Choosing term deposit risk (update 1)
30th Dec 09, 10:41am
Some finance companies are gearing up to offer the choice of either government-guaranteed term deposits, or unguaranteed versions. (Updated with PGGWF's latest interest rate structure.) Marac is reported to be looking at it, and PGGWrightson Finance has announced it is providing for both options. South Canterbury Finance may also be considering such an offer. However, the 'benefit' for not having the protection at this stage appears to be only the 1% guarantee fee - instead of paying it to the Government, it will be offered to investors instead. But the risks to investors of being unguaranteed may not be fully priced with only a 1% premium. Furthermore, this 'benefit' may not always work to the investor's advantage. PGG Wrightson Finance's new set of guaranteed and 'excluded' rates add a 1% premium for deposits less than one year, but they have deducted a 1% from their current offer for terms of 1 year and more. Their previous December 14, 2009 rate offer was all guaranteed until October 10, 2010, even for deposits with maturities beyond that point. With their new offer effective January 1, 2010, term deposits of 1 year and more get the same rates as previously offered, along with the added risk they are not guaranteed. If you want the guarantee from PGGWF, you have to take 1% less. According to a report by Martha Steemen in The Press, "The finance company sector is speculating that the big banks will choose to opt out of the guarantee scheme when it expires in October 2010 and will not seek to be covered by the extension to the guarantee to December 2011." All term deposit offers are here and here, and are updated as soon as new rates are announced. Our lists also detail both the guarantee status, and the credit ratings that apply. At this time, Marac has a sub investment grade credit rating of BB+, South Canterbury Finance is also rated BB+, while PGG Wrightson Finance is as yet unrated. Credit ratings need to be BBB+ or higher to be considered "investment grade". All finance companies will need to have a credit rating by March 1, 2010 under the new RBNZ prudential regulations (unless their liabilities are less than $20 mil.).