Correspondence
Back to Correspondence[copy of letter sent to Comvita Limited]
21st May 2009
Comvita New Zealand Limited
Private Bag 1
Te Puke
Attention: The Chairman, Neil Craig
Dear Sir,
I recently completed an analysis of the published financial statements for 47 public companies for the June 2008 or equivalent year end from a banking perspective. Obviously with the public default of Nuplex and the disclosure by them of critical banking covenants, debt has become an issue that the market should be concerned about.
Of those 47 companies 20 were, based on the knowledge that we now have of banking covenants, potentially in debt difficulties. Your company was one of those companies.
Rather than publishing this research which would have been irresponsible, I have instead elected to pass it to the New Zealand Shareholders Association to deal with in its usual manner.
I thus now write to you in my capacity as NZSA Chairman.
Based on your last full year published result, the key bank covenant ratios for your company are as follows:
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Covenant
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Likely level of bank discomfort
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Your result
Note this is for 15 months. Thus ratios are worse on an annualised basis
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Debt to Ebitda
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Above 4 likely default, based on Nuplex disclosure, above 3 discomfort.
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13.5
Debt $30,095k
EBITDA $2229k
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Interest bearing debt to book equity
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Above 1 discomfort above 2 likely default
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0.49
Book equity $61,044k
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Interest bearing debt to net tangible assets plus interest bearing debt
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Above 90% default, above 75% discomfort
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62%
NTA’s Plus interest bearing debt $48,817k
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Earnings before interest and tax to interest paid
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Less than $3 discomfort, less than $2 default.
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($0.17)
Interest Paid $2,857k
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To provide some clarity regarding the basis on which this analysis is prepared, I refer you to my personal Blog onStuff (Stirring the Pot.) The final in that series is attached as it explains how these numbers were compiled and will assist you in reconciling your reply.
In addition since your last balance date you have announced a half year net profit after tax of $203k, and an EBITDA for the same period of $1.9m, a considerable improvement. You have hinted at improved working capital management, but not disclosed to what extent you have succeed in altering your debt profile. On this basis your book equity has improved to $61,247k, your debt may be unchanged but as your revenue has grown considerably it is more likely debt has increase to fund working capital. In the absence of a full year projection your EBITDA annualised has improved to $3800k. On this basis your debt to EBITDA ratio has likely improved to $7.91, still considerably beyond any banks comfort levels and your interest cover while no longer negative would be under any prudent banks level of comfort. It seems to us that in all likelihood you may come under pressure to increase your capital to deal with both your debt and growth profile
To date your disclosure to the exchange on issues relating to your debt exposure has in our view been inadequate.
In the circumstances we ask that you comment on our analysis and the issues raised in such manner as you see fit, and further ask that you disclose your bank covenants in detail and the relevant ratios to show that you were in compliance at your last balance date and remain compliant at the date of your letter.
The Association usually publishes its correspondence within 7 days of the letter being issued: however the issues raised are in our view so fundamental to the wellbeing of both the company and its owners that we will delay publication until we receive your reply.
However please note that if you fail to reply within 30 days we will forward a copy of this letter to NZX with a requestforthem to make inquiry of you under the continuous disclosure regime. We will subsequently publish this letter regardless of NZX’s action in response.
Yours faithfully
NEW ZEALAND SHAREHOLDERS ASSOCIATION
Bruce Sheppard
Chairman