03 March 2010

South Canterbury Finance Downgraded to BB, Watch Negative

Yesterday evening Standard and Poors downgraded South Canterbury Finance from BB+ to BB, and placed the company on Credit Watch Negative. One further notch downgrade would see the company unable to quality for the extended Deposit Guarantee Scheme. While the pressure on the company intensifies, the company's liquidity options are all tapped out, its existing owners have run out of significant further sources of capital to support the company, and investors appear to be growing more apprehensive about lending to or investing in the company (see for example today's news article Bad time for Southbury to be listing).

Developments are now happening more quickly, more adversely, and the company's options for addressing its problems are fewer and facing more chances of delays and difficulties. The BB rating could be just a stepping stone to BB- and then D for default, given that it is on Watch Negative and S&P are warning, again, about multiple notch downgrades that they will probably not deliver on until payment default is immanent.

See also the updated South Canterbury Finance Credit Rating Timeline.

From S & P:

Standard & Poor’s Ratings Services said today that it has lowered its long-term rating on New Zealand finance company, South Canterbury Finance Ltd. (SCF) to ‘BB’ from ‘BB+’, and affirmed the ‘B’ short-term rating. At the same time, the ‘BB’ long-term rating was placed on CreditWatch with negative implications.

“The downgrade reflects our view that SCF’s asset quality experience has deteriorated to a level that is not consistent with the ‘BB+’ rating level,” Standard & Poor’s credit analyst Derryl D’silva said. “Although the capital injection into SCF will help absorb these 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. That said, but for strong shareholder support evidenced in SCF’s announcement concerning high loan-loss provisions of late yesterday, it is likely that the rating would have been downgraded by more than one notch.”

Stakeholder reaction to SCF’s asset quality difficulties will be integral to the resolution of the CreditWatch and forward direction of the rating. Liquidity is currently weaker than many New Zealand nonbank deposit takers’ in the ‘BB’ rating category, and should it deteriorate further it is likely to result in the rating being lowered. That said, debenture investors in SCF have remained relatively loyal to the company in recent times even considering the difficulties SCF has encountered prior to yesterday’s announcement by the company. 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.

A further concern is that the announcement of high loan-loss provisions by SCF could retard or even scuttle further recapitalisation initiatives being considered by SCF. If further capital is not injected—should liquidity or further asset quality pressures emerge—it is likely to cause the rating to be lowered.

“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,” Mr. D’Silva said. Further, the rating could be taken off CreditWatch Negative if SCF is successful in further strengthening its capital base, and restructuring its business so that Standard & Poor’s concerns regarding liquidity and other rating factors ameliorate. Initially, should Standard & Poor’s concerns ameliorate, it is likely that the rating could be affirmed with a negative outlook.

Conversely, should liquidity deteriorate it is likely that the rating will be lowered—and potentially by more than one notch—depending on the severity of the deterioration. Further, should new asset quality concerns emerge, or recapitalisation strategies prove difficult to execute or insufficient to placate Standard & Poor’s concerns at the ‘BB’ rating level, the rating is likely to be lowered. A downgrade associated with either asset quality or capital difficulties, absent an intensification of liquidity concerns, is more likely to be limited to one notch.

1 comment:

Anonymous said...

Smart move by S&P keeping rating within extended Crown Gtee criteria. Really puts SCF's future in the hands of the Government...