Tranz Rail shares knocked off track after rights announcement

By NZPA

Friday 1st November 2002

Shares in rail operator Tranz Rail were knocked further off track today following its announcement yesterday it planned to raise at least $60 million as part of an agreement to hold on to the Aratere Interisland ferry.

The announcement in late trade yesterday knocked the stock back 11 cents to $1.34 yesterday and today the stock opened another 6 cents lower at $1.28 and then slumped as low as $1.23. By 10am it had partially recovered to $1.33 -- still two thirds below where it started the year at $4.00. It has lost 70 percent of its value from $4.50 a year ago.

Tranz Rail said yesterday the board expected to approve a pro-rata discounted rights issue to existing shareholders on Friday of at least $60 million, to be completed before the end of March.

The rights issue will go toward paying Tranz Rail's banks, and provide cash collateral for a letter of credit to the Aratere Group.

The price of the rights issue has not been announced but with 121 million shares on issue it is highly probable there will be a one-for-one issue at 50 cents or a one-for-two at $1 each.

Richard Leggat, head of research at UBS Warburg, said he believed the stock had been oversold. His firm has a much higher valuation on the stock although he did not wish to specify it.

"We've thought that for a while but I think being realistic in the short term, with a rights issue overhanging the stock, the share price is going to struggle until that rights issue is out of the way.

"Also investors want more evidence that the company is going to be able to achieve its full year forecast. They're forecasting operating earnings of $55 million... and certainly parts of the market are sceptical they can achieve that. We believe they can."

The issue will be underwritten by ABN Amro, brokers said.

Following Tranz Rail's fall in credit rating to BB+ from BBB last month in reaction to its heavy borrowing, the United States-based owners of the Aratere ferry were entitled to ask for a letter of credit to cover the ferry's loss value of about $115 million.

Tranz Rail has since been in negotiation with Aratere Group, and had to resolve the issue before it could renegotiate its banking facilities, currently a five-year, $250 million debt facility.

Tranz Rail chief financial officer Wayne Collins told NZPA the negotiations in New York and New Zealand with the group of banks and institutions had been "hard work".

He was hopeful Tranz Rail would meet the agreement conditions and expected the company to return eventually to its previous rating.

"It won't be immediate, but I hope in due course that will happen. Given that we complete an equity issue, resolve the Aratere situation, and make our profits this year, I think we're a long way toward regaining our status," Mr Collins said.

Tranz Rail last week reported an operating loss of $7.2 million for the first quarter, but said in July it expected to earn $55.8 million before interest and tax in the current year.

The company logged a June year bottom line loss of $122.7 million.

Mr Collins also believes there is good potential for upside for Tranz Rail's stock.

"Now we've resolved our short-term financial liquidity position, if we attain our forecast, this is one of the shares in the New Zealand market that's got quite substantial scope for improvement," he said.

"This takes out some of the uncertainty about it. The only uncertainty remains, will we meet our operating results, and as we go through the year and it becomes obvious, you'd expect the share price to go up."

The next quarter result, due in late January or early February, will be keenly watched.

The market wants to see how many investors signed up for the issue, ASB Securities broker Tim Preston said.

Among the conditions of the agreement, half the proceeds of any asset sales would go towards the Aratere Group, until Tranz Rail's rating returned to BBB.

Tranz Rail has already said it wants to sell its rail passenger services in Wellington, with a sale possible next year.

The ferry lease costs will also increase by under $1 million a year as a result of an annual repricing of the lease by 125 basis points, reflecting Tranz Rail's changed credit rating.

The agreement is conditional on final Aratere Group approval by November 18, and approval from Tranz Rail's banking syndicate to enter $80 million of new banking facilities.

The shortfall between the capital value of the Aratere lease and the vessel's market value would be secured by a general securities deed, under which Aratere Group has first ranking priority over the assets.

Tranz Rail will announce further details of the issue, including price and entitlement, in the near future.

Comments from our readers

No comments yet