SCF rating outlook lowered to negative on weaker profile

Tuesday 7th July 2009

South Canterbury Finance (SCF), whose founder and main shareholder Allan Hubbard injected $40 million of funds into the business this week, had its BBB- credit rating placed on Creditwatch negative by Standard & Poor’s because of a deteriorating credit profile.

The South Island-based finance company has a “one in two chance” of losing its investment grade rating in the next three months, S&P said. The move follows SCF’s announcement of a $37 million loss for fiscal 2009 on the back of a provisioning expense of $58 million.

“There is now an increased risk that some of the non-performing assets could translate into lending losses ultimately," S&P credit analyst Derryl D'silva said. “SCF’s decision to shift its holdings of liquid assets from cash to higher risk and high-yield investments has increased the risk profile of the company and weakened its liquidity,” he said.

The investments resulted “in an increase in related-party exposures, which have moderated SCF's capitalization, and are a weakness at the 'BBB-' rating level.”

S&P last week said Hubbard’s backing for the company is helping underpin its BBB- long-term and A-3 short-term ratings. The ratings company expects he “will remain steadfast in his ability and willingness to support SCF if required.”

The yield on SCY’s 10.43% December 2012 bonds climbed to 14.25% today, according to the NZX.

In addition to the $40 million infusion, Hubbard is to sign an underwriting agreement as security for any further loans that become impaired. That agreement and the reduction of related party exposures could help lift SCF off CreditWatch.

The loss of SCF’s investment grade rating could trigger broader funding issues because the terms of its US$100 million private placement facility allows funding providers to review or withdraw their funding support in that event.

That’s likely to “exacerbate the consequent negative rating momentum, whereby a small negative ratings movement could magnify significantly because of liquidity difficulties that may emerge.”

D'silva said the credit ratings could be lowered by one or more notches if the company fails “to address pressures concerning its liquidity and its weaker capital adequacy position stemming from related-party exposures and rising credit costs.”

Businesswire.co.nz

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