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Non-bank lenders still vulnerable: S&P

Thursday 8th April 2010

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Many of New Zealand’s finance companies continue to face the prospect of failure mainly, owing to liquidity and funding risks, says Standard & Poors in a report today.

S&P credit analyst Peter Sikora says the sector’s asset quality problems seem to have peaked, while regulatory oversight has improved, but most non-bank deposit takers have limited or no back-up external liquidity in the form of a committed bank or other funding lines.

“Most NBDTs are small, geographically highly concentrated, and have narrow business focus,” he said. “Although most have good business positions across certain asset classes, the operating environment remains competitive and these market niches provide little competitive advantage.”

Some asset classes also remained over-serviced.

Finance companies, credit unions and others most vulnerable to liquidity and refinancing risks are those not covered by the government’s deposit guarantee scheme through its extension to Dec. 31 2011, either because they are not rated or they are rated below S&Ps ‘BB’ standard.

“We note, however, that many lower rated finance companies continue to have long-established debenture investor relationships and there is evidence that debenture investors may continue to support them even if they’re not covered by the deposit guarantee scheme,” Sikora said.

“We are somewhat comforted by evidence that most NBDTs have sought to fortify their capital positions and buffer against possible losses on problem loans. That said, liquidity and refinancing vulnerabilities continue to trouble our view of the sector’s creditworthiness and are likely to result in further company failures and consolidation.”

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