UDC Finance's AA- credit rating at risk of being slashed on sale prospects, S&P says
UDC Finance's AA- credit rating was placed on CreditWatch Negative by Standard & Poor's pending UDC's potential sale by Australia & New Zealand Banking Group and the likelihood of a weaker rating as a stand-alone business.
UDC currently enjoys the same credit rating as its parent bank, which was expected to provide "timely financial support" if needed to the finance company, S&P said. It had previously assigned a stand-alone credit profile (SACP) on UDC of bbb-, or six notches below and the lowest investment grade rating.
S&P said it would expect to affirm UDC's rating if it is acquired by a new owner with an AA- rating and it was clear that UDC was a "core subsidiary" of the new group. However, the rating could be cut if UDC is deemed to be of less strategic importance to a new AA- rated owner or the new owner was rated A+ or below. In that case, UDC's rating was likely to be cut to somewhere between its SACP and the parent rating.
Heartland Bank, which is among potential bidders that have expressed interest in UDC, has a BBB rating with Fitch while TSB Bank, another possible buyer, is rated A- by Fitch.
"ANZ may decide to continue to own and manage UDC as it has done in the past," S&P said. "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."
It said the possible sale of UDC was probably part of ANZ's strategy to rationalise its global business mix and capital allocation.
Of New Zealand's 25 registered banks, 11 have a credit rating of AA- or higher.
UDC funds 73% of its business activities via investments raised from the public while 15% comes from shareholder capital and 12% from an $800 million ANZ credit facility with an interest rate of 3.95%, of which $280 million was drawn as at September 30 last year, according to its latest prospectus for first ranking security stock. At that date, it had $1.76 billion of security stock on issue.
UDC also held $81.7 million of cash deposits with ANZ.
As at September 30, its capital ratio was 16.2%, compared with the 8% minimum threshold required by the Reserve Bank
UDC had total assets of $2.4 billion at balance date in the 2015 financial year, making it smaller than Heartland, whose total assets stood at $3.6 billion. Some analysts have speculated the finance company could be sold via an initial public offering and listed on the NZX. Profit outpaced that of Heartland last year at $57 million to $48 million and the bank would be expected to have to raise capital to fund a bid.
The primary difference between the two appears to be their cost to income ratio, which sits at a relatively low 26% for UDC, compared with 47% for Heartland, although First NZ Capital says it's difficult to know how much of UDC's costs may be charged through ANZ.
The broking house estimates Heartland has surplus capital of around $58 million and some flexibility to raise Tier 2 capital.