Correspondence
Back to Correspondence[copy of letter sent to Abano Healthcare Group Limited]
28th May 2009
Abano Healthcare Group Limited
PO Box 106514
Auckland 1143
Attention: The Chairman, Allison Patterson
Dear Madam,
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.
20 of those 47 companies were, based on the knowledge that we now have of banking covenants, potentially in debt difficulties. Your company was likely to be one of those companies. Clearly each company has differing covenants, and you certainly were not outside the guidelines on all of the common benchmarks, and on some actually demonstrated some strength.
However by the time we receive published 2009 data, if EBITDA or EBIT decline while debt remains at current levels you may well face difficulties. Equally if your assets suffer impairment write downs you may well find yourself constrained by equity.
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 Chairman of the Association.
Your results on these key ratios were as follow for the June 2008 or equivalent year end.
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Covenant
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Likely level of bank discomfort
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Your result
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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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1.61
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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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0.69
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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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Minus 201%
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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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$3.95
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To provide some clarity to 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.
Clearly your cash flow is strong and capable of servicing your current levels of debt, and you would only be at risk on this score if your earnings dropped by 75%, which we agree is unlikely. Never the less your business model relies on continuing productivity from the operators (usually former owners) of the businesses you have purchased. This will work while performance incentives (withheld capital payments) remain, but we note that the average term of these is 2-5 years only. In many cases we understand that operators have sold to you as part of an exit strategy and we see a real risk to your cashflow and ebit if operators leave en masse as their contractual obligations are fulfilled.
Our major concern is that you have absolutely no net tangible asset backing, which to our knowledge is normally outside bank lending ratios.
We also note a $40m put option liability in regard to Bay Audiology. It is not clear to us when this amount is due. In the current climate we are concerned that not only will funding be difficult and expensive, but your debt ratios will be severely compromised.
You have confirmed your compliance with Bank covenants, but have not disclosed the details of these.
In the circumstances we ask that you comment on our analysis, and further ask that you disclose your bank covenants in detail including 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 we raise 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 reserve the right to forward a copy of this letter to NZX with a requestto them to make inquiry of you under the continuous disclosure regime. In those circumstances we would subsequently publish this letter regardless of NZX’s action in response.
Yours faithfully
NEW ZEALAND SHAREHOLDERS ASSOCIATION
Bruce Sheppard
Chairman