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Marac-led bank has potential for investment grade rating: S&P

Thursday 3rd June 2010

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The proposed merger by Marac, Canterbury Building Society and Southern Cross Building Society could achieve an investment grade credit rating and will likely attract more partners, according to ratings agency Standard & Poor’s.

S&P director of financial institutions ratings, Peter Sikora, said that the proposed merger “has the potential to be investment grade” and will probably attract more partners into the venture.

“It’s going to be interesting to see the company structure,” Sikora said. “It could be over $3 billion pretty quickly.”

The three firms have signed a memorandum of understanding to investigate merging the two building societies, which would then be acquired by PGC’s Marac unit, with an ultimate goal of applying for a banking licence by the middle of next year, creating a lender with $2.2 billion of assets.

Marac’s aspirations for obtaining a banking licence took a knock last year when S&P downgraded its credit rating to a sub-investment grade BB+, below that required to become be approved as a bank by the Reserve Bank.

Since then, Marac’s parent, PGC, absorbed the lender’s losses and carved out the bad assets into a new vehicle, something Forsyth Barr analyst John Cairns described as “part and parcel of a move to obtain a banking licence.”

The criteria for a banking licence wasn’t simple, and could take several years to complete.

S&P’s Sikora said the announcement will probably speed up other activities in New Zealand’s finance sector, which is expected to face an upheaval this year when the government’s retail deposit guarantee expires in October.

He predicts there will be a lot of consolidation in the non-bank sector, with savings institutions, such as credit unions and building societies, merging. Still, he was less upbeat about finance company, saying “we’re going to see more failures quite frankly.”

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