Banks will be more cautious with SOEs after Solid Energy bail out


The government and banks have agreed to a proposal to financially restructure Solid Energy Finance Minister Bill English and Minister for State Owned Enterprises Tony Ryall announced.

“As we have said previously, ministers were not prepared to expose taxpayers to on-going losses if Solid Energy’s core business was not considered viable,” Mr English says.

“However, we also said that we were prepared to provide support for the company if there was a reasonable chance it could be made viable, and we expected the lenders to also contribute to that recovery,” he says.

Mr Ryall says that although the company still has a lot of work to do, and market conditions remain challenging, the point has now been reached where a financial restructuring proposal can be formalised with Solid Energy’s key lenders.

“The proposed restructuring will give the company more time to work through the issues it faces, as it continues to focus on its core coal business,” Mr Ryall says.

The proposal includes:

  • A restructuring of the bulk of the company’s bank facilities.
  • The company issuing $100 million in non-voting redeemable preference shares – $75 million to key lenders in exchange for part of the debt owed to them, and $25 million to the Crown in exchange for cash.
  • A secured working capital loan of $50 million provided by the Crown, repayable within three years.
  • A secured land mortgage of $50 million provided by the Crown, repayable within three years.

Ministers have also agreed to a secured standby facility of up to $30 million, provided by the Crown, if required.

“Holders of the company’s medium term notes are being asked to agree to waive some of their rights to enable the company to put the financial restructuring proposal forward to lenders,” Mr Ryall says.

“The process to formally adopt the proposal is now underway and is expected to be complete by the end of the month.”

Mr English says the Government’s financial statements for the year to June 30 2013, to be issued next Monday, will include the financial impact of the proposed agreement, including the $25 million cash injection and $100 million of loan facilities and the $30 million standby facility.

“After many months of complex discussions between the Crown, the company and its key lenders we welcome this next step to move the company forward,” Mr English says.

The Green Party shows its idealogical blindness by calling this privatisation by stealth.

Four foreign-owned banks – ANZ, BNZ, ASB and Westpac – will take a $75 million ownership stake in Solid Energy in return for writing off debt. . .

Banks are in fact are taking an expensive haircut.

Banks that lent unsustainable amounts of debt to state-owned coal miner Solid Energy are taking a $75 million “hair-cut”, dressed up as an issue of redeemable preference shares that may never be repaid. . .

English signalled in February, when the problems were announced, that the government expected the banks to take a share of the burden of adjustment created by Solid Energy investing too heavily in experimental new energy forms.

Had the company not been an SOE banks would have been a lot more wary about lending so much to it.

Now they know the government isn’t going to be prepared to carry the full costs of an SOE’s losses they will be more cautious about lending to them in future.

Rather than complaining that this is privatisation by stealth we should be grateful banks are sharing the loss and questioning why the government owned a company like this in the first place.

It’s evidence in the case for privatisation not against it.

Would they buy them back?


Labour and the Green Party are still wasting their time gathering signatures for their petition opposing the partial sale of a few state assets.

They need to explain if they are going to present the petition and, if it has sufficient signatures, force the expense of their politicians’ initiated referendum on us when it will be too late to achieve anything.

Mighty River Power, is expected to be floated by mid-May, long before a referendum could take place, so why are they bothering to collect more signatures?

Truth points out in its editorial Labour  and the Greens need to come clean on asset sales:

. . . We know what the government thinks. We can all read the prospectus when it comes out for Mighty River Power, but what investors don’t know is what Labour intends as its policy towards these sales.

We know they oppose them, but what is their policy moving forward.

Investors and voters need to know if Labour intends opposing the sales in actions and not just words.

Will Labour commit to forced buy-back of the shares, essentially a re-nationalisation of the asset. Before readers poo-pooh that suggestion remember Air New Zealand.

Helen Clark even flirted with securities laws by advising on national television for Mum and Dad investors to keep their shares in Air New Zealand…that everything would be alright. As we know everything wan;t alright and some weeks later the government forcibly acquired as many shares as it could and left about 25% of shareholder mired without any sort of say in the company.

Would Labour do this again with the listed power companies…and if so how much would they pay for the shares…The listing price? The market price (unlikely)?

Labour and their hangers-on who oppose asset sales need to clarify before even a single share is sold what their intentions are.

I suspect that their policy will be as bankrupt as their position so far has been. Words not Deeds. . .

Winston Peters, a likely coalition partner in a Labour/Green government wants to buy the shares back:

. . . New Zealand First will use its influence on the next coalition Government to buy back our state-owned power companies which are being flogged off by National and we are committed to buying back the shares at no greater price than paid by the first purchaser.

Labour and the Green Party haven’t let us know their plans yet.

