Standard and Poor's cuts Allied Nationwide to B with a negative outlook

Ratings agency Standard & Poor’s has cut the long term credit rating for Allied Nationwide Finance to B from BB minus and put its outlook on CreditWatch with negative implications because of a deterioration in its cash on hand.

Standard and Poor's said Allied Nationwide, which is owned by NZX-listed Allied Farmers and is trying to digest almost NZ$400 million of Hanover Finance loans, was now more exposed to the risk of a cash shortfall if reinvestment rates fell between now and the end of the current Government Deposit Guarantee in October.

Allied Farmers has not yet been granted access to the extended Deposit Guarantee Scheme because it falls below the BB threshold required for entry.

“The ratings actions reflect a material deterioration in ANF’s liquidity position beyond what we previously expected and factored into the ‘BB-’ rating,” Standard & Poor’s credit analyst Peter Sikora said.

The negative watch tag placed on Allied Nationwide's rating means there is a one in two chance of a further downgrade within the next 3 months.

“In our view, this deterioration has increased ANF’s exposure to a cash shortfall from now until October 2010 should reinvestment rates weaken from current already-modest levels or should cash inflows from loan repayments be delayed beyond our current expectations,” Sikora said.

“The rating could be lowered by one or more notches if ANF’s reinvestment experience is not quickly stabilized, or if balance-sheet cash levels are weakened by any material and unanticipated delay in scheduled loan repayments,” he said.

Allied Nationwide has been forced to drastically write down the value of the Hanover loans.

Standard and Poor's said even the expected transfer of cash from the remaining Hanover loans into the Allied Nationwide balance sheet would not allay its concerns about availability of cash in the coming months.

"If Standard & Poor’s credit concerns are much worse than currently envisaged and if, in our opinion, ANF’s financial flexibility and contingent plans to respond to liquidity pressures are limited such that default is possible within six months under realistic scenarios, the rating could be lowered into the ‘CCC’ category," Standard and Poor's said.

Here is the full release below from Standard and Poor's

Ratings Services today lowered its long-term issuer credit rating on New Zealand finance company, Allied Nationwide Finance Ltd. (ANF) to ‘B’ from ‘BB-’. At the same time, the ‘B/B’ issuer credit ratings were placed on CreditWatch with negative implications.

“The ratings actions reflect a material deterioration in ANF’s liquidity position beyond what we previously expected and factored into the ‘BB-’ rating,” Standard & Poor’s credit analyst Peter Sikora said.

“In our view, this deterioration has increased ANF’s exposure to a cash shortfall from now until October 2010 should reinvestment rates weaken from current already-modest levels or should cash inflows from loan repayments be delayed beyond our current expectations.”

A CreditWatch Negative listing by Standard & Poor’s implies a one-in-two likelihood that the rating may be lowered within the next three months.

“The rating could be lowered by one or more notches if ANF’s reinvestment experience is not quickly stabilized, or if balance-sheet cash levels are weakened by any material and unanticipated delay in scheduled loan repayments,” Mr. Sikora said.

Although AFL is still pursuing the recapitalization of ANF through the transfer of loan assets acquired from Hanover Finance Ltd. (Hanover; unrated) and United Finance Ltd. (UFL; unrated) this, in itself, will not provide immediate liquidity support for ANF.

That said, the rating could also come under further downward rating pressure if ANF’s recapitalization were to be materially further delayed.

If Standard & Poor’s credit concerns are much worse than currently envisaged and if, in our opinion, ANF’s financial flexibility and contingent plans to respond to liquidity pressures are limited such that default is possible within six months under realistic scenarios, the rating could be lowered into the ‘CCC’ category.

We expect to resolve the CreditWatch after further discussion with management and further analysis of ANF’s ability to contend with liquidity pressures at the ‘B’ rating level in the current unstable operating environment for finance companies in New Zealand.