Tranz Rail shares go into free fall

By Simon Louisson

Tranz Rail shares went into a free fall today.

A spokeswoman for Finance Minister Michael Cullen said the Government was keeping "a watching brief" on the situation but the company was publicly listed and any move was in Tranz Rail's court.

A Tranz Rail spokeswoman said: "We're aware of the situation."

Asked what the company could do, she said: "We're certainly not sitting on our hands."

Shares in the already battered rail company crashed over 50 per cent this morning to a low of 30 cents, but later recovered to 43 cents shortly after 10am.

The Stock Exchange said it was monitoring the situation but had decided not to suspend trading in the stock as it did for Air New Zealand in 2001 when the airline's shares went into freefall.

"We are fully aware of the situation with respect to Tranz Rail," Elaine Campbell, general counsel for the NZSE told NZPA.

"We have not made a determination to suspend the trading at this point in time. We are monitoring it."

She said the exchange had percentage fall formulae in place to trigger a suspension, "but they need to be considered along side any announcements the company may have made that may have accounted for the drop in price".

A decision to suspend was made in the context of whether it considered the market was trading on a fully informed basis.

"There is still a reasonable spread on the stock," she said.

She would not comment on whether the exchange had been in contact with Tranz Rail today.

Today's share price collapse may have been triggered by court documents published by the New Zealand Herald today that showed Tranz Rail would be in a precarious position by the end of June if it did not sell assets.

That was the view that rating agency Standard & Poor's formed after seeing the company's cashflow forecasts on April 3. It was the reason it changed a planned three notch downgrade in Tranz Rail's BB+ credit rating to a five-notch downgrade to B- on Monday.

Tranz Rail terminated its contract with S&P on April 8 and went to the High Court last Friday seeking an injunction to prevent the agency publishing a rating decision. The case was settled out of court and S&P released its downgrade.

The affidavits to the court include one from Tranz Rail's chief financial officer, Wayne Collins, stating Tranz Rail had just $11.3 million in cash at the end of March.

It was facing a $14 million debt repayment on April 1, but banks agreed to change it to two payments of $5 million and one of $4 million spread over three months.

Mr Collins has said the company could have made the payment and he maintained that view today.

Tranz Rail will have just $1.3 million of cash and fully-drawn bank facilities at the end of June and that assumes a $10.7 million sale of railcars to Carter Holt Harvey next month, according to an affidavit from Paul Stephen, S&P infrastructure group team leader.

This was according to a 12-week cashflow forecast provided by Tranz Rail on April 3, which S&P regarded as a "significant new document".

The cash position included a debt paydown as agreed by the banks, a bond interest payment of $4.5 million this month and a lease payment in June of approximately $21 million.

"Assuming that operational cashflow was as forecast and the Carter Holt Harvey asset sale was successful, the company would have only a $1.3 million cash surplus at the end of June 2003.

"If the sales did not proceed, then Tranz Rail would be in a precarious financial position at the end of June 2003 and require further bank or financial support," Mr Stephen said in the affidavit.

He said the banks' reschedule of the debt payment gave some comfort and it appeared that if Tranz Rail faced a liquidity crisis, the banks might still be willing to help.

"If it were not for the bank currently being reasonably well-disposed towards Tranz Rail, it is possible that S&P would feel obliged to give Tranz Rail a CCC rating," Mr Stephen's affidavit said.

Tranz Rail has disputed S&P's judgment vigorously, arguing it had not been given credit for a rights issue last year that raised $60 million and for its operating earnings. It provided a letter to the court from Macquarie Bank's New York office saying Tranz Rail should be rated BB+.

Mr Collins told the court Tranz Rail would be perceived as a forced seller of assets.

"This will impact on the value obtained by the plaintiff for the assets it currently has for sale, including the Wellington Metro business and the Distribution Services business."

Demands from creditors would intensify when the company had a tight cashflow position.

It would be impossible for the private placement in the US to proceed.

The price paid by Tranz Rail for its debt facilities would increase by 1 per cent, costing $500,000 more a year.

The ANZ bank has also told Tranz Rail that it wants an Eftpos facility enabling bookings by customers to become secured, putting further pressure on the company's cashflow and security position.

The latest downgrade to B- means US financiers of the Aratere Cook Strait ferry lease have to increase reserves in relation to their debt from 5 per cent to 10 per cent to comply with regulations.

"A rating downgrade will not only have an adverse economic impact on existing investors, but will probably eliminate the potential for a successful execution of a Tranz Rail refinancing in the US private placement market," the Macquarie letter said.

Mr Collins said the idea of refinancing the $100 million of debt on the lease had been in the early stages.

This month's share price collapse was triggered by a profit warning issued on April 7 when Tranz Rail said it would not meet third quarter targets. However, it forecast a $47 million profit in the year to June 30 and has said that could rise to $60 million if it sells assets.

- NZPA