Liquidity concerns continue to dog South Canterbury Finance
Standard & Poor’s has maintained its BB (credit watch negative) rating on South Canterbury Finance’s long term debt pending greater clarity of information.
The credit rating agency said while South Canterbury has made “some progress” since March 2, it is still exposed to material debenture-refinancing pressures leading into October 2010.
South Canterbury has a significant level of debentures maturing in October.
“We expect SCF’s ability to deal with this liquidity and refinancing risk to become clearer by the end of May 2010,” Standard & Poor’s credit analyst Derryl D’silva said.
“At this time, we’ll be able to observe and assess the company’s success in further building balance sheet liquidity and reducing its refinancing requirements leading into October 2010. We also believe SCF will continue to pursue other options such as asset sales, and recapitalisation to improve its overall financial strength.”
South Canterbury chief executive Sandy Maier said he was pleased that S&P made mention of the company’s progress.
“Having built up liquidity in recent months we are confident the measures are in train to ensure we maintain our record of making all interest payments and redemptions as they fall due,” Mr Maier said in a statement.
S&P’s Mr D’silva noted that South Canterbury’s cause had been helped by securing approval to stay in the extended Retail Government Guarantee Scheme, and management’s efforts to “strengthen broker and investor support”.
Cash is King
S&P said South Canterbury had increased its cash on balance sheet to about $NZ100 million. This was on the back of an average reinvestment rate of 43% over the last five months, new debenture inflows, and loan repayments.
Additionally, short-term liquidity will benefit from a capital injection of $37.5 million as of end-May 2010, S&P said.
South Canterbury’s ratings could be taken off credit watch (negative) and affirmed with a negative outlook within a month, provided liquidity concerns moderate such that:
• The company's cash balance builds to about $150 million at the end of May 2010 and we feel that this will likely improve to about $200 million in the near term, while meeting ongoing liquidity needs.
• There is evidence of sustainable improvement in the monthly debenture reinvestment rate.
• There is evidence of good and sustainable new debenture inflows.
• The $350 million debenture maturity in October 2010 was reduced each month to get closer to SCF’s average refinancing requirement of about $100 million.
• Execution of other options such as asset sales, recapitalization, and impaired loan recoveries continue along with efforts to improve liquidity so as to restore SCF’s overall financial strength to a level that compares with the ‘BB’ rating and peers.
• No new credit concerns emerge.
Conversely, the rating will be lowered—potentially by more than one notch—and will remain on CreditWatch Negative if:
• Some or all of the above do not eventuate.
• It was forced to rely on asset sales to meet any ongoing liquidity shortfalls. In our view, a company rated ‘BB’ cannot rely on asset sales to meet short-term liquidity needs.
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Comments and questions6
$500 million of deliquent property asets allready heavily provisioned according to SCF AS AT 31 Dec 2009. We all know the economy has been very poor since then so its anyone's guess how much further these assets will be written down for the financial year ended 30 June 2010 and thereafter. Despite SCF stating otherwise it wouldn't surprise me if there was another $150-200m in write-downs to come here.
Deduct also over $80 million in tax assets that are completly worthless unless the company trades profitably and there would appear to be no chance whatsoever of this happening in the forseeable future, then there's nearly $300m of related party lending some to very highly geared business ventures like the South Island farm holdings and its anyone;'s guess what these might realise.
Despite SCF's stated position I really can't see how there's any real equity in the business if one takes a realistic view of assets. Its very hard to see how the company can continue to trade once the extended guarantee scheme ends on 31 December 2011.
I thought these ratings were supposed to be long term credit strength ratings, rather than short term cash adequacy ratings. Although if they run out of cash they will default, they won't run out of cash if they're in a strong financial position to maintain access to funding, so shouldn't the focus be in its capital position?
For a company that has:
1. Loaned or guaranteed or otherwise directly or indirectly funded up to $185.8m of its own equity.
2. Deferred tax assets and other future tax benefits that depend on it making future profits of $109.6m that is is unlikely to make, and
3. A claimed equity position of under $250m despite the above two points.
one can only conclude that the company's claimed capital position is only an artifact of heroic accounting assumptions and money-go-round transactions that purport to book debt as capital.
Investors are still rating their existing (partly) unguaranteed debt as distressed, with new funding available only with the benefit of prior charge security or government guarantees (which aren't long term). Isn't liquidity more than monthly cash flows, anyway?
As before with S&P on this company I'm left scratching my head as to where they're coming from. And these ratings are supposed to be the basis of a new regulatory system so investors can have a better understanding of risk? Investors beware of such ratings!
I am surprised SCF trustee TEL continues to provide waivers to the Trust Deed. Not all investors are covered by the Crown Guarantee and allowing SCF to trade-on in its current state may be placing it in a worst off position than if the plug was pulled now. Obviously they got good insurance or know something the market doesn't.
Roger, don't forget they lent $15.6m on a subordinated basis to Southbury Corp and $20.9m on an apparently unsecured basis to Southbury Group post 31 Dec 2009, which makes those related party loans bigger than ever before. Southbury Corp has nothing but debt and SCF ordinary shares, and its equity position appears to be only about $38m, but this company is assumed to be to raise $300m in capital to save SCF. What Southbury Group owns other than Southbury Corp who knows. I wonder what the auditor will accept as fair value of those loans come 30 June 2010?
Also, S&P are wrong about the 'Additionally, short-term liquidity will benefit from a capital injection of $37.5 million as of end-May 2010, S&P said.' This cash comes from SCF repaying other prior charge secured debt, and borrowing back the same cash from the same creditor via Southbury Corp notes secured by the same security (prior charge over SCF assets) as before.
Thanks David for your previous comments on SCF above and on prior blogs. As you can probably tell, I'm now converted. One simply cannot ignore the facts, no matter how decent Mr Hubbard has been there's no doubt that there's been some extremly creative accounting going on at SCF to try and keep the company afloat and eligable for the Govt Guarantee.
Thankfully my debentures have matured which has allowed me to see things from a completly objective point of view. Its interesting to note that the General manager of funding Mr Gloagg has resigned after 29 years with the company effective 12 May 2010, Further Mr Maier's contract is only for one year, ending in December 2010 and as we all know the Auditors have qualified their audit report with fundmental uncertainty regarding the going-concern assumptions made by the directors.
It looks to me as though the Government's granting of the extended guarantee is just about loss mitigation more tha anything else as who's going to have confidence to invest after 31 December 2011 with all the future losses coming out of the wood-work. The Directos can only pull the wool over investors eyes for so long, how much real equity will the company have come 31 December 2011 ?
get a copy of the prospectus it will remain a study tool for a long time.Good luck scf your the last one left those aussie banks have a vested interest in seeing you go down.lets steal from hotchin and give to scf
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