Standard & Poor’s has cut its long-term credit rating on the Tony Radisich owned Broadlands Finance by two notches citing the consumer lender's weak liquidity position, vulnerable funding profile, and high-risk loan portfolio.
S&P ratings analyst Peter Sikora said Broadlands had required regular and ongoing liquidity support over the past year through cash debenture investment injections from sole shareholder Radisich to repay external customer debenture investments both before and after its coverage by the Crown retail deposit guarantee scheme ended on October 12.
S&P cut its already speculative, or "junk", grade credit rating from BB- to B with the outlook remaining negative.
Sikora said Broadlands had progressively cut the size of its balance sheet from almost NZ$40 million in 2008 to about NZ$34 million at September 20 this year in a reflection of the difficult operating environment. Favorable features of Broadlands' credit profile included its good, albeit decreasing, interest margins and its adequate capital-adequacy ratio, he added.
"These factors provide some capacity for the company to absorb higher credit losses," said Sikora. "The outlook reflects our uncertainty around Broadlands' ongoing ability to manage its liquidity and funding position, and the recent change in its business focus toward commercial lending, which in our view will increase the concentration of its credit-risk profile."
"A revision of the outlook to stable would be supported if Broadlands could reestablish the ability to fund more of its lending via external debenture deposits, or via other sources that reduce reliance on its shareholder. We would also need to see balance-sheet or committed back-up external liquidity boosted from current modest levels."
Although wealthy car dealer Radisich had demonstrated strong liquidity and funding support to date and was believed to have capacity to provide more support if needed, Sikora said S&P felt his support was vulnerable to Broadlands being able to generate sufficient returns and value to ensure longer term commitment.
“In our view, Broadlands' credit losses have been fairly well managed to date--but its credit profile is moderated by a high-risk loan-receivables portfolio that exhibits a material level of arrears and some single-customer concentration,” Sikora added.
Broadlands' latest prospectus outlines that Radisich will not withdraw support from Broadlands within the 12 months from 20 August 2010, and that he will use his best endeavours in giving Broadlands the management and financial support it may require to enable it to pay its creditors as they fall due, in so far as such payments cannot be funded from Broadlands’ own resources, within the year from August 20.
Broadlands chief executive Rudi Kats told interest.co.nz in September the 12 month commitment from Radisich was for auditor BDO’s purposes, as a guarantee the firm can make bill payments as a going concern over the next year.
“The good man’s got somewhere around $NZ25 million to NZ$30 million of his own money invested in here,” Kats said. “So that’d be a good carrot, I would imagine, for him to not withdraw his support.”
As of August 31, 60% of Broadlands' loans were in default, up from 48% a year earlier.
Kats also told interest.co.nz that Broadlands had turned down a NZ$100 million cheque from Fortress Credit Corporation in 2007 and in a Double Shot interview in October said the company was hoping to secure a slice of the NZ$1.6 billion Crown guarantee payout to investors in South Canterbury Finance.