Top banker sees new hope for SOE privatisation- Genesis bond sale a success

State owned enterprises' need for capital in the coming downturn could be an opportunity for them to access capital markets directly, a leading investment banker says.

Rob Cameron sees the listing and issuing of non-voting shares as a way to overcome the SOEs' lack of exposure to the disciplines and benefits of equity capital markets.

He also believes the SOE model would be strengthened if the Government sold a portion of its voting shares to the New Zealand Super Fund.

Cameron, who is also chairman of the Capital Market Development Taskforce set up by the previous government, said that like other operations, SOEs would need capital in the downturn.

"It's going to be urgent that businesses access capital, and SOEs will be no different," he said.

"There are downsides now in the environment that people haven't faced before. From a capital management point of view you need to be sure that you can manage them.

"One of the opportunities here is to allow these people to access capital markets directly."

If the Government were to issue shares, it needed to be prepared to issue a minimum of "a couple of hundred million dollars worth" of shares for each SOE involved, said Cameron.

"The basic objective is to get good institutional coverage, get good information coverage, get good liquidity."

Cameron explained his position in a presentation to a conference last month.

The SOE model had evolved significantly from the early approach and there had been a number of improvements, he said.

But the current model had some serious flaws, and if those flaws were not addressed SOE performance would be impaired and eventually "commercial disasters" would result.

The flaws could be readily addressed within the SOE Act, Cameron said.

"What I'm doing is identifying the key areas where I think the model's at risk."

Particularly in an environment where the organisations were facing downturns there should be concerns about addressing shortcomings.

He was hopeful, saying he thought the new Government had an "innovative" view on improving asset management and the performance of its assets.

Among the issues identified by Cameron was the choice of which organisations were SOEs.

He did not believe the model worked for Transpower's core transmission business, where concerns about monopoly power had led to "a complex, unwieldy and expensive regulatory apparatus".

On the other hand the SOE model should be applied to TVNZ, now a crown owned entity with a special charter.

Another issue was the allocation of decision rights between boards and ministers.

Now ministers had decision rights on governance which should be allocated to SOE chairs and boards, he said.

Those rights included board appointments, director succession and directors' tenure.

Director compensation also needed urgent attention, with the under-compensation of directors of Government-owned organisations having an impact on the quality of SOE boards and, more generally, distorting New Zealand's talent market, said Cameron.

To improve performance monitoring, he suggested a standard disclosure regime should be introduced to match that of publicly listed companies.

Private sector equity analysts should also monitor and report on SOE performance and value, with the reports being widely available.

An example of how one of the state owned enterprises - in this case Genesis - can raise money in the current environment was seen today, when the announcement that it reached its bond bookbuild target of $150m and was going to accept over-subscriptions of up to $75m.

In a statement released today, Genesis said $120m of five-year bonds (maturing on March 15, 2014) had been reserved for clients of those participants in the bookbuild process who have received a firm allocation.

The Government-owned power company said $105m of the seven-year bonds (maturing on March 15, 2016) had also been reserved for clients of participants in the bookbuild process.

There will be no public pool for either of the bonds.

Genesis has also set the minimum coupon rates and issue margins.

For the five-year bonds the minimum coupon rate is 7.25 per cent and the issue margin is 1.80 per cent.

The interest rate payable for these bonds will be the higher of 7.25 per cent or 1.80 per cent plus the applicable swap rate - the borrow rate between banks - on the final issue date.

For the seven-year bonds the minimum coupon rate is 7.65 per cent and the issue margin is 2.10 per cent.

The interest rate payable for the seven-year bonds will be the higher of 7.65 per cent or 2.10 per cent plus the applicable swap rate on the final issue date.

The final interest rates payable on the bonds will be determined on December 23.

The minimum holding for both bonds is $5000.

The offer is open from today until December 19, unless it is closed early.

While Genesis Energy is government-owned, the company has previously warned potential investors that the Crown did not guarantee the bonds or any of the other Genesis obligations.

The sale provided New Zealanders with an opportunity to invest in a government-owned business that played a significant role in New Zealand's energy sector.

ABN Amro New Zealand is lead manager for the offer and the co-managers are ABN Amro Craigs, ANZ National Bank, First New Zealand Capital and Forsyth Barr.


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