S&P sees strength in Hubbard

Standard & Poor's says it has noticed the spike in South Canterbury Finance's 2012 bonds, which yielded more than 14 per cent this week, though much of the finance company's ratings strength stems from the resources of founder Alan Hubbard.

"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."

South Canterbury'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 per cent bonds maturing in July 2013 trading at a yield of 7.8 per cent.

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 $117 million at year's end, having almost doubled from six months earlier.

According to the notes in 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 finish in October next year, to prevent disorderly markets.

Moves could include stepping up the cost of the guarantee over time to wean borrowers.

"Based on my gut feel they have to extend that guarantee in some form," says 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 says.  The related party transactions "haven't disadvantaged debenture holders".

Still, it makes sense for the BBB-rated finance companies to become more bank-like, he says. That means fewer related party transactions and an end to lending under arrangements such as the one 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 says.

- © Fairfax NZ News