Tranz Rail plans ferry buy-back

By JIM EAGLES

Already buoyed by its rescue deal with the Government, Tranz Rail yesterday unveiled a plan to buy back the ferry Aratere which could free up $30 million in cash and allow it to realise a $10 million foreign exchange gain.

Chairman Wayne Walden said the company had signed an option agreement setting "very favourable terms" under which it could pay off its lease of the Aratere and resume ownership.

If exercised, the option allowed it to end the lease "at terms that involve very small break costs".

Taking back the ferry, he added enigmatically, "will open up the full range of options for fleet configuration going forward".

The company is now pursuing discussions with other financial institutions to finance the end of the lease and repurchase of the ferry.

Chief financial officer John Loughlin said talks had already been held with potential funders. "The option holds until September 30 so we will have to move fairly quickly."

Loughlin declined to say who Tranz Rail was talking with other than to specify it was not those involved in the lease.

Ironically, Loughlin indicated it was Tranz Rail's position of financial weakness, which initially allowed the institutions to dictate very tough terms for the lease, which also allowed the company to work out a very favourable escape deal.

"It's only their concern about our weakness which made this possible," he said. "I'm sure if they'd known the Government proposal was coming up they'd never have agreed to it.

"They won't be very happy about giving us such easy break costs now they know our position has been stabilised."

Tranz Rail sold the ferry to US-based Wilmington Trust in 1998 for US$55 million ($95 million) and leased it back, using the money to pay off debt. However, relations with the financiers turned sour and when Tranz Rail's credit rating was downgraded to junk status by Standard & Poors last September, it triggered a crisis.

Under the contract, Tranz Rail was obliged either to provide a letter of credit for $115 million or to buy the ferry back at a price estimated to be $50 million above its market value, neither of which it was in a position to do.

As a result the financiers, in the words of Loughlin, who was not chief financial officer at the time, "screwed some really tough terms out of us".

Among them was the requirement that the lease be backed by the ferry itself, a $30 million deposit in a US bank account and security behind the banks over Tranz Rail itself.

"In other words," he said, "they forced us to tie up an enormous amount of security while we were in a position of weakness."

Ending the lease at very low cost, he said, would enable the company to free up the $30 million deposit and to realise a $10 million foreign exchange gain related to a hedge contract connected with the lease.

Loughlin said the lease arrangement did not alter the company's need for the $44 million short-term loan promised by the Government because there was a repayment of $19 million due next week.

In fact, the Government support had gone a long way towards making the new arrangement possible. "As things were before, no one was willing to lend us any more money."

Loughlin said getting out of the ferry lease was a prerequisite for refinancing the company on a less onerous basis.