Equitable uses "application" rules to get extended guarantee

Faced with the prospect of a downgrade because of the negative outlook on its ratings, BB-rated Equitable Mortgages was quick to apply for the New Zealand government's extended guarantee scheme application and was duly accepted last week.

The current government guarantee expires on 12 October 2010, and financial institutions have until 11 October to make an application for acceptance under the extended guarantee.

However, Equitable Mortgages wasted no time because the negative outlook on its rating means there is a possibility of a downgrade in future.

According to the Treasury rules, a deposit-taking institution with a credit rating of BB or higher can apply to participate in the extended scheme.

Once accepted, if the ratings were to get downgraded the guarantee still applies and the fees applicable are the same as those applicable to a BB-rated institution.

Standard & Poor's had indicated in its ratings statement that a ratings downgrade would be considered if earnings were to substantially deteriorate and a more severe downgrade of two or more notches may occur if support mechanisms to absorb loan losses are not working or proved inadequate.  On the other hand, S&P suggested a ratings upgrade is extremely unlikely in the short-to-medium term in the absence of a material shareholder injection of support.

Equitable Mortgages has now used the extended guarantee to lower some term rates on its debenture issues.

The company is now offering 7.25 percent for a five-year term, down from the 8.25 per cent it was offering prior to the extended guarantee.  For four years, it is offering seven per cent against eight per cent earlier, and for three years it has cut the rate by 150 basis points to 6.50 per cent from 8.0 per cent before.