Finance company default rates suggested

Standard and Poor's suspects many finance companies ratings are in a range where defaults are likely.

Tuesday, November 22nd 2005, 6:39AM

International ratings agency Standard and Poor’s has again sounded a warning about the vulnerability of finance companies in New Zealand.

S&P would like to see more companies rated so that investors have some transparency over the risks they face. It also says that ratings help investors evaluate the risk return equation.

Currently only six finance companies are rated by S&P (UDC, Toyota Finance, General Motors Acceptance, Primus Financial Services, Pacific Retail, and Geneva Finance).

S&P says that based on public information the finance company sector is composed of a preponderance of BB and B rated category companies.

“The BB and B credit rating categories indicate that we expect some level of defaults during the full course of an economic cycle.

"Based on Standard & Poor’s default history, a BBB rated company has a 2.99% likelihood of defaulting over a five-year period. A BB or B rated company has a much higher likelihood (11.25% and 25.40%, respectively) of failing to make payments over the same five-year period.”

S&P says that due to the lack of public ratings investors have limited means of differentiating between the credit quality of, say, a high BB or a low BBB company, versus a low B or even a lower rated company. It says that credit quality, or the ability to make timely payments on interest due on debentures, will vary significantly across the industry in an economic downturn.

Although S&P has raised some red flags, it has also put up some green ones too.

“The news for finance companies is not all bad. Many finance companies continue to enjoy growth in lending and profitability. Some have a longstanding track record servicing their customer base. While the economy performs well, this gives investors some good returns, at least in the short term.”

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