S&P picks more flops in finance

Andrew Janes, Dominion Post, 15 August 2006

 

Following completion of a survey of the top 20 New Zealand finance companies, credit ratings agency Standard and Poor's (S&P) have said that five or more companies in the non-bank finance sector are likely to fail in the next year.

S&P said that, with the exception of a handful of larger, more seasoned finance companies, the general quality of the non-bank finance sector is focused towards the lower end of the credit spectrum.

Credit analyst Craig Bennett identified the following three factors that made finance companies vulnerable:

• lack of liquidity;
  
  
• high exposure to one sector (for example, the used car market); and
  
  
• low level shareholder equity.

Bennett said that "the key thing is the covenants that are built into the debenture stock" and noted that the three finance companies who have recently failed were all in breach of their covenants.

S&P considers that there is a lack of transparency in the finance sector and that it is difficult for investors to assess how risk relates to returns. To combat this, S&P suggests improved disclosure and the establishment of an appropriate risk benchmark.

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