Collision in Tranz Rail row

By PAM GRAHAM

Troubled Tranz Rail has refused to supply the owners of the Aratere interisland ferry with a $115 million letter of credit, despite a contractual obligation to provide one.

The extra security became due after Tranz Rail's credit rating was downgraded to junk by Standard & Poor's last month.

Tranz Rail has 90 days to supply the letter of credit, either from existing bankers or other sources, or it has to buy the ferry back at a price analysts estimate would be as much as $50 million more than its present market value.

After a meeting with Aratere's American owners, Tranz Rail chief financial officer Wayne Collins said they were considering their position and had shown a willingness to work things out. Collins will return to the US for more talks as early as next week.

Standard & Poor's executive director, Parvathy Iyer, said there was no incentive for the lessor to take the ferry back.

"Looking at the economics of the whole transaction, there is a possibility that this could be resolved, but definitely at some extra cost to Tranz Rail," she said.

She said the company had some time to resolve the issue and "we will wait until that time to see the progress".

Renegotiation of the company's bank loans was on hold until November 30 because of the letter of credit issue. The company's loan facility was due for renewal on October 16.

Paul Robertshawe, manager of New Zealand equities at Tower Asset Management, said the issue was potentially crucial, although "there are options" such as pledges over other assets or an early pre-payment of the cash costs of the lease that would be more preferable to Tranz Rail. The question was whether they were acceptable to the lessor.

"The only way Tranz Rail can get a letter of credit is to have the support of its banks, who may not necessarily be willing to grant it to them. They may not want more exposure to Tranz Rail," he said.

A provider of a letter of credit does not have security over the ferry and would be liable for the difference between the value of vessel and its sale price.

Tranz Rail sold the ferry to Wilmington Trust in 1998 for US$55 million and leased it back. The transaction, which was not unusual in the industry, allowed it to repay debt at the time.

Tranz Rail shares rose 2c to $1.57 yesterday and have fallen 61 per cent this year.