UDC Finance downgraded to BBB

This may or may not interest you, but recently ANZ announced that they have sold off their Finance Company UDC. Many New Zealanders hold debentures with UDC which has always had the backing of its parent company ANZ. If you hold a UDC debenture it may be worthwhile considering alternatives as noted below (Booster is the new name for Grosvenor who are NZ Govt. approved KiwiSaver default providers). The downgrade in credit rating is substantial and drops the securities credit rating or increased risk of default several tranches.

Definition from S&P website;
An obligation rated 'B' currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

Below is a copy of the communication from Booster's Fixed Interest Manager:
Confirmation of the sale of UDC Finance to China based HNA Group was announced yesterday. This was quickly followed by a credit rating downgrade by Standard & Poor’s from A- to BBB with a negative outlook pending the finalisation of the sale.

Some of the key points from S&P’s statement are:
The sale is subject to regulator approval;

  • S&P assess UDC’s current stand-alone credit rating as BBB- but have given them a one notch uplift to BBB because they believe ANZ will be supportive until the sale is settled later in the year;
  • S&P understand that ANZ will be engaging UDC debenture holders on a replacement of the debenture program (which we would suggest would be worth considering for any holders);
  • UDC remain on negative credit watch after this latest downgrade and S&P expect to further downgrade them if the sale is successful;
  • HNA Group is officially unrated but are assessed by S&P as being a ‘B+’ and it is very rare for a subsidiary to be rated higher than the group credit profile to which they belong. Therefore UDC’s (post-sale) stand-alone credit rating is likely to weaken further;
  • UDC may face challenges maintaining their franchise and their ability to fund via debentures;
  • S&P consider that the change in ownership could affect UDC’s risk appetite and underwriting practices.

We currently have a 2.5% weight to a UDC Finance debenture in the Income Securities Portfolio, which matures in March of this year. At B+ UDC would not be considered for future investments in the Income Securities Portfolio.

This development reinforces the benefits of a diversified portfolio as held by the Income Securities Portfolio. Single-name credit events will continue to occur periodically but their potential impact on returns and capital can be reduced.

Should you have any queries please contact your Amicus adviser.
(Sourced: Booster Investment Services Ltd)

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