Warning for 'mum and dad' investors

International ratings agency Standard & Poor's said the lightly regulated finance company sector was showing "red flags", which raised concerns about how some would cope when the economy slowed and property prices fell.

Thousands of people were investing in finance company debentures that would not qualify as investment grade if they were rated, the agency said.

Bonds categorised as sub-investment grade are often referred to as "junk bonds" overseas and pay out much higher interest rates to reflect their greater risks.

Global research showed on average about 12 per cent of companies with "junk" ratings defaulted on their debts in any five-year period, it said.

Many investors in New Zealand finance companies were receiving lower interest rates than they should if all the risks were taken into account, Standard & Poor's and fellow ratings agency Fundsource said.

Standard & Poor's said it was inevitable some finance companies would fail when the economy slowed.

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