South Canterbury Finance is confident underwriting by principal shareholder and chairman Allan Hubbard will see its BBB- "investment grade" Standard and Poor's rating retained, as opposed to being downgraded.
The Timaru-based 83-year-old company is now on a Standard and Poor's "negative credit watch", which could lead to an investment downgrade.
South Canterbury Finance's (SCF) negative credit watch follows news of an after-tax loss of $37 million - its first booked loss in 75 years - and means the company has a 50% chance of being downgraded by S&P.
A downgrade from BBB- to C would take the finance company beyond the minimum "investment grade" for would-be investors.
Any downgrade would make SCF unattractive to depositors and would add a "significant cost" to interest paid on funds borrowed in the future, ABN Amro Craigs broker Chris Timms said yesterday.
While the S&P credit watch did not bode well for SCF, a positive sign was that S&P had not gone straight to a downgrade, the agency giving SCF "several months" to "work on its position", Mr Timms said.
"Going to a C rating is effectively into junk bond territory, which is outside the investment grade," Mr Timms said.
Last week, Mr Hubbard injected $40 million in cash to help alleviate the effects of a deteriorating property loan book, which prompted the company to record its first bottom-line loss since 1934.
Mr Hubbard also offered a legally binding commitment to underwrite any further significant downgrades or balance sheet knocks during the recession.
SCF has $750 million, or 23% of its loan book, in property but has made a conservative non-cash provision of $58 million for non-performing investments and doubtful property assets for this financial year.
SCF chief executive Lachie McLeod yesterday said the S&P negative credit watch was "not unexpected" after SCF's decision to quarantine and make provisions for "at-risk and non-performing assets" for the year to June 30.
"The underwrite guarantee to be shortly completed by our shareholder [Allan Hubbard] will reinforce the strength of the group and should see its investment grade rating retained," Mr McLeod said in a statement to the financial markets yesterday.
"Our intention to introduce new equity within the next six months, as announced last week . . . should provide further assurance for investors and S&P that the group remains in sound financial health," Mr McLeod said.
S&P said in a statement that, additionally, an existing rating trigger was on SCF's $US100 million ($NZ156.5 million) private-placement facility, which compounded the liquidity concerns.
The trigger specifies that if the rating on SCF were lowered to below BBB-, funding providers may review or withdraw their funding support for SCF, S&P said.
S&P credit analyst Derryl D'silva said S&P's credit-watch action reflected its view that there was now an increased risk some non-performing assets could translate into lending losses, NZPA reported.
South Canterbury's decision to shift from cash to higher-risk and high-yield investments had increased its risk profile, weakened its liquidity and increased its related-party loans, he said.
