Bridgecorp renewal of its B4 credit rating

Media Release

Bridgecorp Limited receives renewal of its B4 credit rating from Rapid Ratings.

After an intensive re-examination of the company and its subsidiaries by Rapid Ratings, Bridgecorp Limited (BL) has had its credit rating of B4 re-confirmed for the 12 months beginning 27 November 2004. This rating is applicable both to the company and to its first ranking debenture stock. This is a borderline investment grade rating.

This is the second corporate credit rating for Bridgecorp Limited and the rating means that the company is operating at between 60% and 65% of its potential. In the past year Bridgecorp’s ratings performance has moved from the bottom end to the upper end of this band. A B4 rating suggests that, with respect to the risk of non-payment of corporate debts and/or the degree of risk of insolvency, Bridgecorp Limited is a moderate risk that can worsen with market conditions. It also suggests that the business of Bridgecorp Limited is moderately good quality. It indicates that the company, whilst not being investment grade is only one notch below investment grade quality.

This Credit Rating is based on a combination of (1) a quantitative rating of B1 derived from running the financials of BL through Rapid Ratings global corporate credit rating web service and (2) an extensive qualitative credit assessment process. The qualitative credit assessment is an intensive process that examines the company’s performance across six broad areas of risk: financial risk, market risk, corporate governance, industry risk, business continuity risk and regulatory and compliance risk. In the case of Bridgecorp Limited the qualitative assessment pegged the overall rating back to B4 indicating there is scope for improvement in the qualitative performance of the company to raise it to par with its financial performance and position. Rapid Ratings has noted that the company has taken significant steps in the past year to improve its performance, particularly in the areas of transparency of information, credit management and reporting, review and documentation of processes, procedures and controls, extension of its Lloyds credit insurance cover and in the reduction of related party transactions.

At a high level, Bridgecorp Limited has maintained a strong financial performance in the past year, coupled with a strong overall financial position (including liquidity, profitability and Lloyds insurance cover for many of its investments against loss). Whilst it is focused on lending into the property development sector, generally considered to be a high risk one, the company is following a clear business model and has the management skills and experience to manage the risks of lending into this sector. Bridgecorp Limited has an experienced Board including two independent directors.

In the past year Bridgecorp has not changed its business model or transaction profile materially. It therefore remains exposed to the volatility and risks inherent in the commercial and residential property development sectors, but has made good progress in the past year in mitigating its risks.

This rating may be withdrawn at any time by Rapid Ratings, if in the opinion of Rapid Ratings, there has been a material change in the financial performance or other risks of the company or its subsidiaries.

Bridgecorp Limited is a private finance company that operates in New Zealand and Australia. Its principal activity is property lending including lending for various stages of property development.

Rapid Ratings is a subsidiary of ASX listed Collection House Limited (CLH) in Australia. Rapid Ratings, which has offices in New York, Toronto, Singapore, Sydney, Wellington and Brisbane, and rates companies in Australia, Canada, China, Japan, Germany, New Zealand, the UK and the US.

*For comparisons with ratings systems of other agencies, see tables 1 and 2 below.

Note to Readers: The non-bank finance sector is a NZ$10 billion industry in New Zealand, but the industry has lacked robust, independent performance measurement. Concern about the lack of independent, professional rating of non-bank finance companies lead a group of financial planners and institutional investors in 2001 to invite Rapid Ratings to become involved with the industry. Bridgecorp Limited is the second non-bank finance company to release its rating to the market. A number of other non-bank finance companies have, or are in the process of being rated. For private institutional clients Rapid Ratings has rated 70 publicly listed companies in New Zealand and 1200 companies in Australia and has issued a rating report for the “top 50” companies listed on the New Zealand Stock Exchange. This report is available on a subscription basis.

