Positive reaction to Tranz Rail cash scheme

By PAM GRAHAM

Investors and credit rating company Standard & Poor's reacted positively yesterday to plans to restore Tranz Rail's finances that include a $60 million rights issue.

The stock closed 6 per cent higher at $1.42 as investors believed the equity raising to pay back banks and provide security for a lease on the Cook Strait ferry Aratere resolved a situation that "could have had a worse outcome".

Tranz Rail has to execute the plan and deliver on second and third quarter profit forecasts before it could be said to have forward momentum, analysts said. Delivery on the rights issue and matters associated with it would "resolve" the creditwatch tag, which means a company is on special surveillance, S&P said.

Tranz Rail's board yesterday decided to go ahead with the rights issue which is intended before Christmas, spokesman Alan McDonald said. Chief financial officer Wayne Collins said an underwriting agreement will be signed with ABN Amro shortly.

Shareholders have to decide whether to take up the rights, the details of which have not yet been announced, or have their holdings diluted.

"If the prospectus shows the confirmation of earnings expectations, I suspect fund managers will support the issue," said Nat Vallabh, portfolio manager at AMP Henderson. He said this week's agreement was a first hurdle and the sale of Tranz Metro passenger service in Wellington would be another marker because proceeds from that would also be used to repay debt and provide security for the Aratere lease.

"The stock had clearly been oversold on concern about the financial position," one stock broker said. Wayne Stechman, head of New Zealand Equities at Tower Asset Management said the market had anticipated a rights issue as part of the resolution of a situation triggered by the company's credit rating downgrade in September.

The owners of the Aratere had the right to ask for a letter of credit for about $115 million, when they already had the vessel worth about $50 million to $55 million as security. Instead, half the proceeds of the rights issue will be used to support a letter of credit and the company will also pay more in interest. The plan is conditional on the approval of the US investors, banks and completion of the rights issue by March next year.

Standard & Poor's said the deal was positive and it paved the way for negotiation of bank funding beyond the date of November 30 when an extension to existing facilities expired.

"Although the company's operating performance in the first quarter of fiscal 2003 was in line with its budget, its liquidity position remains very tight," S&P said. "The successful completion of the $60 million equity raising will be a key factor in limiting the bank funding to $80 million, although forecast operational improvement for the rest of fiscal 2003 is also expected to assist the process," S&P said.

Bank of New Zealand, Citibank, the National Bank of New Zealand and Westpac offer the current bank facility of $250 million, according to Tranz Rail's annual report.