Suicide missions offer new slant to financial, economic equations

By Peter V O'Brien

Friday 21st September 2001

Worldwide concern about potential political, military and financial upheavals after the terrorist attacks in the US last week coincided with substantial losses and writeoffs reported from New Zealand companies.

While this country is a very small figure on the world political scene and in the sphere of international finance and economics, the various events had a big impact on our markets, although our problems were relatively insignificant in the context of the greater disaster.

It is uncertain whether the economic fallout will match those of the Asian financial mess of the late 1990s or the earlier Gulf War but it could be serious.

The New Zealand sharemarket faces up to bad news from companies, which, as usual when it has to be released, came at the last moments of the June 30 reporting round.

Air New Zealand's financial debacle has been well-covered and analysed in the media and in other public forums, including Parliament, so there is no need to pick over figures again, except for one point.

The government committed itself to provide a $550 million standby credit facility for the airline and shareholders Singapore Airlines and Brierley Investments are supposed to contribute a total of $300 million in new equity.

Even that money is currently uncertain. The government is conducting due diligence and we have yet to see what price the shareholders will pay for new shares, given the formula for calculating it and the dive in Air New Zealand's share prices.

It is ironic that such financial assistance was worked out last week before the share prices more than halved in two trading days. Air New Zealand was capitalised at $119.65 million for the A shares and $111.55 million for the B scrip on Monday meaning the whole company could theoretically, be bought for $231.21 million, or 27.22% of the rescue package. That is admittedly a technical argument, because the major shareholder would be unlikely to get out at fire-sale prices.

Brierley Iinvestments said last week it would reduce the carrying value of its Air New Zealand associate by about $US163.1 million, representing its equity accounting share of the $NZ1.32 billion charge taken by the airline.

The non-charge to the "profit and loss account" (statement of financial performance, in our corporate language) would be disclosed as an exceptional item in BIL's results for the year ended June 30.

BIL said it had anticipated the company would return to profitability in the year just ended, after selling its 28.7% interest in James Hardie Industries but it was now expected to report a loss.

Back in March BIL chief executive Greg Terry said in the interim report Air New Zealand had a new management, a new structure and the elements of a new strategy.

"Although the full integration of Ansett and the implementation of the new strategy will take time, the prospects for Air New Zealand going forward are sound."

BIL's share price also suffered in the wake of Air New Zealand's problems, leaving another group of New Zealand's private investors with more losses.

Textile group Designer Textiles came in with a large loss for the year ended June 30, after issuing an interim report in February that recorded net profit for the period at $850,000, although there was a loss of $121,000 in the year ended June 30, 2000.

The company had abnormal items of $12.05 million, comprising restructuring costs of $3.31 million, stock obsolescence of $1.23 million, a fixed-assets writedown accounting for $3.94 million and writeoff of goodwill worth $3.57 million.

Designer Textiles said it was changing the company from a textile-production company, selling fabrics, into a sales and marketing organisation that delivers textile, ready-made curtains, garments and "other solutions to its customers."

Eventure lost $1.43 million for the six months ended June, which was a good "improvement" on the $2.61 million deficit in the corresponding period of the previous year and a $4.56 million loss for the year ended December 2000.

The interim report said the company had undergone a major restructuring under difficult market conditions. That has become a familiar statement from the smaller companies, particularly those with technology associations.

Under "outlook" it was said the directors considered the restructuring was successfully completed.

The main asset was cash of $28.91 million and had been protected. New opportunities were "being investigated to increase shareholder value."

Then we had Otter Gold Mines and GRD (formerly Gold and Resource Developments and originally MacRaes). Otter said, in fine understatement, it had been a "difficult year" for the 12 months ended June 30.

When you lose $NZ41.9 million, or $A33.6 million, times have been difficult. Just about everything that could happen happened - flooded mines, mine rehabilitation, lower production leading to reduced revenue from gold and silver sales and the appointment of administrators (now a well known Australian corporate law term).

GRD's net profit for the six months ended June 30 went from $A8.39 million in the first half of 2000 to $A3.30 million, although the company expected the second half to be considerably stronger.

Markets rise and fall, as do company profits, but slamming airliners into buildings on suicide missions is a horrifyingly new part of the financial and economic equation.

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