Vector keeps its powder dry

By Nick Stride

Friday 27th September 2002

The decision on whether to float 25% of Vector next year is not dependent on the success of its bid to buy all of United Networks.

The prospectus for Vector's capital bonds issue confirms Vector's owner, the Auckland Energy Consumer Trust, has agreed in principle that 24.9% of Vector will be sold to the public.

Both parties insist the decision whether to float will be taken only next year. If no float takes place the coupon (interest rate at face value) for the bonds will increase by 1.5 percentage points, to 9.75%.

The prospectus contains two pro forma reconstructed balance sheets for Vector one assuming a 100% takeover of UNL, and one assuming Vector gets only the 70.2% Aquila has agreed to sell it.

Both exclude the $1 billion Powerco and Hawke's Bay Network proposal to pay Vector for some UNL assets.

Under the 100% scenario it is assumed all of that will go to Vector debt reduction but UNL's existing debt will be retained.

The combined entity would be financed by $2.17 billion of bank debt, to be reduced by the proceeds of up to $350 million of the bonds issue.

Under the 70.2% scenario Vector will repay $470 million of UNL debt.

A share buyback of $390 million will provide Vector with $274 million, which will also go to reducing Vector debt, leading to an overall debt reduction of $744 million.

Bank borrowings would be $1.71 billion less the bonds issue proceeds.

Vector has already had its credit rating from Standard & Poor's cut to BBB plus. S&P said the rating would probably stay at that level if the sales to Powerco and HBN went through.

If not it was likely it would be cut to BBB.

In that case the bonds' 8.25% interest rate would increase to 8.5%, and by a further 0.25% for each downgrade "notch" up to a maximum 9.25%.

The decision on whether to float will be driven at board level by financial and market factors.

The directors will have to decide whether the valuation the market puts on Vector equity at the time justifies a share sale.

At the shareholder (trust) level there will also be political factors.

A deed between Vector and the trust commits Vector not to increase prices for residential and small commercial customers by more than CPI (consumers price index) inflation "plus any new or additional external costs imposed on Vector in servicing such customers to the extent those costs exceed CPI."

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