If they go ahead with the petition without making a commitment to buy the shares back they are adding yet more proof to the contention they’re after publicity for themselves not a change in policy.

If, however, they plan to buy back the shares they will sabotage any efforts they make to pretend they have any interest in the careful management of public finances and any concern for investors.

SOEs put govt blanace sheet at risk


Opponents to the partial sale of state assets complain about the loss of dividends, they forget about the costs.

Trans Tasman points out the risks of state ownership:

. . .there is a harsh reality to be faced, not only with Solid Energy (what’s a Govt trying to do in owning coal mines?) but with other state-owned entities whose profitability has shrunk: think of TVNZ, NZ Post, Kordia. Not surprisingly, Solid Energy’s troubles have thrown into relief how the Govt’s balance sheet, already structurally weak, can be pushed into dangerous territory by businesses where all the risks have to be shouldered by the taxpayer.

Opponents to the sales complain that the government will lose dividend income when up to 49% of shares in an SOE are sold.

They forget the risks and costs of ownership which ultimately fall on the taxpayer.

I’d rather have my taxes pay for core government responsibilities like defence, police, infrastructure, health and welfare than investment in areas best left to the private sector.

Triple profit still not good return


Landcorp has tripled its first half operating profit, largely due to improvement in livestock prices:

Net operating profit was about $11 million in the six months ended Dec. 31, up from $3.2 million a year earlier, the company said in a statement. Sales climbed 13 percent to $103 million.

Sales growth at New Zealand’s largest farming company was led by a 27 percent increase in revenue from livestock to $46.3 million, reflecting higher prices for meat and store animals. Dairy revenue rose 2.5 percent to $53 million on higher milk sales. Total expenses rose to $87 million from about $80 million, largely due to the rising cost of fuel.

“In the North Island, Landcorp operations were not constrained by weather extremes as they have been during each of the previous four springs,” the company said in its half year report. “Grass growth was strong in both islands, and reproductive performance unhindered by storms or exceptional dry conditions. These results were positive for the continued rebuilding of flock and herd sizes following the severe droughts of 2007 and 2008.”

Landcorp expects a positive outcome for 2011/2012, with a net operating profit above $20 million and a $15 million dividend payment for the year.

First-half net profit, which includes changes in the value of livestock required by NZ IFRS accounting standards, rose 73 percent to $71.95 million.

That last sum is an accounting entry which reflects the increase in the value of capital stock rather than revenue.

It all sounds very impressive but the expected $15 million dividend doesn’t look nearly as good as a percentage return on the value of its assets – $1.6b last year and given the increase in the value of land and stock it will be higher now.

Among the arguments against allowing the sale of farmland to foreigners advanced in the last couple of weeks is that it provides unfair competition for local buyers.

Is competition from an SOE any fairer?

Giving win for effect


Trans Tasman sums up the Maori Party grandstanding over the changes to references to Treaty principles in the SOE Act needed to enable partial sales:

The Maori Party needs a win. For its own supporters it could not be seen to give way on this one although the point is largely symbolic. National needs to give them a win which won’t make a lot of difference. You can drive a herd of elegance over this, but the substance is still so much political dust and noise.

If a minority of shares is to be sold the government must do everything it can to ensure it gets the best price.

If the Treaty clause remained it would create uncertainty which would devalue the shares.

Besides, the Treaty was an agreement between the Crown and Maori, it doesn’t bind other people and can’t apply to companies with other shareholders the way it does to SOEs which are wholly owned by the state.

SOE selldown could gross $6.8b


The partial sale of state owned energy companies could gross  $6.8 billion.

Could is the operative word.

However, there is a dearth of local companies listed for potential investors in New Zealand.

Superannuation funds, Iwi, ACC and community trusts will all be keen to invest in SOEs and the over-subscription for TradeMe when it listed shows there are willing buyers.

Report on SOEs tells only part of the story


The Ernst and Young report on the performance of SOEs shows they make healthy “economic profits”.

But that is only part of the story.

Dene Mackenzie showed that returns from the SOEs which are likely to be sold are lacklustre:

While some of the state-owned enterprises provide a large dividend payment to the Government in dollar value, the dividend yield is well below the industry average. 

Macdoctor has come to a similar conclusion:

. . .  I tend to look only at the cash figures involved. . . . The first is the amount of actual cash paid to the government in the fiscal year – not the capital gains or retained earnings – just the cash. That figure is $95 million. 49% of that is $46.5 million. That is how much money the government loses each year by selling MRP.

The second figure is how much it would cost to keep. The independent valuation for MRP is $3,631 million. 49% of that is $1,779 million. Assuming the government could borrow at a mere 5% . . . the interest on borrowing this amount is $89 million. This figure is bigger than 46.5 million, so it is worth selling Mighty River Power.

