A second credit downgrade for Allied Nationwide Finance in three months has been described as disappointing by the firm's chief executive, John Mallon.
Standard & Poors has downgraded the finance company's credit rating from BB- to B with a negative credit watch due to liquidity concerns and what was seen as a heavy reliance on investors reinvesting in the business to meet its forecasts.
"In our view, this deterioration has increased Allied Nationwide Finance's (ANF) exposure to a cash shortfall from now until October 2010 should reinvestment rates weaken from current already modest levels, or should cash inflows from loan repayments be delayed beyond our current expectations," Standard & Poors credit analyst Peter Sikora said.
Shareholders yesterday punished ANF's parent, Allied Farmers, with its share price reaching a new low of 4.5c, down 0.5c for the day.
In December, its share price was 18c.
Standard & Poors said a negative watch meant a one chance in two the rating could be lowered "one or more notches" within the next three months, should ANF's reinvestment rate not quickly stabilise or its balance sheet be weakened by unanticipated delays in scheduled loan repayments.
Mr Sikora said even planned recapitalisation by Allied Farmers through the transfer of assets from its subsidiaries, Hanover Finance and United Finance, to ANF, would not provide the necessary liquidity.
Instead, he issued a blunt warning the credit rating could drop to CCC should ANF's position worsen or the company's financial flexibility and contingency plans not respond as intended.
"While we are disappointed with the action taken by Standard & Poors, we remained focused on taking the necessary steps to improve our credit rating over time," Mr Mallon said.
Craigs Investment Partner broker Chris Timms said ANF's downgrade was serious for Allied Farmers as it related to loans it had considered and approved, and not those it had acquired through the purchase of Hanover and United.
"How comfortable would you feel looking after loans you'd inherited from Hanover?"Mr Timms said at the time Allied Farmers bought those assets, it was seen as a way to have the size and scope to be included in the Government's Retail Deposit Guarantee Scheme.
That goal was unlikely to be achieved as it would not meet the criteria, he said.
Allied Farmers has had to battle bad news since it took over assets from Hanover Finance and United Finance last year.
Soon after completing the $400 million purchase, it wiped $144 million off the Hanover and United assets and then reported a $15.7 million half-year loss to December compared to a $3.9 million loss for the previous corresponding period.
At the time, Chairman John Loughlin said the result was in line with expectations, but that the addition of the Hanover and United assets would strengthen Allied's position.
