Correspondence
Back to Correspondence[copy of letter sent to Allied Farmers Limited]
21st May 2009
Allied Farmers Limited
74 Princes St,
Hawera
Attention the Chairman, John Loughlin.
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 4 likely default, based on Nuplex disclosure, above 3 discomfort.
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$7.40
Debt $35,164k ( bank only)
Finance payables $161,010
Finance receivables $129,616
EBITDA $26,527k
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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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$7.18
Book equity $27,306
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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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99%
NTA’s Plus interest bearing debt $36,230k (excluding Finance receivables and payables shortfall!)
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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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($1.00)
Interest Paid $24,093k
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|
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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 you have announced your half year result. It discloses a loss, a decline in EBITA, a blow out in bank debt and a continuation of funding from depositors presumably on the back of your government guarantee. In short your solvency is now a matter of grave concern. It seems to us that your rights issue of a mere $7.5m is no where near sufficient to restore solvency and as such would indicate that your investors who supported it will be putting good money after bad.
We also note that your debt includes at your last full year, Capital notes outstanding amounting to $12,097k. It is possible that your bank is comfortable with their exposure to you due to the unsecured subordinated nature of these notes. This said the notes will be covered by a loan document, conversion terms and will be supervised by a trustee. You have not disclosed the covenants made to the trustee in respect of these capital notes and it seems clear to us that these notes are entirely vulnerable and are in all likelihood not covered by your government guarantee.
The spread between your finance receivables and payables is alarming, in essence you have borrowed from depositors to finance your core business, this is not dissimilar to what occurred at Nathan finance and I am far from certain that this risk is transparently disclosed in your prospectus to those who buy your bonds.
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. Further you should also disclose your covenants with your capital note holders and your depositors and confirm your compliance with these covenants.
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, and the trustees for both your capital note holders and depositors and also to the Reserve bank with a requestto them to make inquiry of you under the continuous disclosure regime and such other inquires as each need to make for their own purposes. We will subsequently publish this letter regardless of NZX’s action in response.
Yours Faithfully,
B R Sheppard
Chairman