to UDC’s future ownership. We will update investors as soon as we receive any further confirmation from ANZ as to the future of its ownership in UDC."

But there have been other changes made too. Under the section, "How Do We Fund Our Business Activities", a whole sentence has been deleted, which had said: "We are a popular choice for investors and our total funding from new and reinvested investments taken together is as strong as it's ever been."

In another tweak in the section on ranking of security stock, the December version of the prospectus had ANZ holding first ranking security stock under the trust deed as security for UDC's obligations to ANZ with a face value of $880 million. The new amended version of the prospectus puts this figure as a face value of $1.15 billion. And in the section on liquidity risk, the December version of the prospectus said there was a committed credit facility with ANZ of $800 million. In the amended prospectus this is now $1 billion.

The S&P notice of review put out by credit analyst Andrew Mayes said that in the past, S&P had rated UDC six notches above its stand-alone credit profile (SACP) of 'bbb-', equalizing the ratings on UDC with those on its parent, "reflecting our view that the ANZ group is likely to provide timely financial support for UDC - if needed - under any foreseeable circumstances".

"In forming the above view, we considered, among other things, that ANZ was highly unlikely to sell UDC."

Mayes said S&P believed that ANZ's intent to rationalise its global business mix and capital allocation could be among the reasons driving its plan to explore a sale of UDC.

"In addition, we believe that subsequent to a detailed assessment of this plan, ANZ may decide to continue to own and manage UDC as it has done in the past.

"Nevertheless, even in that scenario, we could lower our rating on UDC if, in our view, the recent events bring into question our previous assessment that ANZ is highly unlikely to sell UDC."

Mayes said that if ANZ proceeded with a sale of UDC in its current form, S&P's ratings on UDC would depend on its assessment of three factors:

• The SACP of UDC;
• The group credit profile of its new owner; and
• The strategic importance of UDC under its new owner.

"In the above scenario, we would review the new owner's plans for UDC's business and product offerings and strategy; target capital levels; risk appetite, underwriting standards, and risk management framework; and, funding and liquidity management. We would also review the consolidated group business and financial profiles of UDC's new owner."

Mayes said the CreditWatch with negative implications placed on UDC reflected a one-in-two chance that S&P would lower the ratings on UDC when certainty emerges in relation to its future ownership.

He said S&P believed that one of the following four scenarios is likely to emerge:

1. We expect to affirm our rating on UDC if it is acquired by a new owner rated 'AA-' by us, and we consider UDC to be a core subsidiary of its new group. This scenario may emerge if, for example, one of the three remaining Australian major banks (each currently rated 'AA-/Stable/A-1+') buys UDC; and, in our view, it has a clear and plausible plan to quickly consolidate UDC within the new group.

2. We expect to lower our rating on UDC if it is acquired by a new owner rated 'AA-' by us, and we consider UDC's strategic importance to such a 'AA-' rated owner is weaker than that in the scenario above--for example, if consolidation by such a new owner in a short period is less certain. In this scenario, we would expect to assign UDC a rating somewhere below the parent rating, and most likely above UDC's SACP depending on our assessment of the likelihood of timely financial support from the parent.

3. We expect to lower our rating on UDC if it is acquired by a new owner rated 'A+' or lower by us. In this scenario, we would expect to assign UDC a rating somewhere between its SACP and the parent rating (both inclusive), depending on our assessment of the likelihood of timely financial support from the parent.

4. We expect to lower our rating on UDC if ANZ decides to maintain its ownership and, in our view, the recent events bring into question our previous assessment that ANZ is highly unlikely to sell UDC.

 

If UDC is sold this will be a continuation of the enormous shake-up going on in the finance company sector in the past 12 months.

New Zealand's biggest consumer finance company, GE Money, was sold earlier last year as part of a massive deal valued at A$8.2 billion to a consortium comprising of global investors Värde Partners, private equity group KKR, and Deutsche Bank.

Then the Australian financial services company Flexigroup bought Fisher & Paykel Finance late last year. 

If UDC were to be sold on a similar kind of valuation basis to F&P - which was 9.9x cash earnings before any merger synergies, then the price would likely be at least $600 million or so, though early market estimates have suggested as much as $700 million.

Private equity groups have quickly emerged as market favourites to be successful bidders, but Heartland Bank has been quick to raise its hand as a potential buyer and even TSB Bank's reportedly not ruling out having a go. It's also been speculated that the ANZ could even float off UDC on the stock market.