Marac faces long road to bank status

Marac's aspirations of transforming into a bank have become difficult following its downgrade by Standard & Poor's last week, according to one of the rating agency's analysts.

Thursday, August 20th 2009, 5:11AM

The company's exposure to a weak property development sector was the main cause for the downgrade from investment grade to a junk bond status of BB-.

It's currently sitting on a negative outlook, giving the company a one-in-three chance of being downgraded another notch in the next three months. Unless S&P is convinced the measures Marac and its parent, Pyne Gould, are undertaking will improve the company's asset quality, it could be a long wait before New Zealand has its first locally-owned listed bank.

"We think it won't be addressed in three, six or 12 months" and could be as long as two years, said credit analyst Derryl D'silva. "The real risk for Marac is the residual exposure (to property developments) still on the balance sheet - they need the flexibility to manage it, and may have to tap into their parent again."

Last month Pyne Gould said it would take around $160 million of impaired loans on development properties off its books as part of a restructure. The changes include the purchase of Equity Partners Asset Management, an asset manager controlled by Pyne Gould director George Kerr.

The parent company will report its annual results next week, and is expected to announce a capital raising to help boost cash flow and ease liquidity concerns in the current economic downturn.

South Canterbury Finance, the second-largest finance company in the country by assets, was downgraded to a BB- at the same time as Marac, but D'silva had fewer concerns about the Timaru-based company due to the progress it appears to be making.

If the underwriting agreement by cornerstone shareholder Alan Hubbard comes through, he expects the company to come off its negative outlook. Still, like Marac, any prospect of a return to an investment grade rating is not on S&P's radar in the near-term.

Tags: Finance Companies Ratings