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Standard and Poor’s cuts South Canterbury Finance rating to ‘junk’ rating of BB+ (Update 1)
August 13th, 2009Standard and Poor’s has cut Timaru-based South Canterbury Finance’s credit rating from an investment grade BBB- to a ‘junk’ rating of BB+, South Canterbury said. (Updates with comments from Standard and Poor’s statement about US lenders potentially withdrawing their loan and the potential for multiple further downgrades if owner Allan Hubbard does find extra capital)
“New Zealand has been in recession far longer than most other OECD countries and the current environment is challenging, particularly for property development,” said South Canterbury Chief Executive Lachie Mcleod. “This appears to have had some bearing on S&P’s thinking.”
South Canterbury said it was likely to announce an already signalled capital raising within the next four weeks.
“The re-rating will not impinge on those proposals nor affect the ability of the group to make scheduled interest payments and redemptions to debenture and bondholders,” McLeod said.
“All debenture holders with deposits up to $1 million are, and will remain, covered by the Crown guarantee,” he said.
South Canterbury Finance said it would continue working with Standard & Poor’s to re-instate the investment grade credit rating over the next six to 12 months.
Standard & Poor’s said the outlook on its new BB+ rating was negative, which implied a one in three chance of a second full downgrade. However, the rating had been removed from the full CreditWatch negative position.
“The downgrade reflects our view that SCF’s credit profile has weakened because of asset quality pressures within the New Zealand property development sector,” Standard & Poor’s credit analyst Derryl D’silva said.
“The property development sector is currently experiencing very low business confidence and faces reduced investor demand and limited refinancing options. With this downgrade, a rating trigger on SCF’s US$100 million private-placement facility may be invoked,” D’silva said.
“Private placement investors have an option to review their funding support for SCF after the downgrade, which if it resulted in a requirement to repay the facility, has the potential to exacerbate SCF’s already modest liquidity position,” he said.
“The removal from CreditWatch negative is based on our view that SCF’s primary shareholder, Mr. Allan Hubbard, will remain committed to providing timely support to SCF if required.”
Standard and Poor’s said South Canterbury was on track to complete its proposed underwriting agreement, which was expected to be used as security for any additional impaired loans.
Management remained focused on steadily reducing SCF’s related-party exposures, although a significant reduction was not expected in the near term.
“Despite these challenges, it is our view that SCF is one of the stronger finance companies in New Zealand. The ratings remain supported by SCF’s market position as one of the largest domestically owned finance companies in New Zealand. The market position is underpinned by SCF’s sound business profile and the broad geographic coverage of its operations. In addition, SCF’s funding profile is reasonably diversified, comprising debentures, bonds, preference shares, bank lines, and the U.S. private placement facility.”
Standard and Poor’s said the negative outlook reflected the short-term pressures on South Canterbury’s finances.
“In our opinion, continued challenging domestic economic conditions are placing pressure on SCF’s asset quality with a heightened risk of additional credit losses expected in the short-to-medium term. If SCF’s underwriting agreement with its major shareholder is not executed successfully, the ratings could be lowered to reflect diminution in key shareholder support,” Standard and Poor’s said.
“The ratings may also be lowered by one or more notches should SCF fail to address pressures concerning its liquidity. Conversely, if SCF were able to overcome these challenges and significantly reduce its related-party exposures, negative pressure may be alleviated and the outlook revised to stable,” it said.
Earlier on Thursday Standard and Poor’s also cut Marac Finance’s credit rating from BBB- to BB+
Tags: Allan Hubbard, BB+, Credit Rating, Lachie McLeod, Marac Finance, South Canterbury Finance, Standard and Poors, Timaru
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August 13th, 2009 at 6:12 pm
Like a knife through my heart,The ‘Great Buffet Pretender’ has no clothes.
Wonder if he wants to redeem all those fonterra shares. Hope none of those , ‘fonterra Im now owned by the Aussie banks’ directors have any joint deals?
August 13th, 2009 at 6:17 pm
Isnt there some funding line that gets called in in the event of a downgrade?
The criminal thing is that these type of institutions are required in an economy and their loss leads to tighter credit.
August 13th, 2009 at 8:27 pm
If the big US Banks CDO’s were rated AAA and were proved to be virtually worthless, what does it say about a company that only gets a BB+rating? Also the NZ taxpayer is guaranteeing any losses by SCF at no cost to this company. That’s what happens when you are able to summon the Prime Minister to Timaru!
