Tranz Rail split with S&P surprises debt market

By PAM GRAHAM

Tranz Rail's break with Standard & Poor's had heads shaking in disbelief in some quarters and will be the subject of a statement by the credit rating agency today.

Also, Guinness Peat Group director Tony Gibbs said "no comment" to speculation that the investment company had bought Tranz Rail shares, which yesterday touched a record low of 73c. The shares plunged this week on a profit downgrade.

Tranz Rail also told S&P this week that its services were no longer required and S&P took the rare step of suspending the rating. The company's BB-plus rating, which is the highest of the non-investment grade, or junk ratings, was on review for downgrade.

Still, debt market issuers and traders said many New Zealand companies and local authorities issued debt without credit ratings, particularly if they were non-investment grade like Tranz Rail.

Credit ratings are most useful when a company has an investment grade and wants to sell bonds globally. They provide comfort to institutions buying bonds, but many local institutions have the freedom to buy non-investment grade issues and do their own research on such paper.

Tranz Rail's finances were in the hands of its bankers who have allowed it to spread a $14 million payment due in March over three months.

The payment was the last one to cut bank facilities back to $55 million from $83 million.

Last December, the company agreed with banks and funders of a lease on the Aratere ferry that the proceeds of a $65 million rights issue and planned asset sales would be split 50:50 between paying down the bank facilities and providing extra security for the lease.

S&P's downgrade of the company to non-investment grade last year had triggered a lease clause requiring more security.

Tranz Rail now has $30 million in an overseas bank account supporting the Aratere lease when leaseholders also have the ferry as security.

Chief financial officer Wayne Collins said he was looking at ways of refinancing the debt component of the Aratere lease so the funds held as extra security could be freed up.

Tranz Rail shares closed 4c lower yesterday at 75c.