Rapid Ratings NBFC Credit Rating

The rating process developed by Rapid Ratings for non-bank finance companies (NBFCs) and capital note issuers has the following features:
- The client completes an extensive electronic pre-interview questionnaire (PIQ) focusing on more than 200 performance variables. This normally requires 80-150 hours of client time. The questionnaire is based on a proprietary, hidden points-scoring system developed by Rapid Ratings. Rapid Ratings completes a preliminary assessment based on this response.
- Rapid Ratings sends a team to visit with directors, executives and staff onsite at the client’s offices for approximately 3 to 5 days.
- The client’s financials are entered into Rapid Ratings’ on-line software rating service (www.rapidratings.com) and a quantitative rating assessment is produced with a credit rating (and related score), lifecycle performance analysis, short term forecast, medium term forecast and long term forecast, along with detailed strengths and weaknesses analysis of the company’s financial performance and position.
- Rapid Ratings combines these inputs to produce an NBFC Rating Report that summarises the strengths and weaknesses of the company. This report is written specifically to provide independent analysis of the company. The report will be of value to investors, financial planners, brokers and investment funds.

Rapid Ratings Pty Limited is a global, independent corporate rating agency that uses unique on-line technology to assess credit risk and investment risk. Rapid Ratings’ client markets include, assessing risk concentration and exit and entry decisions in investment portfolios for institutional investors, private equity funds, assessing counter-party risk for large creditors and rating non-bank finance companies and listed company capital note issuers. This service is also designed for banks that wish to undertake back-testing to improve internal credit rating models in preparation for the regulatory changes required by central banks based on recommendations from the Basel Committee on Banking Supervision. Rapid Ratings is a subsidiary of ASX listed Collection House Pty Limited – one of Australia’s top 200 companies. Rapid Ratings rates over 1200 companies in the New Zealand and Australian markets and a growing list of companies in North America, Europe and Japan.

© All rights reserved 2002. This report and its methodologies are the exclusive property of Rapid Ratings. No copies may be made without written authorisation.

1 Appendices

1.1 What is a Corporate Credit Rating and what is it used for?

A traditional credit rating is the considered opinion of the rating agencies regarding the general creditworthiness of a company. The credit rating process involves a legal, quantitative and qualitative, financial and non-financial evaluation of the company. The rating is a function of a variety of risk factors to which the company is subject. A rating is a formal independent evaluation of the company and its ability to meet the obligations of a short term or long-term commercial debt, or the repayment of equity to shareholders.

These corporate credit ratings have widespread uses, notably risk signals for
- investors or lenders regarding individual corporate issues of debt (e.g. bonds, commercial paper, letters-of-credit supported debt, mortgage-backed and asset-backed securities), equity (common or preferred shares) and project financing;
- pension funds, mutual funds, investment funds, banks and insurance companies regarding the quality of their portfolios and exit and entry decisions;
- lease negotiations, and
- general risk management signals about whether the company is too risky to deal with (this is especially true for inter-bank relationships and international trade).

1.2 New Generation of Corporate Credit Rating Tools

Rapid Ratings™ corporate credit rating and financial health assessment software is the leading edge of a new generation of financial analysis tools designed to provide clients with instant information based on a scientific approach. Our assessment utilises a company’s income statement and balance sheet data to produce a quick, but incisive assessment of the current quality of, and risks related to, a company’s financial performance and position. Our assessment uses or provides:

- world class, peer reviewed models;
- automated customized analysis for each client beginning with a comparison of a company’s strengths and weaknesses against global best practice
- automated production of text, graphs, tables and forecasts (the forecasts are only available in the comprehensive credit rating assessment);
- an analytical pyramid with an overall alpha numeric credit rating and related score out of 100 at the top and an individual credit rating for each of up to 62 variables regarding financial performance and position relative to companies in the same global sector using a database with 25-30 years of financial information for tens of thousands of companies across more than a dozen countries;
- each variable is weighted by sector-specific weights that can predict financial failure, distress, turnarounds or success; several sector-specific weighting methods have been used;
- a standard, easily understood credit risk ranking system and measurement scale (see Table 1 and 2);
- a detailed medium and long-term forecast of the company’s credit rating (available only in the comprehensive credit rating assessment); the forecasts use scientifically-derived weighted risk scores based on econometric modelling of the level of significance of industry-specific variables that predict financial failure, distress, turnarounds and success
- high volumes of ratings per day;
- rapid production (in seconds) and rapid delivery (on-line in real time);
- attractive prices.
- In the current and comprehensive assessments incorporate Dupont Analysis to separate operations from financing, while the EBIT result is compared to the cost of borrowing.
- Lifecycle performance analysis (including the historical movements in the company’s short-term credit rating.)

