Correspondence
Back to Correspondence[copy of letter sent to Metlifecare Limited]
21st May 2009
Metlifecare Limited.
302 Great South Road
Greenlane
Auckland
Attention the Chairman.
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, on the face of it 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 the capacity of the Association.
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
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Debt to Ebitda
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Above 7 likely default, based
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$82.55
Debt $16,6261k
EBITDA $2014k
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Interest bearing debt to book equity
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Above 2 discomfort above 3 likely default
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$0.31
Book Equity $531,102k
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Interest bearing debt to net tangible assets plus interest bearing debt
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Above 50% default, above 30% discomfort
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24%
NTAs plus interest bearing debt $691,202
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Earnings before interest and tax to interest paid
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Less than $1.50 discomfort, less than $1.25 default.
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0.02c
Interest Paid $9,954
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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.
In addition since your last balance date the following matters are of concern. They will have had an effect on your compliance with bank covenants, which is a continuous disclosure obligation not a year end test:
Your half year result disclosed an improvement in EBITDA to $3,817k, (annualised $7,634)
In the same period however assets values declined and debt increased to $199,986k.
You appear to have achieve roughly $1 for Dollar on interest cover but hardly sufficient to get you out of the woods, and I have no confidence that the interest number in your financial statement is the actual interest paid as you have been in the habit of capitalising interest to construction projects.
In short there has been a further deterioration in your position which at your last full year was marginal.
We also note the following issues in relation to your ongoing solvency and long term revenue model:
Your business model is based on the pretext that services are provided on effectively a non profit basis and that the profits of the group are generated on selling and reselling units. In essence you are a dressed up real estate play not a care service provider.
What portion of your top line gross revenue is margin on licence sales as distinct from service revenue? It is likely that in the absence of swift deaths and endless new candidates that your business model can never be profitable.
Included in your full year balance sheet was an obligation to your occupiers of $561,325k, of which $75,294k was considered to be a current liability. It seems that your liability is to refund 80% of the deposit paid when an occupier vacates, there is an oblique comment that it is also contingent upon you reselling the unit.
Your ability to resell units will have been compromised by the current property market lack of direction.
- Therefore please advise the following in respect of this unsecured obligation which appears to put your residences or their estates at considerable risk given the lack of cash flow and increasing secured debt levels.
- What is the current outstanding amount due to such holders and please provide and aging of this number.
- What is the resale demand profile, and are prices holding up at a sufficient level to effectively fund the payback of occupancy right holders. (I.e. are the resale’s more than 80% of the price paid by the current occupation)
- In the event of further deterioration in the property market and a further slowing in new inquiries on the back of this what short and medium term impact will this have on your revenue model.
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 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.
But also please note that if you fail to reply within 30 days we will forward a copy of this letter to NZX with a requestto them 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,
B R Sheppard
Chairman