Tranz Rail deal back from brink

By PAM GRAHAM

Tranz Rail and Citibank last night appeared to have buried the hatchet after a public spat between the two threatened to destroy the rail operator's intricate financial restructuring plan.

It began yesterday morning when Tranz Rail called a halt to trading in its shares while it tried to salvage a plan it had presented confidently to shareholders at the annual meeting on Monday.

Tranz Rail aimed to have its bankers and the US owners of the Aratere ferry endorse a $66 million rights issue to raise money to pay off debt and provide extra security to the ferry leaseholders by Wednesday of this week.

Instead, the rail operator traded press statements with Citibank, the world's biggest financial services company, as deadlines for its rights issue loomed.

Tranz Rail said Citibank was refusing to agree to new banking arrangements unless the company broke a US$88 million ($175 million) foreign exchange hedge connected to the Aratere lease. Tranz Rail was unwilling to do so.

Citibank issued a rare press statement and spoke publicly about its client's business for the first time.

The bank's New Zealand chief executive, Andrew Au, said his company had made it clear to all concerned throughout the financial restructuring that it would require a collateral commitment on the foreign exchange hedge contract.

Citibank's hedge contract position with Tranz Rail is unique among the rail operator's bankers.

"It is not an 11th hour thing," Au said.

"In the restructuring we told everybody that the hedging arrangement would need to be an integral part of the restructuring.

"We do not need additional collateral at this point. What we are saying is that they have committed to enter into an agreement with us to post collateral should the mark to market position of the swap turn against them and now they are saying that they cannot fulfil this commitment," he said.

Also, an alternative had been presented to Tranz Rail. "They did not want to [use it]," Au said.

Last night Tranz Rail's chief financial officer, Wayne Collins, said the company had agreed to break its hedge contracts as demanded by Citibank.

This meant only the next four US dollar payments on the Aratere lease were hedged.

The banking syndicate backing Tranz Rail - Citibank, National Bank of New Zealand, Bank of New Zealand and Westpac - agreed to extend the company's banking facilities to December 20.

The extension was a requirement of an underwriting deal with ABN Amro supporting the rights issue. The books close on the rights issue today and the rights become tradeable on Monday.

It was a Standard & Poor's credit downgrade that set off a chain of events culminating in the trading halt yesterday.

The decline in credit rating meant that the owners of the ferry could require a letter of credit from Tranz Rail as security.

They did not do that and negotiations followed which led to the rights issue deal, conditional on agreement of everyone involved.

At the same time a cash advances facility with the four banks, due for renegotiation by October 16, was extended to November 30 - another looming deadline.

Analysts said negotiations can go to the brink before agreement but it was highly unusual for them to be played out in such a public manner.

One shareholder, who declined to be named, said it would be absurd if a receivership or statutory management had resulted from the situation as there had been no default of payments.

Tranz Rail chairman Wayne Walden said the company had resolved most of the issues relating to its capital structure and was making good progress on renewing its bank debt facilities.



A tired Collins could last night reflect on a modest sweetener to the unseemly row. After closing out the hedge contracts, Tranz Rail was left with proceeds of $10 million.

Collins said the money would be used for a new hedge contract when the time was appropriate.