August 13th, 2009 at 9:51 pm
Farm sales fail to settle:
http://www.stuff.co.nz/waikato-times/farming/2748145/Developers-face-costly-ultimatum
August 13th, 2009 at 9:55 pm
But. The Pm didnt extend the deposit guarantee which says a lot,they appear happy to let them go. Personally I think the Aussie banks see it as an excellent time to get rid of some competition. Marac and SCF just made it so easy for them to do it, without the deposit guarantee lets face these boys would have been history a long time ago. This recession/depression has a lot more wealth to destroy yet.
http://www.telegraph.co.uk/finance/markets/6018076/RBS-uber-bear-issues-fresh-alert-on-global-stock-markets.html
August 13th, 2009 at 9:57 pm
Andy I think in the case of the US banks CDO ratings, it was in the interest of the rating companies to give them AAA ratings, because then the banks back came back to them again with more work, rather than going to another ratings company.
A nice little earner for the ratings companies, they by most accounts have a lot to answer for in this financial crisis.
I doubt there is too much incentive to misrepresent their ratings over here though, but who knows when some of their other practices have been so questionable.
August 13th, 2009 at 9:59 pm
Just as well we are not in the UK – Kiwis will be heading home in droves
August 13th, 2009 at 10:02 pm
Cynthia
A big thankyou for that one It ties in with something else Ive been pondering.
Love this bit
IRD loves this sort of stuff
August 13th, 2009 at 10:11 pm
AndrewJ – looks like these farmers though they were home and hosed – must be gutted to find they are now in this position. Do you know more about these or other farms
August 13th, 2009 at 10:15 pm
http://www.stuff.co.nz/southland-times/business/national-farm/2590306/Drop-in-farm-sales-amid-gloomy-outlook
http://www.bridgefield.co.nz/
http://www.bridgefieldfarms.com/assets/images/BF_Financial_Returns.pdf
August 13th, 2009 at 10:28 pm
http://www.chrislee.co.nz/index.php?page=taking-stock
August 13th, 2009 at 10:44 pm
Cynthia
This has happened around us too. The banks have really toughened up. The Aussies are unhappy with lending standards in NZ. Ive heard from a banker that they have been given one year to clean their act up. He mentioned some problems with sales falling through. Where is the tipping point, NZ may be next to get a down grade. Right now the $ is almost .68 us.miles off Fonterra’s target. Fonterra directors have 20 million shares between them, interests in around 1 billion $ of land. This is going to get very interesting and potentially very nasty very fast.
I feel for the poor farmers waiting for these sods to pay up .I hope they got good deposits, although these days many deposits are bugger all.
Your last link shows a classic graph projecting the compounding potential of capital gains but no graph on income to justify it.
August 13th, 2009 at 10:44 pm
Re: the Chris Lee piece – incredible. You know that you can never go wrong investing in property and land. Oops, maybe not……..
Anyone seen what the SCF post guarantee bonds are trading at now?
Might be time for bondholders to point the finger at Forsyth Barr, weren’t they major touts of the SCF bond programme?
August 13th, 2009 at 11:00 pm
Andy
If it was me it would be more than my finger pointed at them.
August 13th, 2009 at 11:31 pm
AndrewJ,
“I feel for the poor farmers waiting for these sods to pay up .I hope they got good deposits, although these days many deposits are bugger all.
”
i have to disagree – I suspect they got greedy and tried to cash in on a bubble that has now come back to bite them. how much was the purchase price related to the income the properties produced? None whatsoever I’m sure.
August 13th, 2009 at 11:49 pm
Although not great for the farmers involved it may not be all bad that the sales didn’t settle. From what I could tell the plan was to take some of New Zealand’s most productive farm land and convert it into giant residential sections (complete with ponys and a duck lake?). Not the most intelligent use of natural resources.
August 14th, 2009 at 12:25 am
agreed marky mark,
And most worryingly, who was going to live in these places. Foreigners?? I’d always though the idea of retirement farms was a good idea but not like this. My idea involved shipping foreigners in on 5 year visas, eyeballed up on health insurance and then herd into high density accommodation(but not by foreign standards) in some rural area – the catch was they could not buy, but were still allowed to play golf etc and spend a long period of time in NZ.
