With both finance companies having slipped below the BBB- threshold, they are effectively downgraded from investment to non-investment ratings, their issues referred to as junk bonds.
Both may have to pay up to 1% more to borrow funds in the future because of the re-ratings.
In a further warning, S&P said if South Canterbury Finance's (SCF) underwriting agreement with majority shareholder and chairman Alan Hubbard was not successful, and Marac's plan to absorb loan-related losses and raise capital did not come to fruition, both companies could see further rating downgrades.
SCF's rating, which was signalled a month ago to be under S&P scrutiny, was dropped from BBB- to BB+ and also carries a negative outlook, while Marac's rating went from BBB- to BB, also with a negative outlook - the latter implying a one-in-three likelihood of a further rating downgrade within a year, S&P analyst Derryl D'silva said.
ABN Amro Craigs broker Peter McIntyre said the pair had been "left in a delicate position", especially Marac, which would have been "very surprised" by the sudden downgrade.
"Debenture holders will be concerned what happens after the Crown guarantee runs out in October next year. That could see more investor funds being rolled out of both SCF and Marac," he said.
The "key issue" for both companies would be their future cost of borrowing, which could increase up to 1% because of the downgrade, Mr McIntyre said.
Following the downgrade announced late on Thursday, an SCF bond maturing in June 2011, paying 10.5% interest, declined from 91c for a $1 bond to 84c in trading and a December 2012 bond, paying 10.43%, declined from 90c to 87c.
Similarly, a Marac bond maturing in June 2013 fell from 93c for a $1 bond to 81c.
Mr D'silva said SCF and Marac were considered among the "stronger finance companies" in New Zealand, with each underpinned by a "sound business profile".
SCF was "reasonably diversified" while Marac had "sound funding and liquidity".
Both could be revised to stable if SCF reduces its "related-party loans" and Marac deals with negative pressures on its credit profile, Mr D'silva said.
SCF's downgrade was initiated as its credit profile had weakened because of asset-quality pressures within the New Zealand property development sector, "where the potential for lending losses is exacerbated by softening trends in New Zealand's economy", he said.
Ratings below BBB- meant funding providers could review or withdraw their funding support for SCF, S&P has said in the past.
In recent months, SCF has come under pressure over the extent of related-party loans to companies associated with Mr Hubbard.
S&P said five weeks ago there was an existing rating trigger in SCF's $US100 million ($NZ147 million) private placement facility, which compounded liquidity concerns.
The 83-year-old SCF was placed on S&P's negative watch five weeks ago after booking its first after-tax loss in 75 years of $37 million.
Mr Hubbard's $40 million cash injection a week earlier and underwriting offer was considered by SCF at the time to be enough to retain the BBB- ratingSCF chief executive Lachie McLeod said in a statement: "The re-rating will not impinge on those proposals nor affect the ability of the group to make scheduled interest payments and redemptions to debentures and bond holders."
All debenture holders with deposits of up to $1 million remain covered by the Government guarantee, he said.
Mr D'silva said Marac's downgrade from BBB- to BB+ was over concerns similar to those affecting SCF and a "greater than expected" deterioration in Marac's asset quality in recent months.
Last month, Marac announced a $65 million after-tax impairment on property development loans and is creating a new asset management company, Perpetual Asset Management, which under its Torchlight Credit Fund will acquire the impaired property development loans.
Marac, a subsidiary of listed Pyne Gould Corp, has less than 20% of its loan book in property financing, and the S&P downgrade, following an annual review, was described by PGC chairman Sam Maling as "unexpected and disappointing".
"Steps have been taken to strengthen Marac's position," he said in a statement.
"We know what to do to earn back the investment grade rating for Marac and to ensure that it is not put in this position again," Mr Maling said.
The downgrade meant Marac's banking syndicate had the right to review its existing banking facilities and it was in discussion with them, he said.
A capital-raising issue is to take place about mid-September, which would support Marac's banking and asset management strategy and it had tightened its credit processes and was focusing on core operations.
He highlighted that S&P had noted Marac had a sound business profile and funding and liquidity position, being one of the largest domestically owned finance companies in the country.
Mr Maling said its core lending business, plant, equipment and vehicle financing were continuing to perform "exceedingly well".
