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South Canterbury rating cut to CC

[UPDATED with S&P release] Standard & Poor's has lowered South Canterbury's rating to CC and put it on negative creditwatch citing a material weakening of the company's liquidity and cash position. SCF though says it is making good progress with its recapitalisation.

Friday, August 20th 2010, 5:45PM

South Canterbury Finance says that Standard & Poor's has revised the Company's long term credit rating to CC, maintained the short term rating at C and the outlook for both the long and short term credit rating as Negative.

South Canterbury Finance Chief Executive Officer Sandy Maier says good progress is now being made on the recapitalisation of the business with the target of making an announcement on 31 August 2010.

"This will be of far more significance for all stakeholders and we would anticipate that Standard & Poor's will want to undertake a review of the Company's credit rating soon after."

"There is confidence amongst all parties involved in the recapitalisation process that a favourable outcome can be achieved and that, following the completion of that process South Canterbury Finance can continue to operate as an active supporter of small and medium business enterprises."

"In the meantime, South Canterbury Finance is comfortable with its liquidity position and continues to meet all obligations as they fall due."

South Canterbury Finance  continues to enjoy the Crown's extended retail deposit guarantee scheme which remains in place through to 31 December 2011.

"Nothing has, or will change, to alter the protection that eligible investors enjoy under that scheme," Mr Maier says.

As a consequence of the change in credit rating, a memorandum amending the Company's current prospectus will be registered as soon as possible.

What S&P says

Standard & Poor's Ratings Services said today that it has lowered its long-term issuer credit rating on New Zealand finance company, South Canterbury Finance Ltd. (SCF) to 'CC' from 'B-'. The short-term issuer credit rating has been affirmed at ‘C'. At the same time, the issuer credit ratings remain on CreditWatch Negative where they were placed on June 21, 2010.

"The rating action reflects a material weakening of SCF's liquidity and cash position beyond what we anticipated when we lowered the issuer credit ratings to 'B-/C' and placed the ratings on CreditWatch Negative on June 21, 2010," Standard & Poor's credit analyst Peter Sikora said. "SCF's substantially diminished cash balance--which is now at a level that in our view may see the company seek additional liquidity support--reflects a combination of loan repayment delays and weaker-than-anticipated reinvestment experience and new debenture inflows. This rating action is despite SCF having some success in managing forward maturities over the past few months."

We noted on June 21, 2010, that the rating could be lowered if the likelihood of success in recapitalization efforts was materially delayed or compromised or if new credit concerns emerged. The weaker-than-expected cash and liquidity position and the lack of progress in recapitalization efforts--as the Aug. 31, 2010, covenant breach waiver deadline approaches--has compromised SCF's business viability without the successful progression of recapitalization plans over the next few weeks. Even if recapitalization plans are progressed, we understand that SCF will also require trustee approval and support to progress and execute recapitalization plans after Aug. 31, 2010, while it is still in breach of trust deed covenants. While the company is pursuing a range of recapitalization options, benefits from these initiatives would only be recognized in the company's ratings once they were sufficiently progressed and a comprehensive assessment was done.

A CreditWatch Negative listing by Standard & Poor's implies a one-in-two likelihood that the rating may be lowered within the next three months. The rating will be lowered to 'D' if SCF does not meet any of its repayment obligations in full and on time. The 'CC/C' ratings recognize that there is a strong possibility that SCF could default on its obligations within six months. The most likely scenario for default for SCF is an inability to progress recapitalization plans before the expiry of its trust deed waiver on Aug. 31, 2010.

We may stabilize SCF's rating and review the CreditWatch if the company successfully executes the recapitalization of its operations and receives the necessary support from all stakeholders implicated in any such recapitalization. This would help remedy SCF's trust deed breach and help strengthen the company's current weak liquidity position.


« Investors continue to shun Allied over trust deed breachAllied Nationwide crumbles into receivers' arms »

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