But it’s not just the money:

National want to sell down these assets because they (correctly in my opinion) see no reason why a government should be dabbling in electricity generation. Labour hate the sales because they think government should be the be-all-and-end-all of everything. They like to call these assets “strategic”. This is code for “we don’t trust the market”.

I’d rather trust the market than politicians and I’d rather sell a minority share in a few SOEs than borrow more which is the alternative if we are to ocntinue to invest in necessary infrastructure.



Ownership doesn’t influence price and service


A friend reckons all power companies are a pack of b of questionable legitimacy:

I wouldn’t go that far. But we use different companies in different places and have noticed no appreciable difference between the price and service from SOEs and private companies.

Opponents of the partial sale of state owned power companies are fear mongering over the difference it will make to consumers.

In our experience ownership doesn’t seem to influence price or service which are the things which matter to consumers.

Does farming give best return on $1668.7m?


Landcorp has confirmed it’s bidding for the 16 Crafar farms.

That’s a board decision and because it’s an SOE the government can’t interfere.

It might however, ask some questions on behalf of the taxpayer including:

  • How will the costs of borrowing affect Landcorp’s already dismal return of  around .6% on its  $1668.7m  investment?
  • If a debt to debt plus equity ratio of 11.1% at last balance date was above plan, what’s planned for the current year?
  • How will the purchase fit with the company’s mission: “To provide shareholding ministers with maximum sustainable financial returns“?
  • If the bid is successful will the company keep all of the other farms it owns and leases?
  • How much land does the company plan to own and lease?

And the public might ask:

  • Do we really want the state which already farms 1.5 million stock units on 105 properties with a total area of 374,948 hectares to add another 16 farms to its portfolio?
  • What do we want in return for our  $1668.7m investment?
  • Is farming the best way to get it?

Then perhaps we could have a calm and reasoned discussion on state ownership of assets in general and Landcorp in particular.

Selling everything at once would be stupid, but so is keeping everything for fear of the emotional reaction that greets a hint that perhaps state ownership isn’t always the best use of scarce public capital.

There will be a case for keeping some SOEs and there is a case for selling others. One reason for sales is that the opportunity cost of ownership for some of the assets is far greater than the return from them.

No sales this term


The government’s response to the Capital market Task Force report has prompted questions about the possible sale of State Owned Enterprises.

One of National’s election promises was that is wouldn’t sell any state assets in its first term.

That doesn’t preclude discussion on possible sales, possibly only partial, in a future term.

Landcorp would be a good place to start. I can’t think of any good reasons for the government to be involved in farming and some of the SOE’s farms were sold under the previous administration.

Listing would shine a bit of daylight on the operation of SOEs and there could be benefits from the financial rigor required of publicly listed companies.

Divesting even part of the shareholding from the government to individuals would free up public money for other things and provide much-needed opportunities for investment in something other than property.

Please tell me it isn’t so – updated & updated again


Trans Tasman is reporting that Michael Cullen will be appointed to chair NZ Post and KiwiBank when Jim Bolger retires.

A loyal National Party member has just phoned to tell me he and others who spent nine years working to get Cullen’s hands off the reins are furious about this and I share their views.

There must be someone better equipped for these roles than the man who overtaxed and over spent for nine long years, leaving our economy far less able to weather the recession than it would have been had his policies been directed at growth rather than redistribution.

SOEs have been underperforming and need highly skilled leadership and that requires someone with a far greater regard for other people’s money than Cullen.

When the idea of Cullen chairing an SOE was  first mooted, blue tinted bloggers were united in their opposition. If the first to react are any indication they haven’t changed their minds: 

Fairfacts Media asks what is John Key playing at?

Kiwiblog says it’s a crappy move

UPDATE: SOE Minister Simon Power has announced:

“Hon Dr Michael Cullen has been appointed to the board of New Zealand Post, and is expected to become deputy chair in the medium term. 


Fairfacts Media thinks Cullen deputising Bolger is too good to be true

At No Minsiter Psycho Milt  is amused but Lou Taylor isn’t.

Keeping Stock thinks John Key is up to something


Roarprawn reckons it’s a poisoned chalice.

Cactus Kate was forced to seek solace in oysters and Moet

Barnsley Bill’s vote has been lost  and Not PC wonders why  he gave it to National anyway.

Whaleoil is disgusted then has second thoughts  and thinks John Key has snookered Labour.


The red rag was thrown and the blue blogs roared, but what if we’re wrong and it’s really a cunning plot?

Fairfacts Media doesn’t think the job’s as good as it looks.

Anti Dismal  has a better idea – sell the SOEs.


at NZ Conservative Zen Tiger spots a pirate plot  and muses on the relevance of history

Macdcotor advises Cullen not to trip on the way out.

At Tumeke!  Tim Selwyn thinks it’s unbelievable.

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