South Canterbury ratings wobble

An infusion of fresh capital could not prevent South Canterbury Finance's rating from getting downgraded and ratings agency Standard & Poor's has warned more downgrades may follow if further capital is not injected or if liquidity and asset quality deteriorate further.

Yesterday, S&P downgraded the rating to BB from BB+ and affirmed the B short-term rating. It also put the BB long-term rating on credit watch with negative implications.

The downgrade comes after the company on Monday reported a loss for the half year to December 2009 of NZ$154.9 million, due mainly to NZ$229 million of losses on asset realisations and further impairments on loans.

South Canterbury had on Monday announced plans to strengthen the balance sheet by folding in transport businesses of the company's cornerstone investor Allan Hubbard. It also indicated it is seeking to raise more capital through brokers Forsyth Barr.

S&P, however, is concerned that high loan-loss provision could retard or even scuttle further recapitalisation initiatives that the company is considering, and warned another downgrade is possible.

A further downgrade will mean the company will no longer qualify for inclusion in the government's extended deposit guarantee scheme that starts in October 2010 when the current guarantee expires.

S&P said a downgrade could be more than a notch if the liquidity situation worsens or if there are concerns over asset quality.

The rating could be lifted from negative watch if liquidity concerns moderate to such an extent that the company has sufficient excess cash to manage potential volatility that could result from negative developments affecting the company, and the difficult environment that deposit takers are currently facing, says S&P.

South Canterbury has around NZ$1.5 billion in liabilities.