S&P denies Cullen election-year ratings bonus

By Nick Stride

Friday 7th June 2002

Finance Minister Michael Cullen got a one-on-one interview this week with the man who rates his government's debt. But if he was hoping for an election-year rating boost he would have been disappointed.

"A near-term upgrade is unlikely," Standard & Poor's associate director for Asia-Pacific sovereign ratings, Ping Chew, told S&P's financial markets conference in Auckland on Wednesday.

New Zealand stands with Australia at the top of the Asia-Pacific country- ratings league with a AAA rating for local currency borrowing, the highest, and AA plus for foreign currency debt.

But Mr Chew said New Zealand had "a weak liquidity profile," with the main concern high private-sector debt.

While this was not a direct contingent liability for the government, it had risen to 125% of gross domestic product, from 92% a year ago. It now stood at three times the median for AA rated countries.

Mr Chew said the rise of the value of the New Zealand dollar against the US dollar was not of immediate concern.

The credit rating agency had been "a little concerned" about the impact the dollar's fall post-1997 might have had on debt servicing ability but knew now that it had had little effect and had boosted exports.

"If the US dollar continues to decline and the New Zealand dollar appreciates quickly there could be some impact on exports and that could be a drag on the economy," he said.

"However, if you look at the trade-weighted index value for the New Zealand and Australian dollars it's not a concern yet as it's really largely a phenomenon of the US dollar's decline, not a New Zealand or Australian dollar appreciation."

S&P released its annual Australia and New Zealand CreditStats this week, rating 341 companies, 22 from New Zealand and the entire S&P/ASX 200 index.

S&P director of corporate and infrastructure finance ratings Jeanette Ward said experience showed New Zealand companies generally couldn't sell debt securities rated at less than BBB.

Air New Zealand's rating remained "vulnerable/weak" but the outlook was positive.

In a year or so, Virgin Blue could be a threat, as Qantas was now. But the government's shareholding underwrote the rating, she said.

The outlook for Tranz Rail was mixed as the markets waited for the benefits of restructuring to show through.

Fonterra's growth strategy could become a rating factor as cashflows from businesses that didn't enjoy the protection of the co-operative structure increased.

Two issues for company ratings were share buybacks and dividend policy, she said. Buybacks weren't good for bondholders and some companies gave away all their flexibility to respond to tough times by paying out maximum dividends when times were good.

Chris Dalton, managing director for Australia and New Zealand, said S&P had completed a worldwide survey of investors following the accounting scandals surrounding the collapse of Enron and other companies.

As a result S&P would change its focus, paying more attention to equity prices as indicators of companies' financial health.

But investors had indicated they didn't want greater volatility in companies' ratings.

While New Zealand corporates came through 2001 with a clean slate Australia had a record year for defaults with four issuers notching up more than $US800 million ($1.7 billion) of bad debts.

This year the failure of Pasminco added a further $US2.8 billion.

Comments from our readers

No comments yet