Further asset writedowns at Timaru-based South Canterbury Finance has seen its credit rating lowered to BB, the minimum for inclusion into the government's extended deposit scheme.Standard & Poor's issued the downgrade last night and placed the rating
Further asset writedowns at Timaru-based South Canterbury Finance has seen its credit rating lowered to BB, the minimum for inclusion into the government’s extended deposit scheme.
Standard & Poor’s issued the downgrade last night and placed the rating on creditwatch with negative implications meaning South Canterbury could face further downgrades.
“The rating could be taken off creditwatch negative within a matter of months if liquidity concerns moderate such that SCF has sufficient excess cash to manage potential volatility given the confluence of negative developments affecting SCF, and, more generally, the continuing difficult market for New Zealand nonbank deposit takers,” S&P analyst Derryl D’Silva said.
On Monday, South Canterbury announced an unaudited, preliminary loss of $155 million of the six months to December on the back of $229 million of loan losses and asset writedowns during the period.
In October the company announced write-offs and provisioning of $122.9 million.
Hubbard support crucial
The company is working through a major recapitalisation with the support of principal shareholder and chairman Allan Hubbard.
Mr Hubbard’s latest move to shore up South Canterbury’s balance sheet includes an injection of $152.5 million, through the sale of shares in his Scales Corporation and Helicopters NZ companies to South Canterbury.
Mr Hubbard’s Southbury Corporation had earlier raised $27.5 million in convertible notes for South Canterbury, while George Kerr’s Torchlight Credit fund has provided a loan of $75 million to help South Canterbury repay US investors, now completed.
Forsyth Barr is working on further capital raising proposals to further strengthen the capital base of the company.
Liquidity problems remain
South Canterbury’s most immediate problem is its liquidity levels. The company is looking to sell investments, including property assets, but must do so in a limited timeframe.
According to its latest prospectus the company must roll over more than $1.1 billion of debt this year, ahead of the expiry of the first version of the government's guaranteed deposit scheme.
About $490 million is due to be repaid by the end of June and a further $650 million falls due before the government's retail deposit guarantee scheme expires in October.
Standard and Poor’s said although the Hubbard capital injection will help absorb South Canterbury’s bad debt charges, “it does not, by itself, restore financial strength to a level that we consider is consistent with the ‘BB+’ rating.”
“Further, SCF’s financial flexibility and, in particular, further shareholder support of SCF, is diminished following the capital injection.”
South Canterbury maintains that its reinvestment levels are still solid with a “steady net inflow of funds in excess of redemptions evident in January 2010 extending through February.”
S&P noted that should debenture investors and other liability stakeholders continue to show relative support for SCF it is likely that Standard & Poor’s will become less concerned regarding SCF’s liquidity, which could contribute to the rating being removed from creditwatch negative.
However, a further concern was whether South Canterbury Finance’s high loan provisions could potentially scuttle further capital raising options.
“If further capital is not injected—should liquidity or further asset quality pressures emerge—it is likely to cause the rating to be lowered,” Mr D’Silva said.
