S&P takes comfort from Hubbard's backing for South Canterbury Finance

Thursday 2nd July 2009

South Canterbury Finance’s BBB- credit rating partly reflects the tacit support and resources of founder Allan Hubbard, according to a Standard & Poor’s analyst who says the ratings agency has noticed the spike in the company’s 2012 bond yield.

“On the positive side you have Hubbard as being strongly behind the rating,” said S&P analyst Derryl D’Silva. “He’s one source of capital in case there were increased losses in the business. That’s factored into the ratings.”

The yield on the December 2012 bonds, which carry a coupon of 10.43%, reached about 14.3% yesterday and was at 14% today. The company’s 2011 and 2012 bonds fall outside the limits of the government’s deposit guarantee scheme, which has been cited as a reason for the surge in yields and a jump in trading volumes this month.

Still, other longer-dated BBB- corporate debt has avoided the same fate, with MARAC Finance’s 10.5% bonds maturing in July 2013 trading at a yield of 7.8%.

Adding to concern about South Canterbury Finance is its exposure to dairy farming, which is facing reduced returns, and the level of related party transactions, which stood at NZ$117 million at Dec. 31, having almost doubled from six months earlier.

According to the notes to the firm’s first-half accounts, the loans were typically “at rates not less than the company’s cost of funds” with none written off or forgiven.

The jump in yields “isn’t something in itself that triggers a rating change or review,” D’Silva said. ”The main risk for the rating is primarily across credit losses and on the back of some exposures to commercial property and some exposure to rural.”

Some investors are predicting the government will ease in the end of the guarantee scheme from its official Oct. 12, 2010, finish to prevent disorderly markets. Moves could include stepping up the cost of the guarantee over time to wean borrowers off.

“Based on my gut feel they have to extend that guarantee in some form,” said Andrew Michl, who helps manage $4 billion worth of fixed interest and cash at ING New Zealand.

ING has “a small amount of exposure” to South Canterbury’s bonds, Michl said. The related party transactions “haven’t disadvantaged debenture holders.”

Still, it makes sense for the BBB rated finance companies like MARAC and South Canterbury to become more bank like, he said. That would mean fewer related party transactions and an end to lender such as the arrangement with PGG Wrightson, where South Canterbury lent debt that’s convertible to shares.

“Would you see ANZ or Westpac doing that? The answer is no,” Michl said.

(BusinessWire)

Businesswire.co.nz

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