Standard & Poor's has placed South Canterbury Finance's investment grade BBB- credit rating on "CreditWatch negative", implying a 50:50 chance of a downgrade in the next three months.

"This rating action follows South Canterbury Finance's announcement of a loss of $37 million in fiscal 2009 because of a material provisioning expense of $58 million," S&P analyst Derryl D'silva said.

South Canterbury, principally owned by Timaru magnate Allan Hubbard, last week disclosed the provisioning expense on its property loan book and the consequent effect on its bottom line.

Apart from an increased risk that some of the non-performing assets could ultimately translate into lending losses, D'silva said SCF's decision to shift its holdings of liquid assets from cash to higher risk and high-yield investments had increased the risk profile of the company and weakened its liquidity.

"The investments have also resulted in an increase in related-party exposures, which have moderated SCF's capitalisation, and are a weakness at the 'BBB-' rating level."

An extra risk for the company was that a rating downgrade would give investors who have provided the company with US$100 million of funding the option of reviewing or withdrawing their support.

"Such a downgrade would likely exacerbate the consequent negative rating momentum, whereby a small negative ratings movement could magnify significantly because of liquidity difficulties that may emerge."

D'silva said the company's rating "may be lowered by one or more notches" should it fail to address these issues. On the positive side, South Canterbury's "sound business profile and geographic diversity" continued to support its credit rating.

The rating was also supported by S&P's expectation that Hubbard "will remain steadfast in his ability and willingness to support SCF if required".

Apart from a $40 million capital injection announced last week, Hubbard has pledged to underwrite any further loan impairments.

D'silva said South Canterbury may be removed from CreditWatch if this underwriting agreement is formalised, and if the company reduced related party exposure enough to relieve pressure on its capitalisation level.