Share sale to bolster Tranz Rail

By PAM GRAHAM

Tranz Rail yesterday announced plans to raise at least $60 million from a rights issue as part of a complex deal to shore up its finances after its credit rating was downgraded to junk in September.

The share sale - likely to be pro rata and renounceable - will be discounted from yesterday's closing price of $1.34.

Chief financial officer Wayne Collins said it would be underwritten.

One analyst said the market would be "a bit spooked" today by the equity raising. "Clearly they will try to do it ASAP and the market wants to know the details."

Half the proceeds will be used to pay back bank loans. Tranz Rail's bank loan facility will also be reduced from $250 million to $80 million.



The other half will be used to back a letter of credit to the US owners of the Aratere Cook Strait ferry, known as the Aratere Group.

Chairman Wayne Walden said he was pleased the letter of credit problem was being resolved.

"As the market is aware, resolving the company's short-term liquidity position was contingent on the satisfactory outcome to the Aratere issue."

When Tranz Rail's credit rating was downgraded the ferry's owners had the right to ask for a letter of credit for about $115 million, in addition to having the vessel, worth between $50 million and $55 million, as security.

Tranz Rail, which had not been asked for the letter of credit, argued that was too much security.

There was also doubt whether its banks would provide a letter of credit. Renegotiation of Tranz Rail's bank facility was on hold until the letter of credit issue was resolved.

Under the deal announced yesterday, Tranz Rail will provide a general security deed for about $60 million until it can supply a letter of credit following its rights issue.

Its Aratere lease costs will increase by as much as $1 million a year, reducing once the letter of credit is supplied. Tranz Rail will earn interest on the money that sits in a bank backing the letter of credit.

The agreement is conditional on approval of the Aratere Group at a meeting on November 18, approval of Tranz Rail's banking syndicate and completion of the share sale by March 31.

Tranz Rail expects the conditions will be met. Its board meets today to formally approve the rights issue.

"This is a fantastic deal for us," Collins said. The agreement would allow the company to move forward.

The analyst said that once the equity sale was away, the focus would return to operating earnings, which were forecast to rise.

The deal expires when Tranz Rail's credit rating returns to investment grade.

Last month Tranz Rail reported a loss of $14.2 million for the three months to September 30. Collins forecast pre-tax earnings of $55.8 million in the year as export and holiday business picked up.