High price tag on Tranz Rail issue

By PAM GRAHAM

Tranz Rail is paying high fees for its $66 million rights issue.

The issue prospectus reveals total fees of $3.5 million. ABN Amro Rothschild's fee to lead, manage and underwrite the issue is $1.96 million, or 3 per cent of the amount being raised.

The underwriting fee is 2.25 per cent. Investment bankers say the typical range is 1.2 per cent to 2 per cent.

Underwriting fees vary from deal to deal depending on the type of security, risk and discount to market - more discounted issues are often handled for a lower fee.

Tranz Rail spokesman Alan McDonald said the fee reflected the complexity of the issue.

ABN also pays sub-underwriters, although the firm would not say how much would be sub-underwritten or firmly committed.

"We've been very encouraged by the response from institutional shareholders and brokers about the prospects of the issue," said John Moore, director of investment banking at ABN.

Tranz Rail is offering shareholders the right to buy five shares for every seven held at 75c a share. The company's shares rose 5 per cent yesterday to $1.22.

Compared with yesterday's share price, the shares purchased in the rights issue are about a 27 per cent discount to a theoretical share price after the issue.

Tranz Rail will use half of the money from the rights issue to support a letter of credit to the Aratere ferry leaseholders and half to pay off bank debt. Any sale of assets will be used the same way.

Tranz Rail is forecasting an annual profit of $53.1 million before interest and tax.

Chairman Wayne Walden said in the prospectus that the rights issue would resolve a short-term liquidity position and "give Tranz Rail the opportunity to address its asset disposal programme in an orderly fashion".

Analysts estimate that the company's net debt to total capital ratio will fall to 38 per cent from 48 per cent because of the rights issue.

The underwriting agreement is conditional on an extension being granted to Tranz Rail's banking facility and approval by bankers and Aratere ferry lease holders by November 25.