S&P cautions on refinancing risk as Crown deposit guarantee expires

Credit rating agency Standard & Poor’s is “very concerned” about the volume of debenture rollovers finance companies face just prior to the end of the Crown retail deposit guarantee scheme.

In a Double-shot video interview with interest.co.nz Peter Sikora, S&P’s director of financial institutions ratings for Australia and New Zealand, said S&P analysts were spending a lot of time monitoring the situation.

This includes just over NZ$350 million worth of debenture maturities South Canterbury Finance (SCF) faces in October, when the initial two-year guarantee scheme is due to end, compared to the NZ$100 million worth of maturities the company would face in a typical month. Sikora said SCF was exposed to a "material degree" of refinancing risk especially with that "bucket" of debentures maturing in October.

SCF, which S&P downgraded to B+ last week from BB due to liquidity and refinancing risks, is one of eight companies so far accepted into the extended Crown retail deposit guarantee scheme which runs from October until December 31 2011. The others are Canterbury Building Society, Equitable Mortgages, Fisher & Paykel Finance, Marac Finance, PGG Wrightson Finance, Southern Cross Building Society and Wairarapa Building Society.

Sikora said there was a real distortion in the market at the moment in terms of depositor behaviour and some aspects of liquidity. Issuing non-government guaranteed debentures was very difficult because the likes of SCF were offering rate kickers to attract the money they need to manage their own refinancing risk.

This means investors looking for yield investments can get guaranteed debt at a higher rate to what other companies are paying. Sikora said S&P was currently looking closely at the reinvestment dynamics.

“Clearly at some stage the finance companies will need to start living in a world without the benefit of a government guarantee,” Sikora said.

“There will come a time next year, even for those who have been accepted into the extended guarantee, where we’re going to need to see evidence of then being able to raise non-guaranteed funding. And absent that ability downward rating pressure is certainly not off the table.”

S&P had a negative bias on the finance company sector and this liquidity and refinancing risk was one of the key issues behind that.

But despite the demise of about 40 finance companies over the past four years which has put billions of dollars of investors’ savings at risk, tougher Reserve Bank regulation of the non-bank deposit taking sector and the major banks competing harder for retail deposits as they face higher funding costs themselves, Sikora still sees a future for the finance company sector.

“We’ve got ratings out there in the single B and BB- category in the finance company sector and we’re suggesting with those ratings that they have a viable future,” he said. “If it was a situation where we felt this sector did not have a viable future then the ratings would be significantly lower.”

There were also some companies who had managed to raise un-guaranteed debt and shown some ability to manage through system pressures.

“I think there’ll be further consolidation and some changes to the way the sector looks and runs in the future, but the scenario for this sector to disappear altogether probably in my mind is a little way off the horizon.”

 * This article was first published yesterday in our paid subscriber email for bank executives, regulators and other industry experts. Subscribe here or email bernard.hickey@interest.co.nz

 

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