Geneva given a tough assignment
Wednesday, October 17th 2007, 8:17PM 
2 Comments
Poor old Geneva Finance. Last week I mentioned in the Good Returns Weekly Wrap that Standard and Poor's two-notch downgrade of the company, from B+ to B- seemed like pretty rough treatment from the rating agency.
As you could expect S&P were on the phone pretty quickly after reading the comments.
Since then plenty more has happened and it leaves lots of questions and thoughts in my mind.
A week ago my proposition, and I know it was one shared by many others in the industry, was that they felt S&P had essentially given Geneva some rough treatment.
The reading of the situation was that Geneva was talking to some institutional crowd about taking a stake in the business and the discussions would be concluded soon.
My thoughts are that S&P had already put the company on a Credit Watch and if this was the issue then it should let the discussions run their course.
However, reading S&P's statement it appears that its view was that Geneva's risk profile had changed and therefore it had to downgrade the company two notches.
No doubt S&P will defend itself by saying that if it came across information that changed its views then it was obliged to act, rather than sit on the fence.
It's very difficult to argue against that.
However, what I, and many others don't know, is how did the risk profile change? No one in the know is providing details or information.
What is clear though is that S&P's downgrade probably did a good job in triggering the next series of events. Namely Geneva asking its clients for a moratorium and S&P dropping the company to a D rating.
One could assume that the previous downgrade from B+ to B- immediately stopped funds flow. A D rating is like giving it the death penalty.
I hope that Geneva survives and comes through this. It is one finance company which has worked hard to set standards (eg: a rating) and has put in place measures (a wholesale funding line) to help it if the market deteriorated, as it has.
It seems unfair that a company which has tried to do the right thing gets hammered like this.
It also shows that the rating from a crowd like S&P can work against the company. In some ways the past week has showed people who ratings work.
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Until a couple of years ago I managed a group of equipment vendor finance companies in Asia Pacific. We used a planning model to set performance expectations and monitored P & L and Balance Sheet Ratios every month and produced trend data for month on month, year on year performance. All funding was from capital, retained earnings and banks. The Debt:Equity Ratio was quite conservative and yet Return on Equity was a healthy 15-20%. Banks tripped over themselves to lend us funds and there was never any confidence issues.
Clearly this business model is not available to all finance companies but ratios not ratings is the fundamental performance criteria.
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In Europe, the principle is : If you take money from the general public and pay interest on that, you are fulfilling a banking function.
With that you are subject to full controls of the Reserve Bank, and also to a particular thing called “ratio” established by the banking law and monitored by the Reserve Bank.
A ratio tells you how much capital you have to have to raise money from the public, how much you can raise on the capital markets and in which proportions with the public's money. How much capital you have to have to carry on with the activity after periodical audits...and so on.
The monitoring and compliance to those ratios makes you a well managed financial entity, authorised to take money from the general public, and entitled to protection of the Reserve Bank as lender of last resort if all compliance is in place.
If you don’t comply, the Reserve Bank can:
Seize and manage the company with an appointed Commissioner.
Seize all assets, revoke by authority unclear transactions happened up to 2 years before (as some of the good asset stripping in Bridgecorp case), guarantee the depositors and “pilot” all the crisis up to a safe take over by a stronger entity.
And a lot of other options that have one single scope in mind. Guarantee the savings of the depositors, first, above and regardless of ANY other interest.All in the exclusive power of the Reserve Bank.
That is the price to have a lender of last resort. To be a clean well managed and respected Institution operating under precise ratios established in the banking law.
Doesn’t this sound more safe and secure than any rating by the rating agencies ?
And, moreover, a well managed company like Geneva, would have complied to the ratios, being helped by a Reserve Bank credit facility...and bailed out from a run on the money...like Northern Rock, not precipitated in a crisis by a hastily beaten retreat on the rating motivated by: New informations?? Or the necessity not to be fingered if worse came to worse?