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S&P tells South Canterbury how it can improve its rating

Standard & Poor's has set out a range of conditions that South Canterbury Finance need to fulfill to get off its negative Credit Watch status.

Thursday, 6 May 2010

by Paul McBeth

However the ratings agency warns that asset sales alone will not be enough to forestall a downgrade.

S&P confirmed SCF's current status, a BB rating with negative credit watch, which gives the finance company a 50:50 chance of being downgraded over the next three months, and said "SCF's ability to deal with this liquidity and refinancing risk to become clearer by the end of May 2010."

S&P said SCF wouldn't be able to meet its short-term liquidity needs with asset sales alone after the company indicated it would split its business into three units, one of which would house the firm's investments that were flagged for sale. The other units would separately hold SCF's problem loans and its finance operations.

Credit analyst Derryl D'Silva flagged the month of October, when the first government deposit guarantee was set to expire, as a major liquidity threat, with a large chunk of debentures are set to mature.

By the end of May, "we'll be able to observe and assess the company's success in further building balance sheet liquidity and reducing its refinancing requirements leading into October 2010," D'Silva said. "We also believe SCF will continue to pursue other options such as asset sales, and recapitalization to improve its overall financial strength."

S&P said the Timaru-based lender could be taken off creditwatch negative and placed on a negative outlook if it builds its cash balance to $150 million by the end of the month, and makes headway into rolling over the $350 million worth of debentures coming due in October. The rating agency also wants to see signs of healthy reinvestment rates and strong inflows of cash.

D'Silva said the lender had benefited from getting accepted into the government's extended retail deposit guarantee, and a $37.5 million cash injection at the end of this month. Pyne Gould investor George Kerr's Torchlight Fund pumped in $22 million via Allan Hubbard's Southbury Corporation, and had the option of boosting that to $37.5 million.

SCF is seeking to raise as much as $50 million through deposits that aren't covered by the government's guarantee. For those deposits covered by the extended government scheme, it's offering 8% annual interest for 12-month to 20-month terms, and expects to roll-over about half of its existing debentures as they come due.



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