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UDC gets downgraded on sale news

UDC has had its credit rating down-graded following ANZ's announcement it plans to sell the business to a private Chinese conglomerate, and questions are raised about the future of the finance company.

Thursday, 12 January 2017

S&P Global Ratings has lowered its credit rating on UDC Finance from A- to BBB, and this rating remain on CreditWatch with negative implications, meaning it is more likely to be downgraded in the future than lifted.

The downgrade reflects S&P's opinion that the likelihood of timely support from UDC's ultimate owner, ANZ, has reduced following the announcement of its sale to the privately owned Chinese conglomerate HNA Group, which is not rated.

The sale is scheduled to be completed toward the end of the 2017 calendar year and requires various regulatory approval.

S&P continues to apply a one-notch uplift to its rating on UDC, instead of three as it has done in the past, for likely support from the ANZ group. "This is because, notwithstanding the likely sale of UDC in the short term, we believe that in periods of distress for UDC in the interim (should any arise, which we do not expect), there remains the potential for some limited support from the ANZ group."

ANZ provides UDC with a $1.8 billion credit facility and this is expected to stay in place during the sale period.

"We also understand that ANZ will be engaging with UDC's debenture holders on the replacement of the debenture program."

"Our ratings on UDC remain on CreditWatch with negative implications, reflecting our view that UDC's credit profile remains subject to downward pressures over the next year, if the sale is concluded."

S&P assess the creditworthiness of the HNA Group at B+ and this could constrain UDC's overall creditworthiness.

"We typically do not assign a subsidiary a higher issuer credit rating than our assessment of the GCP because we consider the relatively weaker parent could potentially divert assets from the subsidiary or burden it with liabilities during financial stress, and the subsidiary could have much less debt- and capital-raising flexibility."

S&P says that UDC's credit profile itself may weaken due to the likely change in ownership, notwithstanding intent from HNA Group to "preserve UDC's operations."

"We believe that subsequent to the conclusion of the sale, UDC may face challenges maintaining its franchise in both the debenture funding markets--if it is to remain funded by debentures--and amongst some of its borrowers. It is also unclear if the new parent would maintain UDC's capital levels, which we currently forecast to remain strong.

"We also consider a change in ownership could affect UDC's risk appetite and underwriting practices, which we currently regard as being more conservative than that typically observed amongst New Zealand finance companies.

"Finally, UDC's funding and liquidity profile will likely change as a result of the change in ownership--a profile that currently rests heavily on a combination of debenture funding and the committed credit facility from the ANZ group. In the interim, however, we expect the financial support from ANZ to UDC to be sufficient to meet the finance company's funding and liquidity needs until the sale is concluded."

The CreditWatch with negative implications reflects S&P's expectation that it would further lower its ratings on UDC if the sale is successful.

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