S&P slashes SCF 5 notches to CC with negative outlook; SCF says on track for August 31 recapitalisation news

Standard and Poor's has slashed South Canterbury Finance's credit rating by 5 notches to CC and has warned the Timaru-based finance company faces a default within 10 days because its cash balances have substantially diminished in recent weeks.

Loan repayment delays, a weakening of reinvestment rates and new funds inflows meant South Canterbury Finance was likely to seek additional cash.

However the troubled finance company said it remained on track to announce a recapitalisation by August 31.

South Canterbury withdrew its prospectus from its website this afternoon to amend it with the credit rating change.

While its prospectus is withdrawn it cannot raise fresh money.

(Updated with detail from S&P statement, SCF Sandy Maier's comments)

'August 31 is D-Day'

SCF Chief Executive Sandy Maier said the company was making good progress on a recapitalisation by August 31, which is necessary to meet the requirements of a waiver of a condition in its trust deed.

“This will be of far more significance for all stakeholders and we would anticipate that Standard & Poor’s will want to undertake a review of the Company’s credit rating soon after," Maier said in a statement.

“There is confidence amongst all parties involved in the recapitalisation process that a favourable outcome can be achieved and that, following the completion of that process South Canterbury Finance can continue to operate as an active supporter of small and medium business enterprises," he said.

"In the meantime, South Canterbury Finance is comfortable with its liquidity position and continues to meet all obligations as they fall due.”

SCF has a government guarantee that has been extended to the end of next year.

'Recapitalisation may not be enough'

Meanwhile, Standard and Poor's suggested even a recapitalisation may not be enough to save South Canterbury.

"The weaker-than-expected cash and liquidity position and the lack of progress in recapitalization efforts--as the Aug. 31, 2010, covenant breach waiver deadline approaches--has compromised SCF's business viability without the successful progression of recapitalization plans over the next few weeks," Standard and Poor's said.

"Even if recapitalization plans are progressed, we understand that SCF will also require trustee approval and support to progress and execute recapitalization plans after Aug. 31, 2010, while it is still in breach of trust deed covenants," it said.

"While the company is pursuing a range of recapitalization options, benefits from these initiatives would only be recognized in the company’s ratings once they were sufficiently progressed and a comprehensive assessment was done."

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. Standard and Poor's downgraded SCF to B minus on June 22. See article here for more detail.

'D for Default possible'

"The rating will be lowered to 'D' if SCF does not meet any of its repayment obligations in full and on time. The 'CC/C' ratings recognize that there is a strong possibility that SCF could default on its obligations within six months. The most likely scenario for default for SCF is an inability to progress recapitalization plans before the expiry of its trust deed waiver on Aug. 31, 2010," Standard and Poor's said.

"We may stabilize SCF's rating and review the CreditWatch if the company successfully executes the recapitalization of its operations and receives the necessary support from all stakeholders implicated in any such recapitalization. This would help remedy SCF's trust deed breach and help strengthen the company's current weak liquidity position."