SCF expects to keep investment rating

South Canterbury Finance is expecting to retain its investment grade rating, with shareholder Allan Hubbard to complete an underwrite guarantee shortly.

South Canterbury chief executive Lachie McLeod made the statement today, following an announcement yesterday by ratings agency Standard & Poor's that it was placing the company's 'BBB-/A-3' rating on negative watch.

That means there is a one-in-two chance of a downgrade in the next three months.

Mr McLeod said today S&P had acknowledged the commitment of Mr Hubbard to the group and the leading role the group played in supporting the New Zealand economy.

"Being placed on negative credit watch is a precautionary move in the current recessionary climate and was not unexpected following the decision to quarantine and provide for at risk and non-performing assets in the year to June 30, 2009," Mr McLeod said.

"The underwrite guarantee to be shortly completed by our shareholder will reinforce the strength of the group and should see its investment grade rating retained."

South Canterbury's intention to introduce new equity within the next six months, as announced last week, should provide further assurance for investors, and S&P, that the group remains in sound financial health, Mr McLeod said.

Yesterday S&P credit analyst Derryl D'silva said S&P's CreditWatch action reflected its view that there was now an increased risk some non-performing assets could translate into lending losses ultimately.

South Canterbury's decision to shift from cash to higher risk and high-yield investments had increased its risk profile, weakened its liquidity, and increased its related-party loans, Mr D'silva said.

On the positive side, the company had a sound business profile and a good geographical spread.

Last Friday, South Canterbury said Mr Hubbard had injected $40 million of new capital into the business and had undertaken to provide further support if needed, to counter the impact of any balance sheet write downs of property loans.

Based on conservative assumptions, a $58m provision (non-cash) would be taken for non-performing investments and doubtful property assets in the financial year to the end of June.

As a result, South Canterbury expected to report a net loss before tax of about $37m for the financial year.

A legal underwrite agreement with Mr Hubbard would stand as security for any further specific loans that could become impaired over the current recession period.

NZPA