Standard & Poor's (S&P) has cut its long-term credit rating on NZF Money by two notches to CCC from B citing a material rise in past due loans and weakened liquidity position leaving the company "delicately placed" in a position where it could potentially "run short of cash."
S&P has also placed NZF Money's ratings on credit watch with negative implications. See S&P's report here.
"The rating action reflects our view that NZF’s liquidity position has weakened, largely as a result of a material rise in past-due loans, compounded by some volatility in NZF’s debenture-reinvestment experience," S&P credit analyst Nico De Lange said.
NZF Money is a subsidiary of NZF Group, which also owns a 50% stake in Mike Pero MortgageHoldings and is chaired by Peter Huljich. NZF Group shares fell 1 cent, or 17%, to 5c today.
NZF Group has a special shareholders meeting scheduled for March 14 as it looks to issue up to 56 million new shares to capital notes holders who don't choose to renew the notes by 5pm on March 10. This comes after the company announced in January that, If capital noteholders holding NZ$20 million worth of notes don't elect to renew, NZF Group will, on the notes' March 15 maturity date, compulsorily redeem the capital notes by issuing new ordinary shares. The capital notes currently pay annual interest of 9.75%. Those who renew, for a five-year term, will receive just 6%.
As at 24 February, NZF Group says the level of renewals from among the 500 capital noteholders was running at 82% meaning it doesn't expect to be issuing many shares.
Although the NZF Money was positioned to meet its liquidity needs over the next few months from cash flows generated from the repayment of a number of past-due loans, De Lange said - in S&P's view - the company was "delicately placed."
"In our view, the company could run short of cash if loan repayments are not progressed as anticipated, notwithstanding that forecast loan repayments over this period are on loans where there is an unconditional sale contract in place and NZF's confidence around prospects that loans will be settled," De Lange said.
S&P credit watch negative, implies a one-in-two likelihood that the rating may be lowered further within the next three months. S&P will continue reviewing NZF’s liquidity profile and cash flow expectations.
De Lange said evidence of success of settlement of past due loans over the next two months could help stabilise NZF Money's ratings at the current level.
"(But) cash flow concentrations in the next few months relating to anticipated loan repayments support the prospect that ratings could potentially move to 'D' upon a delay in scheduled loan repayments over this period."
S&P describes companies with CCC speculative, or junk, ratings as being currently vulnerable and dependent on favourable business, financial and economic conditions to meet their financial commitments. A D rating means a company is defaulting on its financial commitments.
Downgrade 'not unexpected'
NZF Group CEO Mark Thornton said the downgrade from S&P wasn't entirely unexpected, as NZF Money's guarantee under the Crown retail deposit guarantee scheme had ended last October. On top of this, there were concerns about the current economic outlook for New Zealand and "negative bias" towards the New Zealand finance company sector, which was still going through a period of turmoil, said Thornton.
NZF Money said the increase in past due loans was a direct result of its decision to purposely allow a number of loans to expire at the end of loan agreements, in order to keep its recovery options open, improve its ability to renegotiate revised lending terms and conditions, and to control the sale and recovery process where necessary.
The company’s forecast liquidity position was based on a number of unconditional sales contracts in place that are due to settle in the next two months, which would result in the company sitting on significant cash reserves, said NZF Money chairman Craig Alexander.
"As a result, the company anticipated returning to new lending within the next six months on current forecasts. The company also continued to comply with all of its Trust Deed covenants and ratios, including its Capital Adequacy Ratio, Gearing Ratio, Liquidity Requirements and Related Party Exposure Limits," said Alexander.
NZF Money's latest financial statements showed the company had NZ$232.3 million worth of debt at September 30 last year. Of this, NZ$29.7 million was secured debenture stock, almost half the NZ$58.2 million NZF Money had on March 31 last year. It also had NZ$3.5 million of secured subordinated notes, NZ$93.3 million of secured notes and NZ$105.79 million worth of a NZ$225 million Westpac term loan, set to mature on October 18 this year, was drawn down. The Westpac loan is part of a residential mortgage backed securities programme.
Meanwhile, the company had NZ$246.5 million worth of loans and advances to customers outstanding at September 30. Past due loans rose to NZ$17.3 million at September 30 from NZ$11.3 million at March 31.
As of September 30, NZF Money had cash of NZ$2.8 million, down from NZ$12.5 million at March 31. The NZF Group had cash of NZ$4 million down from NZ$15.3 million.
February reinvestment rate just under 42%
Alexander said NZF Money's reinvestment rate had shown "significant improvement" following the expiry of the Crown guarantee, rising to 41.68% last month, compared with a 12 month average of 35.34% and an average of 56.44% following the expiry of the guarantee on October 12.
Meanwhile, directors were confident the unconditional sales contracts in place, and on which deposits have already been paid by buyers, will settle on time meaning S&P's concerns over potential delays in cash flow over the next few months won't occur.
"NZF Money continues to manage its business on a prudent basis and has met all of its payment obligations to investors since it first offered secured deposits in late 1999. NZF Money would like to thank all of its long term loyal investors for their continued support," Alexander added.
(Updates add comments from NZF Money and NZF Group, debt and loan figures for NZF Money).