August 14th, 2009 at 7:33 am
Andrewj, thanks for that telegraph link. Enough to get me thinking.
August 14th, 2009 at 7:38 am
Where will this leave PGGWrightson, wasnt Hubbard going to back Norgate with another 25 million. How deep are Hubbards pockets? He seems awfully confident, I read a recent interview, I will try and find it. He was very bullish about his dairy farming investments. Naive I thought. Naive…cant spell methinks.
August 14th, 2009 at 7:48 am
PGGWrightson ,probably terminal. I will repost link to weekend article by GREG NINNESS
http://www.stuff.co.nz/business/2733341/Southern-exposure
Its more a matter of how and when, rather than if. Its the flow on effects I’m looking out for,lots of interparty involvement. Its just the beginning of the destruction of a lot of debt that was not based on earnings.(Includes housing)
August 14th, 2009 at 8:09 am
Imagine borrowing $100m to invest in leasehold land in Albany – sounds similar to that Beaumont Quarter deal in Freemans Bay that Nigel McKenna was involved in:
http://www.stuff.co.nz/sunday-star-times/business/money-story-archive/385052/Millions-at-stakein-Beaumont-leasehold-dispute
Speaking of McKenna – anyone know how things are panning out at Kawarau Falls in Queenstown?
It would appear that billions is going down the gurgler on a massive variety of development, leasehold, subdivision, apartment and land projects across New Zealand.
It really was crazy how things got so optmistic that banks would fund leasehold land purchases where the rental/lease payments had no prospect of being paid due to inability to obtain income – ie undeveloped leasehold land in Albany.
The banks deserve to lose on these deals.
August 14th, 2009 at 8:12 am
Re SCF “With assets of about $2.2 billion, SCF is the country’s third largest finance company but at the end of June it reported its first loss since the Great Depression, largely as a result of its property lending.”
I wonder how that $2.2 billion figure is looking today given the type of property that was invested in?
Incredible that New Zealand banks lent an extra NZ$545 million to the agriculture sector in June alone!
Somethings gotta give!
August 14th, 2009 at 8:14 am
Thanks Andrew, thats the article I was after.
Its all very incestuous isnt it. Why would you invest in these companies when they are using them as their private banks. I think Norgate and co have done their darndest to kill Wrighties. I look at Silver Fern Farms and my shares and think bugger you, not putting more of my money in that hole. I can buy real animals, buy feed, and make real money. Give your money to these people and you never see a dollar back. They have the gaul to tell me its for my future, hell they gave away my future when they did that disastrous fight for Richmond. They were prepared to give away half the company to Norgate. Norgate was so crazed he didnt even secure the money before spending 200 million.
Is it any wonder we look to the great ponzi scheme of property to secure our fortunes.
Edited by Alex: Hi guys, just a reminder not to use abusive or defamatory language in your comments.
August 14th, 2009 at 8:21 am
Change a few names and it sounds like home. Time to open the immigration flood gates even wider,foot to floor dont look back.
http://www.businessinsider.com/henry-blodget-taleb-you-fools-dont-understand-that-were-doomed-2009-8
The Black Swan graced CNBC with His presence this morning. In sum:
* We’re all in denial
* We’re replacing private debt with public debt.
* We’re not dealing with the cancer in our banking system.
* We’re not making the structural changes we need to make.
* We’re not being aggressive enough about restructuring debt (debt for equity swaps).
* Bernanke is a wimpy Greenspan sycophant
* Obama’s rewarding the fools who got us here (Summers, Bernanke, Geithner)
* The banksters are taking over again
He’s pretty much right, by the way.
August 14th, 2009 at 8:24 am
I agree with others here, the current so called uptick in housing is a manipulationby banks to get the losers out of their big loans and another bunch of mugs in. So the banks are home free for a bit longer. I mean to say, raising long term, reducing short….and the public falls for it because of the likes of what goes on above.
August 14th, 2009 at 8:26 am
To me it looks like a second wave of recession or a dip into depression is on it’s way and it will be 2008/1929 all over again, especially once the oil price, inflation and interest rates head skyward or could it be that the green shoots are growing strong and the worst is behind us?
