South Canterbury Finance has been placed on a negative credit watch by ratings agency Standard and Poor's just a month after the company had a rating downgrade from BBB- to BB+.
Standard and Poor's announced the warning yesterday, saying it had concerns about company's liquidity, the quality of its assets and related party exposure - lending estimated at $130 million to companies in which South Canterbury Finance (SCF) chairman and principal shareholder Allan Hubbard has interests.
Mr Hubbard said the concerns would be allayed when the audited accounts were released later this month.
Standard and Poor's credit analyst Derryl D'silva said SCF was placed on credit watch because, with no public debenture prospectus, the company's funding flexibility and liquidity undermined its BB+ rating level, at least in the short term.
SCF's liquidity levels were modest after it moved its liquid assets from cash to high-risk and higher-yielding investments and to related-party entities "of uncertain credit standing", while United States private placement investors were reviewing their support of SCF, Mr D'silva said.
If that support was withdrawn, it would exacerbate liquidity concerns and potentially reduce SCF's credit rating to B, he said.
"Should US private placement investors continue their funding support for SCF, downward rating pressure is likely to be less severe."
Mr Hubbard responded that those concerns would be addressed when SCF's audited accounts were released later this month, saying they had been delayed by the Practice Review Board of the NZ Institute of Chartered Accountants requiring a peer review of SCF's auditors.
Mr Hubbard said in a statement the global financial crisis meant there was less tolerance from rating agencies for such delays.
Once the accounts were released, a new prospectus would be issued, after which SCF would allot new securities.
It had suspended acceptance of subscriptions until a new prospectus was released and subscriptions were being held in trust.
Mr D'silva said SCF would be taken off credit watch if SCF showed it could re-access the debenture investor market with no long-term negative effects on its debenture profile, there were no adverse surprises in its 2009 audited accounts, and it could source two or more highly qualified independent directors to address weakness in its financial profile and guide it through restructuring and recapitalisation.
The ratings agency would also be encouraged if it saw support from private placement investors, bankers and debenture investors.
Craigs Investment Partners broker Chris Timms said this news would further unsettle investors.
But he said Mr Hubbard's strong ethics and genuine concern for the wellbeing of his investors gave him confidence they would be central to any decisions Mr Hubbard and his board made.
Key dates
South Canterbury Finance's fall from favour:
July 8, 2009: Standard and Poor's places negative credit watch on company's BBB- rating.
Aug 13, 2009: Standard and Poor's re-rates company BB+.
Aug 29, 2009: SCF reports $71.2 million loss for the year, including $35 million loss on investments.
Sept 21, 2009: Standard and Poor's places negative credit watch on company's BB+ rating.
