Bankers hold fire as forest deal founders

By PAULA OLIVER

Bankers may wait until next month to decide how to deal to the country's largest forestry estate and its battling owners.

Fletcher Forests yesterday confirmed that its joint venture with Chinese partner Citic had almost certainly breached its banking covenants.

The Central North Island Forestry Partnership, which takes in the giant Kaingaroa forest, is required to meet ongoing financial targets set by its lenders. Led by the Bank of New Zealand, the banking syndicate is owed $US650 million ($1.48 billion).

But Fletcher Forests chief executive Terry McFadgen admitted yesterday that a banking target set for December 31 had almost certainly not been met.

Final accounts were still being put together, but low log prices meant the partnership was unable to lift its performance to the levels required.

The banks' options included stepping in and taking control of the assets, or seeking a new agreement, an analyst said.

Mr McFadgen said the lenders were unlikely to act hastily, and it could be mid-February before the group of 12 banks decided what action to take.

"They have processes to go through, and I understand they are awaiting some consultant reports that may not come through until early February," Mr McFadgen said. "Obviously this is not an outcome we planned for, but if the banks do step in then it will be better than having things drifting on indefinitely."

The partnership has been on a collision course with its lenders for months, after it was soured by a bitter dispute over Fletcher Forests' management of the assets.

Chinese Government-owned Citic has filed legal proceedings against its partner, claiming Forests sold logs too cheaply to itself - a claim rejected by Forests.

Neither party has been able to agree how much cash would need to be injected into the partnership to ensure it met its financial targets.

Mr McFadgen said it was unlikely the parties would be able to agree to put more cash into the partnership. Subsequently, he said that the banks might take over the assets unless a better solution could be found.

"It really depends on how they view the future, and whether they think log prices could turn around," Mr McFadgen said.

Citic NZ financial vice-president Michael Kidd said yesterday that he was waiting to hear from Fletcher Forests if the partnership was in default.

Both parties have signalled over the past two months that the breach was likely, but have not been able to avoid it.

Analysts are split on what the best outcome will be, although some say that Fletcher Forests will benefit most if the banks step in.

Forests share price closed unchanged at 28 cents.