S&P, Moody's hit Tranz Rail

By PAM GRAHAM

Tranz Rail has failed to muzzle global credit rating agency Standard & Poor's and been slapped with a downgrade from Moody's Investors Service as well.

The rail operator went to the High Court at Auckland last Friday to stop S&P publishing a five-notch downgrade, saying it had ended S&P's contract and the agency's opinion was based on confidential information.

The parties settled yesterday and S&P released a statement with a brief explanation of the downgrade from BB+ to B-.

Tranz Rail, in a release even before the court sat yesterday, disagreed with its analysis.

Later in the day, Moody's downgraded Tranz Rail's debt securities one notch to B2, equal to a B rating by S&P, underlining that a contract or confidential information were not needed for a rating agency to form an opinion.

Justice Rhys Harrison yesterday rescinded an order suppressing reporting of Tranz Rail's application for an injunction on Friday.

During the hearing it emerged that Tranz Rail released a profit warning on the day S&P was due to make a final decision on its downgrade.

Tranz Rail also argued that a private placement it was planning in the United States could be affected by the downgrade, and it provided advice from Macquarie supporting that view.

Justice Harrison noted that there had been a complete breakdown in the relationship between the two parties, and told Tranz Rail "you are trying to muzzle S&P but the issue is whether you have the right to do it".

In the end, he did not have to decide.

The judge had said Tranz Rail's confidentiality argument was stronger than its termination-of-contract argument, but a lot of material, including the rescheduling of a $14 million debt repayment, was already public knowledge. The payment was due on April 1.

He said Tranz Rail was blaming "every man and his dog" in press reports of the profit downgrade, and figures in a column by the Herald's Brian Gaynor suggested the company was insolvent on a balance-sheet approach.

Tranz Rail's B- S&P rating means it is judged to have the capacity to meet financial commitments, though the rating remains on watch with a negative outlook.

Moody's said it was concerned that Tranz Rail's revised forecasts would not be met. The company had relatively low cash balances, high working capital requirements and bank debt and lease principal payments due in the next few months.

"Gross cashflow coverage of these payments plus capital expenditure requirements will leave little cash available for further debt reduction, which may be a problem given the fact that its current bank debt matures in June 2004 and there can be no certainty the current bank lenders will roll over their exposure on similar terms," Moody's said.

It has the rating on review for further possible downgrade.

Tranz Rail's share price fell to a record low of 62c yesterday before recovering to close at 69c.

The trigger for S&P was advice from the BNZ that Tranz Rail and its banks had rescheduled the $14 million payment, the court heard. Tranz Rail is now making the payment, the last one from a restructuring package agreed last December, over three months.

The company said yesterday that it had not been given enough credit for a total $88 million debt reduction it will have achieved by the end of June, on top of $91 million last year.

Tranz Rail has said it is trying to refinance the debt funding on the Aratere lease to free up $30 million of extra security it has in an overseas bank account supporting the lease, which already has the ferry as security. The need for extra security was triggered by S&P's downgrade of the firm from investment grade to non-investment grade last year.

The court hearing traversed issues such as the inability to stop publication outside New Zealand and the requirement to tell the Stock Exchange of material changes.

Four hours after Tranz Rail cancelled the contract it sent a letter to S&P saying all its communications with the rating agency had been confidential, the court heard.

Tranz Rail was notified about a downgrade on March 17 and a final decision was due on April 7, the day it went to the market with a profit warning, which triggered a 19 per cent fall in its share price.

The rail firm was represented by Mathew Dunning, of Russell McVeagh, and S&P was represented by John Turner, of Buddle Findlay.

Turner told the court the litigation was unprecedented for S&P.

The company said surveillance of the rating, and resolution of the creditwatch, "will in future be based on publicly available information".

A substantial security-holder notice yesterday said one shareholder - thought to be Colonial First State - had reduced its Tranz Rail stake to 7.7 per cent from 9.3. Tranz Rail met big shareholders yesterday.

Interpreting the ratings

Standard & Poor's* (Moody's**)

* AAA (Aaa): Extremely strong capacity to meet financial commitments.

* AA (Aa2): Very strong capacity to meet financial commitments.

* A (A2): Strong capacity to meet financial commitments, but susceptible to adverse conditions.

* BBB (Baa2): Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

* BB (Ba2): Less vulnerable in the near-term but faces major ongoing uncertainties in the event of adverse business, financial and economic conditions.

* B (B2): More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.

* CCC (Caa2): Currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments.

* CC: Currently highly vulnerable.

* C-: A bankruptcy petition has been filed or similar action taken but payments or financial commitments are continued.

* D-: Payment default on financial commitments.

* Ratings from AA to CCC can be modified with a plus or minus to indicate degrees of financial strength.

** Ratings below Aaa can be modified with numerals 1, 2 or 3 in order of financial strength.

Ratings in bold indicate "investment grade" financial strength.