Tranz Rail's full Monty gets mixed reception

By CHRIS DANIELS

Tranz Rail's financial strip-show may have impressed New Zealand's investment community, but it is being viewed quite differently by ratings agency Standard & Poor's.

The Tranz Rail share price rose 7c to $2.27 yesterday after a comprehensive release of company information and forecasts.

But S&P promptly announced it had placed the company on a negative creditwatch and would meet Tranz Rail managers soon to question them further.

After this meeting it could either keep its current rating of BBB/A-2 or downgrade it.

"The ratings could go down by one notch, reflecting the dwindling confidence in the company's financial performance despite its monopoly position in New Zealand's rail freight industry," said S&P.

If it is downgraded one step to BBB-/A-3, the company would still keep its "investment grade" status.

Parvathy Iyer, S&P associate director, corporate and infrastructure finance ratings, said: "Despite completing most of its extensive business restructuring initiatives in the past 12 to 18 months, the company has fallen short of its target cost savings, and has been unable to contain the adverse impact on its revenues."

Iyer said Tranz Rail expected to recoup market share and revenue next year through "greater service penetration and high unit profitability". This would be challenging, given the intense competition from road transport, she said.

The poor ratings outlook reflected that "and the vulnerability of the company's financial measures."

Iyer said key financial measures in this financial year would be "substantially subpar for the BBB rating level".

The other major credit rating firm, Moody's, changed its outlook on Tranz Rail from stable to negative in April, citing a weaker operating environment and a disappointing interim profit. Moody's said the next 12 to 18 months would be critical for the company as it sought to lift its profitability.

Despite this negative view of the information handed out by Tranz Rail, some in the financial community were overwhelmed by the depth of detail, previously hidden behind the veil of commercial confidentiality.

"When your share price has taken a hammering like the Tranz Rail price has over the past six weeks, it makes you a little more inclined to drop your trousers," said one analyst.

Andrew Bascand, fund manager at Alliance Capital Management, which looks after $850 million for 9.5 per cent Tranz Rail owner Axa, said the level of disclosure from Tranz Rail was "almost extreme in a New Zealand context. I truly believe they are being conservative in stating next year's numbers, because there are contract negotiations going on now that are not in the numbers ... solid energy, forestry stuff.

"They haven't put rate increases into the numbers."

Returns on the interisland line were not huge - not monopoly profits, said Bascand, but a normal return on asset margins.

"That's what they have to get out of the rest of the business now," he said. "That's the crux of the matter and that's what everyone will be watching."