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Standard and Poor’s has downgraded South Canterbury Finance’s credit rating from BB plus to BB and has warned of the potential for a further downgrade within 3 months that would stop the Timaru-based finance company’s from being included in the government’s extended deposit guarantee scheme from October. (Name corrected in fourth paragraph)

South Canterbury’s credit rating is now at the bare minimum of BB needed for inclusion in the scheme, which would extend the guarantee until the end of 2011. The BB rating is on CreditWatch with negative implications, which means there is a risk of a further downgrade within 3 months.

The downgrade follows South Canterbury Finance’s announcement of NZ$229 million of loan losses and writedowns for the six months to December 31 and the subsequent injection of capital by its founder Allan Hubbard. Standard and Poor’s said the downgrade would have been bigger without the capital injection.

Standard and Poor’s analyst Derryl D’silva told interest.co.nz that the reaction of South Canterbury’s retail debenture holders would be a key factor in the ratings agency’s considerations in the coming three months, as would the ability of South Canterbury Standard and Poor’s to raise capital from other investors.

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By Bernard Hickey

Renowned South Island investor and financier Allan Hubbard has moved to bolster the balance sheet of South Canterbury Finance by injecting his 100% ownership of Helicopters (NZ) and his 64% stake in Scales Corp into South Canterbury in exchange for new South Canterbury shares worth NZ$152.5 million and NZ$10 million in cash.

“We’ve had a shareholder who instead of walking away has said: ‘Yes, I’m going to massively support this company’,” South Canterbury and Southbury Holdings Chief Executive Sandy Maier told interest.co.nz.

“He has increased the equity and his investment in South Canterbury in a very large way,” Maier said.

The injection of equity came as South Canterbury Finance released its half year results showing a NZ$154.9 million net loss after it booked NZ$229 million of losses on asset realisations and further impairments on loans.

The result and the deal announced today also breached two covenants of South Canterbury’s Trust Deed, but South Canterbury said its trustee Trustees Executors had granted a waiver from compliance with these covenants. They related to having no greater than 35% of shareholder funds being to a single party (Helicopters) and the level of equity investments being greater than 100% of shareholder funds.

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Standard and Poor’s has assigned a BB long term credit rating to recently restructured rural finance company PGG Wrightson Finance, which will be enough for it to be part of the government’s extended deposit guarantee scheme.

The deposit guarantee extension from October this year until the end of 2011 is only available to those non-bank deposit takers with a BB rating or better. Finance companies must have a credit rating by March 1 under the Reserve Bank’s new regulatory regime.

PGG Wrightson said it would look to increase its rating over time and was pleased with a 78% average reinvestment rate from depositers, which had increased to a high of 90% through January. PGG Wrightson offers both guaranteed and non-guaranteed deposits.
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Standard and Poor’s has issued a B+ long term credit rating to Napier’s Manchester Unity Credit Union (MUCU), which is insufficient for it to be part of the government’s extended deposit guarantee scheme.

The deposit guarantee extension from October this year until the end of 2011 is only available to those non-bank deposit takers with a BB rating or better. Finance companies must have a credit rating by March 1 under the Reserve Bank’s new regulatory regime.

Here is the full statement below from Standard and Poor’s.
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New South Canterbury Finance CEO Sandy Maier has completed a review of the Timaru based financier and announced to the NZX an expected loss for the six months to December 31, 2009, along with plans for Forsyth Barr to raise new funding. South Canterbury is also likely to restate its results for the year to June 30, 2009, and had applied for the extended government retail deposit guarantee, Maier said.

(Update 1 includes full statement.)

Here is the full release from South Canterbury:

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Southbury Group and South Canterbury Finance owner Allan Hubbard has appointed Sandy Maier, who worked as the statutory manager for the DFC in the early 1990s, as CEO for a year, replacing interim CEO Timaru accountant Nigel Gormack.

The Press reported that Maier was working on a ‘reasonably urgent’ turnaround of the Timaru-based finance company, which needs a capital injection and asset sales to bolster its balance sheet before the end of the current government guarantee in October 2010. The Press also reported that South Canterbury was close to raising NZ$25 million through a convertible note issue.

Changes at SCF have been slow and its recapitalisation plans are still unclear. Two months ago it received emergency funding of $75 million from Pyne Gould Corporation’s Torchlight Credit Fund, colloquially described as a vulture fund which lends to troubled entities.

SCF used that to repay US$50m to American investors and still has to pay them another US$50m in four instalments by the end of March. US$12.5m is due at the end of this week. Maier said there was a capital raising closing at the end of the week to raise $25 million through the issue of convertible notes to habitual investors. This is less than indicated in a debenture prospectus released in October which said $40m to $75m would be raised.

Here is the full South Canterbury release to the NZX on Tuesday.

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