South Canterbury and Marac junked
Standard & Poor's resolved its CreditWatch with negative implications and lowered its credit ratings on South Canterbury Finance to 'BB+/B' from 'BBB-/A-3'. While the outlook on the rating is negative, S&P warned, as it did when it initiated the CreditWatch in early July, of the potential for more downgrades to follow, if South Canterbury's liquidity problems are not resolved.
Key among these problems is a US$100 million private placement, which has just had a minimum credit rating requirement triggered by the downgrade. If US investors now use this trigger to demand repayment, South Canterbury will have to try to refinance the debt when the New Zealand property development sector, to which it is a major lender, is experiencing very low business confidence, reduced investor demand and limited refinancing options, according to S&P.
S&P is pinning a lot of hope on South Canterbury's primary shareholder, Alan Hubbard, underwriting any further exposure South Canterbury may have to impaired loans. This comes after he has already injected an additional NZ$40 million of capital into the company to absorb the impact of increasing credit losses. It is possibly not insignificant that Hubbard is 80 years old.
As noted at the time of the initiation of the CreditWatch, South Canterbury has NZ$475 million of bonds on issue in New Zealand, with maturities ranging from January 2010 to December 2012. It also owes retail investors considerably more than that. While most of these investors should be covered by the New Zealand Government's guarantee of banks, finance companies etc., the guarantee only has a little more than a year to run.
S&P's action on South Canterbury may not have come as a surprise, given the probability of the rating action was flagged by the CreditWatch; but S&P also moved on Marac Finance Limited, lowering its ratings to 'BB+/B' from 'BBB-/A-3', and leaving the ratings with a negative outlook. Like South Canterbury, Marac is one of the largest finance companies in New Zealand and is heavily exposed to the property development sector.
Thus S&P downgraded the company for the same reasons as it did South Canterbury, and is also looking for Marac's parent, NZX listed Pyne Gould Corporation, to support its on-going credit quality. Fortunately, Pyne Gould has just completed a capital raising but it may not have been intending to use those funds to support Marac.
Nevertheless, S&P is anticipating that Pyne Gould will acquire about NZ$160 million of Marac's impaired property development loans, at face value. If this does not occur, Marac could also face further multiple downgrades.
Our records show that Marac has only one bond outstanding in New Zealand, a NZ$104 million, secured bond, with a July 2013 maturity. It was issued only in June last year. However, retail investors also have substantial exposure to Marac.
In fact, Interest.co.nz puts the outstanding debentures of both South Canterbury and Marac at NZ$1.48 billion and NZ$769 million, respectively. And as Interest.co.nz points out, the downgrading of two of New Zealand's largest finance companies to junk may now make it very difficult for the New Zealand government to remove its guarantee, at least of the finance company sector, when it is due to expire on October 12, next year.