1.2 Credit Ratings Equivalence Table

Table 1 shows the equivalence in the corporate credit ratings scale between Rapid Ratings, Standard and Poor’s, Moody’s and KMV :

Table 1:
Rapid Ratings S&P Moody's KMV
A1 95 AAA Aaa 0.02
A2 90 AA aa2 0.04
A3 85 AA- aa3 0.06
A4 80 A A2 0.11
B1 75 A- A3 0.19
B2 70 BBB Baa2 0.31
B3 65 BBB- Baa3 0.5
B4 60 BB+ Ba1 0.78
C1 55 BB Ba2 1.2
C2 50 BB- Ba3 1.7
C3 45 B+ B1 2.6
C4 40 B B2 3.6
D1 35 B- B3 5
D2 30 CCC+ Caa1 6.7
D3 25 CCC Caa2 8.8
D4 20 CCC- Caa3 11
E1 15 CC Ca 14
E2 10 C C 17
E3 5 D D 20
E4 0

The Rapid Ratings’ credit rating scale ranges from 0 to 100, or from A1 to E4 (A1=low risk, E4=high risk). Each rating level covers a range of 5 percentage points. KMV’s credit ratings range from 0 (lowest risk) to 20 (highest risk). KMV’s lowest risk level is equivalent to S&P’s credit rating of AAA and Rapid Ratings’ credit rating of A1 (or 95 and above), while their highest risk level is comparable to S&P’s D and Rapid Ratings’ E3.

Standard and Poor’s ratings (AA+, A+, BBB+) are not listed but are implied and Moody’s equivalent ratings are also not listed but are implied.

While the Rapid Ratings scale appears to be linear, this is not really the case. Owing to the way the statistical distributions underlying the models for each sector have been constructed, and the sector specific-weights for each variable, companies make non-linear movements over time on Rapid Ratings scale.

1.3 Rapid Rating’s Credit Rating Categories for Corporate Credit Rating and Asset Quality Branding

Table 2: Rapid Ratings’ Credit Rating Categories for

CORPORATE CREDIT RATING & ASSET QUALITY BRANDING TM
RISK RATING:
One year
Outlook EXPLANATION: with respect to the degree of risk of non-payment of corporate debts and/ or the degree of risk of insolvency. ASSET QUALITY BRAND™
(AQB) RATING
TIER A A1 Minimal risk of non-payment and insolvency Exceptionally high quality
A2 Exceptionally low risk Very high quality
A3 Very low risk High quality
A4 Low risk but there are some concerns Moderately high quality
TIER B B1 Moderate to low risk and somewhat subject
to fluctuations in market conditions Very good quality
B2 Generally moderate risk Good quality
B3 Moderate risk / more subject to market conditions Reasonably good quality
B4 Moderate risk that can worsen with market conditions Moderately good quality
TIER C C1 Medium to moderate risk and generally subject
to fluctuations in market conditions Satisfactory quality
C2 Generally medium risk Reasonable quality
C3 Medium risk / more subject to market conditions Still medium quality
C4 Medium risk that can worsen with market conditions Periodic concerns
TIER D D1 High to medium risk and very subject
to fluctuations in market conditions Questionable quality
D2 Moderately high risk / increasingly at risk Seriously questionable
D3 Still high risk Speculative
D4 High risk of non-payment Very speculative
TIER E E1 High risk of failure which is unlikely to improve with better market conditions Exceptionally poor quality
E2 Very high potential for payment default Seriously impaired
E3 Still trading but likely under extreme creditor pressure Bad & doubtful
E4 Still trading but possibly insolvent Non-performing

ENDS

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