Companies use capital note issues to raise money to counter share volatility

By Chris Hutching

Friday 19th October 2001

In a surprise move National Property Trust joined the increasing number of companies raising money through capital notes or other subordinated debt issues.

Recent high-profile issues have come from Blue Star, GPG, Fonterra, Sky City and Sky TV (see table). Fonterra has flagged an issue but hasn't yet produced a prospectus.

Capital note or bond issues have become more popular as the recent volatility of share markets has spooked shareholders.

They offer investors a regular return and often a repayment date or opportunity to convert to shares. Banks and major financiers like them because they strengthen their first-ranking securities.

But subordinated debt issues can also be used to shift debt off balance sheets and this appears to be the case for Dunedin-based and listed retailer Arthur Barnett. The company over-reached itself with a big redevelopment of its central city Meridian Mall in Dunedin and since then has posted small profits and passed on paying dividends.

For more than a year directors had the mall on the market but have dropped the idea in favour of an $18 million capital note issue in perpetuity returning 10% per annum and fully underwitten by broker Forsyth Barr.

Arthur Barnett chairman Trevor Scott said the timing was unfortunate, coming just before the US terrorist attacks and subsequent fall in interest rates. With the benefit of hindsight the level might have been set around 9.5%, he said.

The company has also issued $4 million worth of the notes to itself to provide more funding flexibility and would be able to resume dividend payments. Arthur Barnett's high-debt burden is reflected in the recent annual result where tax, depreciation and interest shaved more than $5 million to give a final net surplus of just $508,000 on revenue of $29.8 million.

Meanwhile, the Stock Exchange is also keen to raise the profile of subordinated debt issues rather than have investors park their money in bank accounts. One way is to make capital notes and bond issues more easily traded like shares.

An exchange committee has been working on changing the rules to encourage brokers to report sales, settle more speedily and provide more transparent information to investors. Stock Exchange business development manager Kathy Gruschow said a new website would soon be up and new regulation would encourage brokers to participate more fully in the market.

"We want to make it easier for investors to switch from equity investments to debt investments. We want them to spend and invest rather put their money in the bank. A listed company gives more security for these issues," she said.

Investors should be comforted by the high disclosure regulatory framework that listed companies must work within to obtain prospectus registration.

One of the most well-known subordinated debt issues that went awry was the default on the Skellerup bonds. Ms Gruschow said it was a case where NZSE surveillance and high disclosure requirements could have provided a fully informed market.

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