Tranz Rail suffers degrade to junk

By CHRIS DANIELS

Standard & Poor's yesterday cut Tranz Rail's credit rating two notches to junk status, ranking the company's debt below investment grade.

The move underscores Tranz Rail's fragile financial position and its urgent need for a new injection of capital.

An immediate effect is that the owner of Tranz Rail's leased interisland ferry Aratere can now demand a letter of credit for about $115 million as security.

Chief financial officer Wayne Collins has said there was a chance Tranz Rail could get away with not providing the letter, because the ferry owner also had the security of the vessel itself. An additional letter of credit would mean they were being asked to provide two forms of security.

Collins said apart from the impact on the lease conditions of the Aratere, yesterday's downgrade did not directly affect any other part the business.

Existing debt facilities had been extended to November 30, by which time it was hoped the issue of the letter of credit for the Aratere would be resolved.

According to its latest financial statement, Tranz Rail has short-term debt of $84.6 million and long-term debt of $219.4 million.

It paid $26.3 million in interest in the year to June.

Collins said that the Aratere owners, a group of institutions based mainly in the United States, would be visited this month.

He said the downgrade was expected.

"S&P have been quite favourable to us over three years on negative outlook even though our financial structure didn't support our previous rating," said Collins.

"They are now saying 'well, we've been very tolerant, but let's deal with Tranz Rail as it looks now, and if you do all these things we'll look at a re-rating'.

"I think they've been quite fair and considerate about it, really."

Tranz Rail has a weak liquidity position and faces challenges to improve its internal cash flow in the near-to-medium term, said Standard & Poor's, which cut Tranz Rail's rating from BBB to BB+.

"Despite its entrenched position in New Zealand's freight market, the company's underlying operation has deteriorated significantly in fiscal 2002, with competitive issues compounded with extensive operational changes," said S&P associate director Parvathy Iyer.

"The company's short-term revenue target appears challenging.

"Based on its recent track record, the company faces a challenge to improve and sustain satisfactory cash flows."

Iyer said Tranz Rail needed to secure new long-term bank funding or "complete potential equity raising".

In a speech before announcing last week's loss of $122.7 million for the year to June 30 compared with a net profit of $5.6 million the year before, Tranz Rail chief executive Michael Beard said that the S&P review could "trigger other events" and the company had plans to "cover the various scenarios that may arise".

One of the plans involved raising new equity, but Beard said the Tranz Rail board had yet to decide which avenue provided the best solution.

Tranz Rail shares closed up 3c yesterday at $1.58 each.

* Wellington Regional Council chairman Margaret Shields yesterday said that Beard may have been over-optimistic in expecting a sale of its Tranz Metro commuter service by the end of this year. The sale of Tranz Metro, if resolved in time, would help to ease pressure on the company's balance sheet, possibly removing the need to raise new equity.