S&P cautious on Challenger

Ratings house Standard & Poor’s (S&P) has flagged the possibility of a downgrade of the Challenger Financial Services Group.

In a ratings analysis issued on Thursday, S&P said it had affirmed its ‘A’ rating of Challenger Life No 2 Ltd and ‘BBB plus’ rating of Challenger Financial Services Group, while, at the same time, the outlooks on Challenger Life and Challenger Group were revised to negative from stable.

S&P said the ‘BBB plus’ rating on Challenger Group was two notches lower than Challenger Life, largely reflecting the holding company’s structural subordination to the policyholders of Challenger Life.

“The negative outlook implies a roughly one-in-three chance of a rating downgrade,” the analysis said.

Commenting on the analysis, S&P credit analyst Mark Legge said the negative outlook reflected the impact of ongoing difficult financial market conditions, which had placed pressure on Challenger’s earnings in a number of business areas, increased reputation risk for the group and weakened investor sentiment.

“Although managed to date, these issues have weakened the flexibility of Challenger Group to continue to withstand adverse market conditions at the current rating level,” Legge said.

He said, in particular, S&P believed the prospect for the group’s mortgage management business was uncertain given the continued subdued state of the residential mortgage backed securities market.

“Moreover, the funds management business continues to be buffeted by the poor investment markets and adverse sentiment toward the industry following the need to tighten redemptions in the face of material outflows from some funds,” Legge said.

He said the outlook for transaction-driven revenue was also modest, as merger and acquisition activity was likely to be subdued given the tighter availability of credit.