Jittery market fears worst at Tranz Rail

By FRAN O'SULLIVAN assistant editor

Tranz Rail investors, spooked that their company faces a "WorldCom" scenario, bailed out of their holdings in the company again yesterday.

Shares in Tranz Rail plunged a further 16c to $2.40 - their lowest level on record - as the company's warning that its fourth-quarter earnings will fall well short of market forecasts sank home.

On Monday, the shares fell to $2.56, then their lowest point since Tranz Rail was privatised in 1993.

The Market Surveillance Panel is studying the company's response to its "please explain" request, issued last Thursday, after its shares fell.

Panel chairman Bill Falconer, travelling in Europe, could not comment on the matter last night.

Yesterday, panel secretary Philippe Leloir would not comment on Tranz Rail's formal response to the query.

But panel executives will discuss the issue with Falconer before reaching a decision on whether to demand further explanations from the company or if they will launch their own inquiries into Tranz Rail's accounting and disclosure policies.

Critics, who include some of Tranz Rail's prime customers, claim the company has capitalised routine maintenance expenditure and used this to inflate the book value of its track network by more than $300 million since 1993, enabling it to report higher profits than would otherwise have been the case.

Tranz Rail has countered that criticism by saying it capitalised part of its spending on track maintenance because it was preserving a perpetual asset.

The points exercising exchange regulators include:

* Whether Tranz Rail's earlier results have been overstated.

* Whether Tranz Rail should have foreshadowed much sooner that its fourth-quarter 2002 result will be lower than analysts' expectations.

* Whether the company has kept the market fully informed.

* Whether leaked information relating to a possible accounting restatement contributed to Tranz Rail's dramatic share slide.

When it announced third-quarter results in May, Tranz Rail said it would make asset writedowns when it unveiled its annual result for the June 30 year.

It posted a net after-tax profit of $2.8 million for the three months ending March 31, down from the $13.1 million profit recorded previously because of restructuring costs.

Managing director Michael Beard said then that a new accounting standard FRS3 (Accounting for Property Plant and Equipment) was being considered.

It was possible that certain assets could prove surplus to requirements and that writedowns would take place in the fourth quarter.

"While the result would impact the profit-and-loss account, there would not be any cashflow impact," Beard said.

Tranz Rail's share register is dominated by institutions after Switzerland-based merchant bankers Sir Michael Fay and David Richwhite and US-based Wisconsin Central Transportation sold their respective 15 and 24 per cent stakes at $3.60 and $3.70 a share in February.

Panel observers pointed to the similarity with Air New Zealand's declining fortunes last year, when the company's public statements obscured a drastically deteriorating situation.

The panel later launched an inquiry into Air New Zealand's disclosures after it announced the largest loss in New Zealand corporate history last September and a $885 million Government bailout was organised.

The inquiry absolved the directors from any legal comeback.

But the panel has taken a tougher stance on regulatory issues since former McKinsey executive Mark Weldon took over as exchange chief executive last month.

Tranz Rail general counsel Gabrielle Meech confirmed on Friday that the fourth-quarter result would be hit by substantial writedowns related to the sale of its passenger network and the contracting of its engineering work.

Returns from transporting forestry products had also fallen and other costs increased, the company said in a statement made after the market closed.

The statement was in response to the exchange's query about the sharp drop in Tranz Rail's share price since June 20.

The company plans to make an announcement regarding its current prospects within a month.

Rating agencies have already warned that Tranz Rail may face a downgrade if it is unable to control its operating costs this financial year and to advance its business reforms sufficiently to deliver cost-savings in the current June 30 year.

The agencies are expected to drop Tranz Rail's debt rating after its annual result for last year is announced if they are not satisfied with prospects for the present year.

The company has already been downgraded this year by credit rating agency Moody's from stable to negative, due to a weaker operating environment and a disappointing interim profit.

Moody's said the next 12 to 18 months would be critical for Tranz Rail as it sought to lift profits.

In March, Standards & Poor's noted the company's cost profile was weak compared with its global peers.

Its ability to cut costs was "challenging" as it relied on management's ability to reduce staff numbers substantially, bed down more efficient work practices and to control restructuring costs.