Standard & Poor's has downgraded its credit rating on GFNZ Group, which trades as Geneva Finance, to CC with a negative outlook from CCC-. The new rating indicates a company is "currently highly vulnerable."
S&P said the downgrade reflected "heightened concerns" GFNZ could default in the next few months if it's unsuccessful in securing new additional external funding, with the possibility of default extending through to March 2013 if receipt of money from planned funding initiatives is delayed.
On August 14 GFNZ said a four-for-one rights issue, worth NZ$1.4 million, had been deferred to at least October. S&P said this adds to "heightened sensitivity" around GFNZ's ability to meet debt obligations due in September.
"Also deferred are other funding initiatives that include the issuance of new debentures (GFNZ had no debenture prospectus on issue since June 2011)," S&P credit analyst Harry Hu said.
"Although debenture funding secured in early months was only anticipated to be small amounts, delay on this more sustainable source of funding further hampers our view of GFNZ's ability to accumulate sufficient funds to meet future repayment needs and support its business prospects," Hu added.
In June last year the Financial Markets Authority stopped GFNZ from borrowing money from the public after the company breached a loan agreement with its bank, Bank of Scotland International (BOSI), meaning the bank could've demanded repayment . However, GFNZ's prospectus expired on June 30 last year, as did the FMA's interim order preventing the company from raising money from the public.
GFNZ has undergone a series of capital reconstructions since its subordinated noteholders backed a moratorium in 2007 - as opposed to winding the company down or appointing a receiver - that ran from November 2007 till April 30, 2008. See more on the company's background here.
Meanwhile, S&P said GFNZ prepaid half its next scheduled repayment on August 17 with repayment of the other half amounting to NZ$1.21 million to debenture holders and NZ $1.25 million to BOSI.
"GFNZ has to meet NZ$2.4 million in debenture repayments and a NZ$ 2.5 million bank facility reduction every six months to March 2014. Consequently, both the debenture-holder repayment and bank-facility reduction will double until these debts are fully satisfied by March 2015," S&P said.
"This liquidity risk could be partially mitigated if GFNZ was successful in securing new funding. Liquidity pressure could also mitigate liquidity pressures by cutting back new lending; however, we understand this lever would only be used as last resort, and exercised sufficiently prior to the repayment date to accumulate sufficient funds. Following this, GFNZ would need to meet another NZ$4.9 million scheduled repayment in March 2013. A mitigating factor is GFNZ's debtor receipts, which is expected to average NZ$2.1 million per month, plus cutbacks on new lending, which is to be used as last resort."
Hu said the negative outlook on the new rating reflects GFNZ's ongoing funding and liquidity challenges in meeting its scheduled debt repayments, including enduring delays and deferral of new funding sources that increases the risk of default over the next six months.
"We believe that GFNZ would default on its credit if it failed to secure new external funding as planned through August and September 2012. Although there is some prospect that GFNZ will secure additional funding to support its September 2012 repayment obligations, this success would not itself support any upward revision of the finance company's rating from the 'CC' level," said Hu.
S&P's only ratings below CC are C, indicating a bankruptcy petition has been filed or similar action taken but payments of financial commitments are continuing, and D which indicates payment default on financial commitments.
Annual loss narrowed
For the year to March 31 GFNZ reported a loss of NZ$1.6 million after tax versus an NZ$8.6 million loss the previous year. It had finance receivables of NZ$40.9 million, down NZ$8 million year-on-year. As of March 31, GFNZ had total assets of NZ$53 million including cash and cash equivalents of NZ$1.4 million. It had total liabilities of NZ$42.6 million including a NZ$20 million BOSI term loan facility and outstanding debentures of NZ$19.78 million. See GFNZ's full annual results announcement here.
In March GFNZ placed about 44 million new ordinary shares with financial services firm Federal Pacific Group, which is now a 19.99% shareholder, raising NZ$1.2 million of new capital. Of this deal GFNZ said: "This vote of confidence by Fedpac represents a significant milestone as the Group pursues funding opportunities which include: (a) Funding through a professional investor structure via which FedPac have committed to provide $3.0m of funding. (b) The reactivation of the group’s prospectus and (c) The pursuit of alternative banking lines to replace the BOSI facility which is scheduled to be repaid in full by 31st March 2015."
The company also said it was committed to the consumer finance and insurance market - it has a wholly owned insurance company in Quest Insurance Group - with a primary focus on the automotive sector.
"Over the last four years there has been considerable rationalisation, and increasing barriers to enter into this sector. As the economy normalises and comes out of recession there will be an opportunity to expand this business. Obtaining ongoing sustainable funding is key to capitalising on this opportunity," GFNZ said.