by Jenny Ruth
Owned by the listed-NZF Group, NZF Money's rating could be downgraded further to "D," S&P says. S&P had previously rated the company "B."
"NZF's liquidity position has weakened, largely as a result of a material rise in past-due loans, compounded by some volatility in NZF's debenture reinvestment experience," S&P analyst Nico De Lange says.
Although NZF Money can meet its liquidity needs over the next few months from cashflows generated from the repayment of a number of past due loans, S&P "believes NZF's liquidity position is delicately placed," he says
"In our view, the company could run short of cash if loan repayments are not progressed as anticipated, notwithstanding that forecast loan repayments over this period are on loans where there is an unconditional sale contract in place and NZF's confidence around prospects that loans will be settled," De Lange said.
There's a one-in-two likelihood NZF's rating will be lowered again within the next three months. "Evidence of success of settlement of past due loans in the next two months could help stabilise ratings at the current level." But delays in scheduled loan repayments could lead to a downgrade.
S&P says liquidity pressure could potentially remain high through calendar 2011 as material levels of debenture stock progressively mature.
NZF's ability to contend with weak levels of debenture reinvestment will rely heavily on its ongoing success in resolving its large portfolio of past due loans "in a property market that is, in our view, under pressure."
NZF's credit profile also reflects "uncertainty around its ongoing business viability, given the strong headwinds in the commercial property market, challenges around funding and liquidity and the company's weak profitability," S&P says.
"These pressures could, in our view, contribute to a weakening of potential further shareholder or investor support"
Chief executive Mark Thornton says the downgrade wasn't entirely unexpected. Chairman Craig Alexander says the increase in past due loans was a direct result of NZF's decision to allow a number of loans to expire at the end of loan facility agreements in order to keep its recovery options open, improve its renegotiation ability and to control the sale and recovery process where necessary.
Unconditional sales contracts due to settle in the next two months will result in the company "sitting on significant cash reserves."
NZF continues to comply with all its trust deed covenants and ratios and its reinvestment rate in February was 41.7% compared with the 12-month average of 35.3% and an average of 56.4% since NZF's government guarantee expired on October 12 last year.
Earlier this week, Thornton said discussions with a potential business partner are continuing but the Christchurch earthquake's impact on NZF's market, predominantly in the Auckland region, has yet to be understood.
NZF has been working to attract much-needed fresh equity since early last year.
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