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Correspondence

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 [copy typed from PDF of letter from Nuplex Industries Limited]       
 
     Nuplex  Industries Limited
12  Industry  Road, Penrose                                                                                                                                                                                                                                               
Auckland 1061     
 
 
 
                                                                        
1 June 2009


Mr Bruce Sheppard
Chairman
New Zealand Shareholders Association Inc
PO Box 6310
Auckland City
New Zealand


Dear Bruce

I am writing in response to your letter of 21st May 2009 which was considered by the Board when it met recently.

We believe the analysis which you have presented in your letter is not accurate in a number of material aspects. Furthermore, we would submit that the assertions and conclusions which you have made are without substance or foundation.

You state that the company was potentially in debt difficulties as early as June 2008 and it was obvious. It should be noted that there had been no deterioration in the company’s covenant compliance at that time, and, as this was a reporting date to our banks, it is equally clear they were not expressing any concerns. Your statement therefore “If it was obvious on any objective analysis of your June 2008 results that you were in breach of your banking covenants……….” is particularly misleading, factually incorrect and offensive.

Banks generally set a range of covenants as “warning signals” which, if triggered, will result in the bank and borrower discussing the circumstances for the signal being triggered and whether any further action is required. A whole range of covenants are used and those applied to a particular loan will depend on many things. It is not unusual for different banks to apply different covenants and thresholds with a company. Lenders will also generally allow adjustments for non-recurring or unusual items and the adjustments may differ from lender to lender.
Further, the trigger or threshold of each covenant can vary widely. For example, the senior debt cover ratio threshold can range between 2 and 4 or more. For this reason, covenants generally remain confidential between lender and borrower.

Your letter details four covenants which you imply are four key bank covenants that apply to Nuplex. These are not the covenants that Nuplex has in place with its bankers.

You have also requested that Nuplex disclose its current bank covenants in detail. As explained above, these are “discussion triggers”, the thresholds of which can vary widely and we are required by our bankers to keep them confidential between the bank and Nuplex.

Let me now address the covenant ratios which you apply. You would appear to have discounted the essential difference between bank debt and Capital Notes in ascribing risk. Please be aware as per Notes 17 and 21 that the company has $52.344 million of Capital Notes. These are considered by the banks and the financial community as quasi capital and are excluded from covenants with the exception of total interest cover as they do not have the same risk profile as senior debt. As per Note 17, senior debt was $350.337 million which after the deduction of $50.843 million cash as the Balance Sheet reports on page 39 leaves a net senior debt position of $299.494 million as at June 30, 2008.

  1. Debt to EBITDA

    The figure which you have used for EBITDA ($114,558k) is incorrect. As set out in Note 2 on page 47 of our 2008 Annual Report, our reported EBITDA was $121,823k.

    Your covenant calculation of 3.52 is also incorrect and the correct ratios are:

    For net senior debt               2.47

    For net total debt                  3.31

    Taking into account the Group’s cash position as set out in the Balance Sheet on page 39 of our Annual Report, the disclosures made in the 2008 Annual Report are correct and audited.

  2. Interest Bearing Debt to Book Equity

    Again, your covenant calculation of 1.11 is correct only if cash is ignored and Capital Notes are assumed to be debt for such a ratio calculation.

    The correct ratios are:

    For net senior debt                 0.82

    For net total debt                    0.96

  3. Interest Bearing Debt to Net Tangible Assets plus Interest Bearing Debt

    Your calculation implies that this ratio falls well short of the level of discomfort to which you have referred.

  4. Earnings Before Interest and Tax to Paid Interest

    Your calculation even when adjusted for the correct EBIT number implies that this ratio falls well short of the level of discomfort to which you have referred.

    In the circumstances, we believe your letter has been issued in error. I note that you have said that you will not publish your letter to me until you have a reply for which I thank you. However, I do take offence to the fact that you have publically aired your thoughts and conclusions via your blog. As explained above, many of your calculations and conclusions are based on a number of incorrect assumptions. As a consequence your statements, from someone in your position, are damaging to Nuplex.


    Yours sincerely



    Rob Aitken
    Chairman