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Standard & Poor's has lowered its long-term counterparty credit ratings on Broadlands Finance to 'B/B' from 'BB-/B' with a negative outlook.
"The counterparty credit ratings on Broadlands reflect its weak liquidity position, vulnerable funding profile, and high-risk loan portfolio," Standard & Poor's ratings analyst Peter Sikora said.
“The outlook reflects our uncertainty around Broadlands' ongoing ability to manage its liquidity and funding position, and the recent change in its business focus toward commercial lending, which in our view will increase the concentration of its credit-risk profile.”
Broadlands is no longer in the Crown Retail Deposit Guarantee Scheme.
Results filed on September 8 show the charging group made a loss of $1.85 million for the March 2010 year, compared to a profit of $857,754 in 2009.
The group took an impairment loss of $6.35 million on its loan book of $35.35 million while making further impairment allowances of $11.84 million.
Past due loans (120 days plus) accounted for $20.3 million of the total book.
Debentures on issue totaled $15 million, half of which were due within 12 months of the March balance date.
In the past year, Broadlands has required regular and ongoing liquidity support in the form of cash debenture investment injections from its sole shareholder, Anthony Radisich, to repay external customer debenture investments heading into and post the initial retail government guarantee expiry in October.
“Although this key shareholder has demonstrated strong liquidity and funding support to date and is believed to have capacity to provide further support if required, we believe that this support is vulnerable to Broadlands being able to generate sufficient returns and value to ensure the shareholder's longer term commitment,” Mr Sikora said.
“In our view, Broadlands' credit losses have been fairly well managed to date--but its credit profile is moderated by a high-risk loan-receivables portfolio that exhibits a material level of arrears and some single-customer concentration,” Mr. Sikora added.
Broadlands has heavily reduced the number of motor vehicle dealerships from which it originates loans. The company’s credit loss experience also benefits from its recourse back to dealerships.
The company has progressively reduced the size of its balance sheet from nearly $40 million in 2008 to about $34 million at September 20, 2010.
S&P said favorable features of Broadlands' credit profile include “good, albeit decreasing,” interest margins and an adequate capital-adequacy ratio.
“These factors provide some capacity for the company to absorb higher credit losses.”
S&P said the rating could be lowered by more than one notch if Broadlands' shareholder's willingness or capacity to support the company were to materially weaken.
“This could stem from sustained weak operating performance, which could weaken the value of this business to the shareholder, or if Broadlands' debenture reinvestment experience or new debenture inflows remained low and weak.”