Locals take long ride on very slow train

Tranz Rail began its listed life three years ago with plenty of steam in its engine.

At the time, overseas institutions outgunned locals, bidding 619c a share to get the bulk of the 25 per cent of the company put up for sale. Because the shares were also listed in the United States they attracted the high multiples at which in vogue railway assets were selling.

Tranz Rail's share price performance didn't disappoint, bolting to a high of 900c mid way through 1997.

Its three main owners, who had bought the asset from the Government in 1993 for around $400 million, were chuffed. Investment bank Fay Richwhite and the two US based owners Wisconsin Central and Berkshire Partners had stripped out nearly all their cash they had put in just prior to listing. So basically their profit was the price the market put on their remaining Tranz Rail shares.

But since reaching those heady levels in 1997, the share price has been in decline. Yesterday it closed at 320c.

To cap things off, last week credit ratings agency Standard & Poor's signalled a double downgrade for the New Zealand rail operator.

It cited as reasons weak economic activity in New Zealand, languishing export markets, declining average freight rates, higher costs and increasing debt usage associated with major capital projects in the past few years.

Certainly Tranz Rail is hauling a mountain of debt - its net debt position, combining on and off balance sheet, is in excess of $420 million.

A central issue for the company is that its ability to pay the interest on that debt is decreasing. Last year operating cash flow covered interest three times. Today it has shrunk to two times.

Simply, Tranz Rail is spending more than it can afford. Its heavy capital expenditure programme, amounting to around $357 million in the last two years, is not generating profits.

For example buying a new ferry to replace an old one on a Cook Strait route facing new competition blunts earnings rather then grows them.

Tranz Rail realises it has a problem and is cutting back its spending to less than $50 million a year. Analysts also pick the company will have to axe its dividend until it gets back on track..

Tranz Rail's decision to pare back its spending comes a little over a year after it shelled out around $38 million on buying back its shares.

But sadly while the overseas investors appear to have taken the opportunity to exit the stock, locals have bought in. After owning virtually nothing when it listed, New Zealanders now hold more than half the shares.

While this puts them in the same boat as Fay, Richwhite and Wisconsin, who remain shareholders, the ride from here looks like a long slow one.