SkyCity's capital raising queried

Nigel Morrison. Photo / Dean Purcell

Questions have been raised over the need for SkyCity to raise up to $214 million in new capital.

The casino and hotel operator yesterday joined a growing list of New Zealand companies raising money from its shareholders.

SkyCity said it was raising the money to cut its gearing level and reduce debt.

But analysts have queried the move and warn it could be detrimental to shareholders.

First NZ Capital analyst Rob Bode said SkyCity had formed the view that it was too highly geared for the current environment.

"That part makes sense." But he questioned how the company would reduce debt when it did not have any due until May next year.

"There may be an opportunity to retire debt ahead of time but we can't see this at this point in time."

Bode said the money would likely end up sitting in cash which could have an impact on the earnings per share.

"You can't raise money, invest it in cash and not have an impact."

Forsyth Barr analyst Jeremy Simpson said the move was prudent in the current environment and in the past one of the most widespread criticisms of SkyCity had been its debt levels were too high.

"From that perspective it is good. But I don't think they necessarily needed to do it. The company's balance sheet is in a sound position. There are no pressing reasons for it to do so."

But SkyCity chief executive Nigel Morrison said it wanted to reduce its gearing level as it was a little on the high side and the company had been criticised for that in the past.

It had a gearing level of 3.1 times earnings before interest, tax, depreciation and amortisation.

Morrison said the extra capital would allow it to reduce gearing to 2.5 times which it hoped would make the company more attractive to some investors who have previously been put off it in the past.

It would also allow it to reduce net debt. The company has $964 million in debt due over the next 10 years.

"It will give us the opportunity to talk to some holders of debt and manage it." Morrison said this could mean talking to its capital noteholders about an early repayment although it was more likely to try to focus on the debt issued to US private investors as it was a much larger level of debt.

SkyCity has a $485 million debt to US institutions which is due to be repaid in 2012.

Morrison said that debt was owned by up to a dozen institutions who specialised in corporate debt. There had been no pressure to pay back the money.

"They really appreciate the creditworthiness of SkyCity," he said. Asked why they would want the money to be paid back given that creditworthiness Morrison said some of the companies may wish to have the debt repaid in order to invest in other debt which paid higher returns.

The placement was expected to be completed overnight. It aims to raise $178.9 million at $2.52 per share from institutions but could raise more if the book build sets a higher share price.

Retail shareholders would then have a chance to take part in a $35 million share purchase plan where they can apply for up to $12,000 worth of shares. The price will be set at the lower of the placement price and a 2.5 per cent discount to the five day volume-weighted average price prior to the close of the offer. SkyCity shares closed down 8c at $2.85 yesterday.

Morrison said expectations were that around 30 to 50 per cent of shareholders would take that up.

That would allow for up to $15 million to be offered to high net worth investors for whom $12,000 was not enough to maintain their shareholding through a top-up.