August 14th, 2009 at 8:27 am
SteveL
Another Video for you
http://informationclearinghouse.info/article23239.htm
buffet
http://www.stuff.co.nz/business/market-data/2751682/We-goofed-on-derivatives-risk-Berkshire
August 14th, 2009 at 8:31 am
William – and on the way through the new bunch of mugs pay another set of big application fees etc and the banks have them take out a whole load of insurance to cover banks arse as the previous loans didnt have this in place.
At the same time property values artificially rise so that the loans against the rest of the properties dont look so bad and then people confident and start spending only for it to all come crashing down again once the sheeple realise they have been rorted again.
I heard a conversation in my local cafe yesterday between two early 30’s women along the lines of ” I’ve gotta buy a house, I’m gonna get left behind blah blah” Even the guy behind the counter was in on the conversation – the banks will be loving this.
August 14th, 2009 at 8:37 am
Re that link to Taleb – there was another one indicating, shock, horror! that Roubini thinks the recession will be over by the end of the year! Low probability of a double dip!
http://www.businessinsider.com/henry-blodget-roubini-im-a-bull-now-2009-8
August 14th, 2009 at 8:40 am
Cynthia, it makes one wanna weep, especially after reading Andrews Black Swan. Its hard to blame the sheeple when our business leaders are so bad.
August 14th, 2009 at 8:50 am
I remember talking to Andy Hamilton on this site two years ago nearly, about the future of SCF. If it was obvious to us then, how is it that financial advisers who are meant to be experts continued to recommend them and their bonds. I have a friend whose mother has invested her life saving with SCF they listened to me but went with the expert. When the air clears trust is going to a big thing,huge,if I dont trust someone they are not getting a penny and financial planners have proved themselves to be a bout as good as a blindfolded Monkey.
August 14th, 2009 at 9:01 am
Do as much related party lending as possible then collapse before October 2010 and the government will come running with a few hundred million to fund the losses due to the massive mistake of guarantee being placed on finance companies. Taxes then rise as government has to find a few hundred million to cover the costs of the bailouts which they will undoubtedly have to fund in the coming months.
At least if you have invested in a govt guaranteed finance company that collapses before Oct 2010 you have an escape route. The banks will be hoping such finance companies do collapse as govt will solve their problem.
August 14th, 2009 at 9:03 am
Leave off the monkey jibes Andrewj, Minty was out long enough to post me a score of valuations and share tips. The Capuchin Mon ey Investment Fund is a winner.
August 14th, 2009 at 9:07 am
Cynthia, I may be wrong but the govt guarantee does not cover related party lending.
Could be a laugh being saved by the govt if ones finance co investment crashes, only to be taxed more to cover the payouts!!!!
August 14th, 2009 at 9:14 am
You could be right but if related party lending causes the outfit to go under then the rest of the ship goes with it. http://www.rbnz.govt.nz/finmarkets/domesticmarkets/3513466.html
August 14th, 2009 at 9:29 am
Andrewj – goodness, is it really 2 years ago? How time flies. SCF followed a model that was really not that disimilar to all the other Finance companies. All that related party lending on everybodys favorite, property. Fortunately the government came along and gave them that guarantee – for a few weeks immediately after they recieved it they were still offering extraordinarily good rates on 1 year and 18 month debentures which were covered so it was possible to ‘game’ them.
Those who played them within the deposit gurantee period are still sitting pretty. The taxpayer maybe less so.
Those who bought bonds out beyond the Oct 2010 deadline must be feeling a tad queezy. Those who spruiked such issues should will be running for cover.
August 14th, 2009 at 9:29 am
Andrewj
I feel for the poor farmers waiting for these sods to pay up .I hope they got good deposits, although these days many deposits are bugger all.
You’ve already posted the answer on the deposit – it will be the GST, since the IRD “funds” it. Property developers do think this way, by the way.
In at least two cases it is understood the GST on the total purchase price of the properties has been claimed despite the properties not having settled.
August 14th, 2009 at 9:36 am
andrewj,
“replacing private debt with public debt”
love that. the 90s was all about replacing public debt with private debt as the drive for EMU and the required accounting fudges meant fiscal discipline was the name of the game. Now it’s time to whack the debt ball back over the net to the public sector.
But you know what? Either way, the debt balloon keeps growing in one direction no matter who is holding it.
And when it bursts for good we will all get very wet.
August 14th, 2009 at 9:42 am
IanC
That maybe a loophole(the size of France) we should ask IRD about?
