When you got a B grade in high school it was something to
write home about. But investing in a finance company with a B
grade could mean you have a one in five chance of losing your
money over a five-year period.
Ratings for non-bank retail deposit takers became compulsory
on March 1 and results have shown what many knew already -
that most of New Zealand's finance company sector is below
what investment experts call investment grade or a BBB rating
- a one in 30 chance of failing to pay up over a five-year
period.
Most of the 30 companies now rated have an average of BB - a
one in 10 chance of default.
Brook Asset Management's managing director Mark Brighouse
says one of the main reasons institutional investors do not
put money into anything below the BBB level is because the
level of default rises steeply below there and gets higher as
you go down the spectrum.
"It's simply not a risk they are interested in taking because
they have got other risks in their portfolios."
But John Kidd, head of research at broker McDouall Stuart,
believes there is a place for lower rating companies as long
as people understand they are getting paid a higher level of
interest because of the risk.
He says a large part of the problem is that the Government's
retail deposit scheme has created a distortion.
From October 12 those with a BB rating can qualify for the
extended guarantee but those who sign up will essentially be
covered by the Government's rating of AA+.
Lower rated companies should pay investors a higher level of
interest to compensate for the extra risk.
But the underlying rating will not mean anything until the
Government weans companies off its guarantee.
Mr Kidd says that has the potential to create confusion for
people as the scheme winds down and they have to start
thinking for themselves again.
At the moment finance companies cannot price their interest
payments according to their rating because that would likely
see them flooded with cash.
"It really doesn't bring home the concept of credit risk."
The same scenario occurred when the guarantee scheme was
first set up and finance companies were controversially
included.
A name, residential address, and (preferably residential) telephone number is required from readers who comment on ODT Online. These details will not be visible to site visitors.