Last-minute agreement saves $66m Tranz Rail rights issue

By PAUL PANCKHURST

Tranz Rail's financial restructuring is back on the rails after a hiccup that prompted fears of an Air New Zealand-style Government bailout.

The company is to mail a prospectus to shareholders tomorrow after settling a dispute with Citibank that threatened to kill a crucial $66 million rights issue.

Caving in to Citibank's demand, Tranz Rail closed US$81 million in foreign exchange hedging contracts connected with the lease of the interisland ferry Aratere.

Tranz Rail picks up $10 million from Citibank as part of the unwinding of the arrangement.

Trading in Tranz Rail shares was halted during yesterday's last-minute talks to reach the agreement. When trading resumed at 12.15pm, the market pushed the shares down 3c to $1.25.

UBS Warburg director of research Richard Leggat described the market reaction as muted.

The hedging arrangement was set up four years ago, when Tranz Rail was in much healthier shape, to protect the company until 2011 from foreign exchange risks relating to its US dollar lease payments for the ferry.

That deal covered a series of interim payments and the final "balloon" instalment of about US$50 million ($99.5 million), due in 2011.

Now, only the next four payments - or US$7 million - will be hedged, taking the company through to July 2004.

Leggat said the risks associated with the company had risen "a little" because of the unhedged exposure after that time.

Tranz Rail chairman Wayne Walden said the conclusion of the refinancing negotiations meant the company could "face the future with confidence".

"We've nearly completed our massive change programme. Our operating performance is meeting forecasts and we are now well placed for future growth."

An equity analyst for Tranz Rail shareholder Alliance Capital, Kevin Bennett, saw no problem with the temporary absence of hedging past July 2004 and said that Tranz Rail was right in indicating it would not be rushed into putting new cover in place.

As the company improved its financial position - as expected in its forecasts - it would be able to negotiate a new long-term instrument on more favourable terms.

Asked about the fears in the past week that Tranz Rail could become "another Air New Zealand", Bennett described the company as a very different case.

Its earnings were improving and research showed marked improvements in customer service.

Market watchers said the company did the smart thing by halting trading, preventing what could have been a dramatic short-term plunge in its share price.

The 11th-hour dealmaking also meant last-minute amendments to the prospectus for the five-for-seven renounceable rights issue, priced at 75c a share. Rights to the shares start trading on Monday.

A significant drop in the company's share price is inevitable as the change is factored in.

As for the drama of last week: one investment banker called it a "just a one-day glitch" and "a bit of a storm in a tea-cup".