Correspondence
Back to Correspondence[copy of letter sent to Provenco Group Limited]
21st May 2009
Provenco Group Limited
25 College Hill,
Ponsonby
Auckland
ATTENTION the Chairman, Rick Christie.
Dear Rick
I recently completed an analysis of 47 public companies published financial statements 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 became 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
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Debt to Ebitda
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Above 4 likely default, based on Nuplex disclosure, above 3 discomfort. Negative obviously a default
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Negative 6.40
Debt $63,860k
Ebitda ($9984k)
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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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1.25
Book equity $51223k
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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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125%
Tangible assets plus debt $50943k
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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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($4.98)
Interest paid $5240k
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To provide some clarity regarding the basis on which this analysis is prepared, I refer you to my personal Blog on Stuff, (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 have occurred that have a bearing on your continuing compliance. We note that you have advised the exchange that your banking facilities have been rolled forward to mature on the 30 June.
Your half year result was disclosed as positive Ebitda amounting to $550k. You have not so far made a full year projection. At the half year you did however record a loss of $23m which will have reduced your book equity.
Your equity position has improved by $1,161k as a result of the capitalisation of capital notes which has also reduced debt.
You have announced the sale of a substantial portion of your business for $22.5m which is conditional and you have not stated the likely date of settlement. This is subject to shareholder approval at your up coming EGM. It is obviously insufficient to discharge your bank debt. You have not disclosed the carrying value of this business and the likely effect on equity, nor have you confirmed whether any obligations are required to be settled from the sale proceeds. So the best scenario is an eventual reduction in bank debt by say $22.5m
On this basis the current position would be an annualised Ebitda of say $1.1m, and residual interest bearing debt of $40,199k, or a ratio of 36.54, clearly beyond any prudent banker’s long term comfort levels and clearly insufficient to even cover interest payable on the loans. Your equity will have eroded to $29384k assuming no loss or profit on your disposal. Or a ratio of $1.36, i.e. worse than as at 2008. You have also given no substantive guidance as to the effect of the loss of 73% of your gross revenue in the event this sale is approved.
In short the obvious stress that was evident at June 2008, has hardly improved in 2009 and the company only survives at the behest of its bankers.
We also note the following issues in relation to your ongoing solvency and compliance.
As at June 2008, of your total bank debt in NZ dollars, $5,700k was denominated in USD, and $19,004k was in AUD. You will have sustained currency losses on these loans and this will have further eroded your equity position and increased your debt.
You also have capital notes outstanding however these will either have been rolled over or redeemed.
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 request for them to make inquiry of you under the continuous disclosure regime, and then we will subsequently publish this letter regardless of NZX’s action in response.
Yours Faithfully,
B R Sheppard
Chairman