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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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Bernard Hickey details the key news overnight in 90 seconds at 9am in association with BNZ, including news that South Canterbury Finance has announced losses of NZ$229 million on loan provisions and asset writedowns, forcing its owner Allan Hubbard to recapitalise the Timaru based finance company. See more detail here.

Hubbard will inject Helicopters Ltd and Scales Corp into South Canterbury in exchange for new South Canterbury shares. South Canterbury now needs to retain its BB credit rating if it wants to remain alive beyond the end of the current government guarantee in October. South Canterbury owes more than 40,000 investors over NZ$1.5 bln.

Meanwhile, Allied Farmers has reported a NZ$220 million writedown on its assets acquired from Hanover Finance just two months ago. It has uncovered problems with loans and delays with projects. It also found ‘unusual things’ in documents that it has referred to authorities for further investigation. See more detail here.

Standard and Poor’s has also given Allied Nationwide Finance a BB minus credit rating, which is less than required to retain its deposit guarantee. Allied hopes to win a one notch upgrade later in the year.

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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Timaru-based South Canterbury Finance has announced it has paid off its United States Private Placement facility a month early.

This gets it out from some unfavourable terms, imposed after it breached its bond conditions.

It is also making an early payment of the last installment of the refinancing fee agreed last year with the USPP note-holders.

The company says “it is continuing to enjoy the net inflow of funds that gathered momentum in January and has extended through February”.

A good current liquidity position has enabled it to settle up with its disgruntled US bond-holders, it said.

Here are the key figures from the statement they issued today:

The final payment of $US17.7 million ($NZ24.3 million) being made today comprises the February payment of $US7.5 million, the final payment of $US10 million due on 31 March 2010, and accrued interest.

They also said they will issue their half-year financials early next week which will include a report on the Company’s progress regarding strengthening of its capital structure.

Timaru-based South Canterbury Finance has released an updated investment statement following an announcement to the stock market last week in which it foreshadowed a loss in the half year to December, and said it would have to restate its financial statements for the year ended June 30, 2009.

Included in the memorandum of amendments to the investment statement was confirmation Group Credit Manager Peter Bosworth resigned on December 3, following CEO Lachie McLeod’s resignation in late November. It has already been reported that Chief Financial Officer Graeme Brown resigned on December 18, although had signaled his intention to resign several months earlier.

The full memorandum of amendments and new investment statement are reproduced below. We welcome your views and insight on the documents:

South Canterbury also commented further on its relationship with South Island Farm Holdings and the restating of its June financial statements:

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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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