(The following was released by the rating agency)
-- New Zealand finance company GFNZ Group Ltd. (GFNZ) will need to meet NZ$4.9 million in repayment needs at the next scheduled payment date (September 2012).
-- GFNZ recently gained traction on a NZ$6 million receivable finance deal with Federal Pacific Group Ltd. (FedPac), although the deal is not yet legally binding on the investor.
-- Should this new funding not be successful, the risk of defaulting on the next scheduled debt repayments will significantly increase.
-- We are placing the ‘CCC-’ rating on GFNZ on CreditWatch with negative implications. We expect to resolve the CreditWatch placement after the settlement of the receivable finance deal with FedPac, should it be successful.
On June 5, 2012, Standard & Poor’s Ratings Services placed its ‘CCC-’ long-term issuer credit rating on New Zealand finance company GFNZ Group Ltd and GFNZ’s wholly owned insurance subsidiary, Quest Insurance Group Ltd., on CreditWatch with negative implications.
Rationale The CreditWatch action reflects GFNZ’s reliance on the proceeds from a receivable finance deal with Federal Pacific Group Ltd. (FedPac) --a recent shareholder, holding 19.9%--to meet NZ$4.9 million in scheduled repayment in September 2012.
Although this deal recently gained momentum upon the formalization of Prime Asset Trust Ltd. (a vehicle for GFNZ’s receivables to be transferred and held for the benefit of investors), it is not legally binding on FedPac at this stage.
Based on earlier investment documentation and Standard & Poor’s recent discussions with GFNZ management, the intention is to obtain NZ$3 million of new funds in June 2012, and another NZ$3 million in September 2012. These steps reflect GFNZ’s New Zealand Stock Exchange announcement on Feb. 28, 2012, indicating FedPac’s assistance with ongoing financing needs.
In our view, given the proximity of the next scheduled payment date, the timely receipt of invested proceeds is essential to avert possible negative actions on GFNZ’s creditworthiness. Under the receivable finance scheme, interest is capped at 11.25% per annum, and funds will be invested for a maximum 48-month term, with the initial 24 months paying interest only. Invested amounts will be secured by eligible receivables, with a 20% equity buffer provided by GFNZ.
In addition to the receivable finance scheme illustrated above, and among other funding initiatives, GFNZ is at final stages of getting a new debenture prospectus to market. In our view, the amounts invested are likely to be small in the initial months, with the receivable finance deal pending and the next scheduled repayment date drawing near.
However, should new debenture money reach substantial levels and demonstrate stable patterns, there is scope to revisit our rating accordingly in the longer term. Liquidity GFNZ needs to meet scheduled debt repayments each March and September, out to 2015.
The amount of these repayments is significant to GFNZ’s cash flows, with the next repayment of NZ$4.9 million due in September 2012. The receivable finance proceeds of NZ$3 million in June 2012 and another NZ$3 million in September 2012 is, in our view, crucial to meeting these repayment obligations, given the limited cash held and unavailable bank draw-downs. Furthermore, we do not believe the new debenture prospectus will raise sufficient funds to alleviate the liquidity pressure in the short term.
We also believe there is limited opportunity to negotiate other material sources of funding ahead of the next repayment date to sufficiently meet this need. CreditWatch We expect to resolve GFNZ’s CreditWatch placement after the settlement of the receivable finance deal with FedPac, should it be successful in raising the required funds to meet the next scheduled repayment. Alternatively, we could take negative ratings action if the receivable finance deal with FedPac were not successful in raising the necessary funds as planned.
A CreditWatch negative placement indicates that we believe there is a 50% probability of the rating being lowered in the short term. Over the longer term, and conditional on the receivable finance deal be successful, there is scope for an upward revision should new debenture money reach a substantial level and demonstration a sufficient level of stability.