KEY POINTS:
Bay of Plenty Regional Council has raised $200 million of "cheap" cash without selling its controlling stake in the successful and regionally significant Port of Tauranga.
Buyers have been found for $200m of non-voting perpetual preference shares in Quayside Holdings, the council-controlled organisation which owns Port of Tauranga
shares and other investments, the council said yesterday.
The sale is a first. It leverages the council's 55 per cent shareholding in the listed port, which had a market capitalisation of around $800m last month.
"I see it as a tightly zipped pocket. We've moved $200 million from that pocket to a less zipped pocket," said Sandy Lawrie, deputy chief executive of Environment Bay of Plenty, as the council is also known.
The money is expected to go into an new infrastructure fund to invest in roads, sewage and water projects, rail, regional parks, airports and harbours in one of New Zealand's fastest growing regions.
How the infrastructure fund will function is still being worked through. It could make grants or loans or take equity stakes in projects.
If all goes to plan Bay of Plenty will hand Auckland a lesson in proactive local solutions to infrastructure problems.
Mr Lawrie said this was not the first time the council has leveraged its holding in Port of Tauranga. It also did it when Quayside was created in 1991 as Quayside took on debt.
The council has been caught by the global credit crunch with this share sale as it has had to offer a high dividend rate on the shares, but a tax angle means it still gets cheap money, analysts said.
"It is a good deal using tax imputation credits but the timing is terrible. They should have done it a year ago," said Roger Kerr, director of Asia-Pacific Risk Management. A year ago investors had more confidence.
The shares were expected to sell at a margin of around 1.3 percentage points above the three-year swap rate but the margin is closer to 1.7 per cent. A year ago the margin would have been much smaller.
The shares, which have debt instrument characteristics, will pay a minimum of 10 per cent a year. The rate is reset every three years.
The council considers it has got cheap money because of the 10 per cent, 7 per cent is cash and the rest is tax credits.
Councils do not pay tax so the tax credits the council received from the port in the past were of no use to it. They are being passed onto shareholders who can use them in this structure.
The shares are perpetual, which means never ending. Quayside has applied to list on the NZDX debt market so investors will have a way out of the investment by selling on the so-called secondary market.
It is important if there are to be further sales of this kind of shares that trading is liquid to build investor confidence.
The shares also have a put and call option. The council can buy them back, or shareholders can require the council to buy them back in certain circumstances, including if Quayside loses control of the port.
The raising of $200m on which dividends of 7 per cent a year in cash have to be paid means about $14m of dividends from Port of Tauranga will not be available to subsidise council rates in the future.
Already special dividends paid by the port have not been passed on to rate payers.
About $52m of special dividends have "been put to work" and as a result Quayside now has investments worth $108m in addition to the port holding. Quayside's investments include a dairy farm and kiwifruit orchards as well as a "typical international portfolio" of shares, providing a diversification away from the port.
The port's dividends have grown at a compound annual rate of 21.6 per cent per annum since 1995.
An interesting question is whether the leveraging of Quayside's port shareholding will cause it to be a more proactive shareholder.
"The council owner doesn't exert control on a daily basis monthly basis or decade basis," port chairman John Parker said.
There is one council member on the port's seven-member board and Mike Smith, an independent director of Quayside, is also a board member.
Mr Parker said dividend policy was "whatever we determine at the time".
"But we try not to undercut the previous dividend."
There would be no pressure on the port to keep the dividend up, he said.
Mr Lawrie acknowledged that there was a perception in some circles that councils were bad shareholders and should not exert control over investments.
"We're a bit more subtle," he said.
- NZPA