August 14th, 2009 at 10:33 am
SCF is not alone
http://www.bloomberg.com/apps/news?pid=20601039&sid=a04oVutXQybk
August 14th, 2009 at 11:15 am
I don’t know that its a loophole per se – the way I understand it, you have an unconditional contract to buy something, then you can claim back the GST (regardless of when you have to pay for the asset). As far as I know, the IRD doesn’t differentiate between whether its fertiliser / a tractor / a whole farm.
August 14th, 2009 at 11:49 am
Alex, sorry, thanks for fixing whatever I got carried away with. You know I am in two minds bagging these guys. At least they are out there giving capitalism a shot in a big way. So I guess they get it wrong in a bigger way.
Its unlikely those farmers got much of those deposits, the real estate agents grab their commision out of the deposits first dont they?
There is a big farm park not far from me. Its brilliant. Lake, views, privacy. Awesome. Except unsold.
August 14th, 2009 at 4:50 pm
Bernard some old posts from you on SCF
August 08
http://www.interest.co.nz/ratesblog/index.php/2008/08/25/south-canterbury-finance-posts-higher-profit/#comment-7232
Its hard to reconcile this especially there insistence of minimal exposure to Dairy when the NZ Herald today posts this,
S&P noted both finance companies’ property loans were in the development sector or the under-pressure dairy sector.
http://www.stuff.co.nz/business/industries/2750840/S-P-cuts-rating-for-two-firms
Im finding these opposing views hard to make sense of.
August 14th, 2009 at 5:24 pm
From SCF 25/08/2008:
Where does it start to be called fraud?
August 14th, 2009 at 6:00 pm
PeterR
I dont think we are allowed to use the F’ word
August 14th, 2009 at 7:04 pm
http://www.odt.co.nz/news/business/63294/scf-bonds-fall-exceptional-trading-volumes
the past is hard to hide from,
South Canterbury last updated the markets 11 months ago after the government asked finance companies to publicly report their circumstances.
Mr McIntyre said while some bond holders were “taking advantage of the increased volume” by selling, others were looking to market regulator the New Zealand Stock Exchange for a “please explain” to SCF on the increased bond-trading volume and inter-party loans issues.
Mr McIntyre said, “For investors, it would be a good time for another report from South Canterbury.”
some of their top grade investments
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10572735
more
http://www.odt.co.nz/news/business/45761/75m-now-sought-developers
and more
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10559839
SAFETY NET
Finance companies accepted into the retail deposit guarantee scheme and the size of their loan books.
Allied Nationwide – $158m
Asset Finance – $20m
Avanti – $33m
Broadlands – $32m
Finance Direct – $5m
Fisher & Paykel – $361m
MARAC – $1303m
Medical Securities – $198m
Mutual Credit – $17m
Mutual – $9m
NZF Money – $68m
Oxford – $52m
PGG Wrightson – $505m
Priority – $4m
Savings & Loans – $3m
South Canterbury – $1379m
UDC – $1966m
August 14th, 2009 at 8:19 pm
Andrewj.
Your ODT link reminds us of the good old days. At the end of June a story in that SCF bonds had dropped 8 cents and were then only worth 92 cents. Today you could buy them for 81 cents.
August 14th, 2009 at 8:25 pm
more pain in private equity,Unbelievable.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10590636
August 14th, 2009 at 8:50 pm
i thought he was genius
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10530495
what is he really worth ?
August 17th, 2009 at 8:07 am
Chris Lee is obviously starting to get worried:
http://www.stuff.co.nz/timaru-herald/business/2758195/SCF-not-another-Hanover-Investor
‘The worst case for South Canterbury Finance is that millionaire shareholder Allan Hubbard winds up the company before the expiry of the government guarantee to protect investors, Kapiti Coast finance industry commentator Chris Lee says.
Lee, a sharebroker with many clients invested in SCF …’
I hope the government learns from this the harm/distortion they have made in the market with the deposit guarantee scheme. As Lee suggests, this would be the most logical course for SCF, well, possibly, and it forces the taxpayer to pick up the tab.
August 17th, 2009 at 8:37 am
maybe Chris Lee has a run on funds as his clients rush for the door at the same time.
I see PGC have a wish as well
http://www.stuff.co.nz/business/market-data/2758197/Pyne-Gould-tipped-to-raise-160m