Walden denies new crisis looms

By PAM GRAHAM

Tranz Rail chairman Wayne Walden yesterday denied a suggestion from hostile bidder Toll Holdings that the company faced another financial crisis within weeks.

He said a Government deposit of $44 million would see the company through seasonal lows in cashflow.

Analysts said the statement drew attention to the company's reduced bank facilities and to current seasonal cash outflows.

But the market's focus was on whether Tranz Rail's institutional shareholders would force Toll to raise its 95c-a-share bid.

The shares closed at 97c amid speculation that foreign hedge funds werebetting on a raised bid.

Walden urged shareholders to read the independent Grant Samuel report released on Monday.

The report, eclipsed by the Government's track buyback deal with Toll the same day, said Tranz Rail's debt and liquidity position was precarious and the company was severely undercapitalised.

The report traversed the history of financial engineering. The founding private owners leveraged the company with $300 million of debt and $105 million of equity and then took out $100 million of capital before the 1996 sharemarket listing raised $175 million to repay debt.

"Tranz Rail has effectively relied on debt funding or new equity to fund operating cashflow deficits since it was privatised in 1993," the report said.

Assets were sold and leased back, shifting liabilities off the balance sheet and into fixed costs in United States dollars. The contracting out of engineering functions also fixed what had been variable cost.

Other financial issues had been poor billing and debt collection, arbitrary capitalisation of expenses and high head office costs.

The Government's $44 million deposit on the first track buyback deal, paid on June 18, stopped a fire sale of assets and staved off insolvency.

Grant Samuel said that after a rolling stock lease payment, Tranz Rail had $24 million for working capital and its cash advance facility was drawn down by only $15.2 million at June 30.

The $44 million deposit, secured by a second-ranking security deed, does not have to be repaid until June 30 next year and interest is payable.

A new owner's priority would be refinancing and anyone with a strong balance sheet would be able to reduce funding costs.

Simon Botherway, at Brook Asset Management, said that if Tranz Rail got the same track buyback deal that the Government had agreed with Toll, it would be more bankable, and he would be interested in taking part in a recapitalisation.

Also looming is the refinancing of $100 million of unsecured subordinated fixed-rate bonds maturing in October next year. It is a big chunk of the $185 million of debt Grant Samuel estimates as due by then.

Toll managing director Paul Little said his company would talk to institutions again next week and he did not want to comment yesterday on Tranz Rail's finances.

The Grant Samuel report said central and regional government invest $2 billion a year on roads, while Tranz Rail had invested $1.1 billion between 1994 and last year, of which about $840 million was capital expenditure. The rest went on restructuring and acquisition costs.

Grant Samuel identified the absence of passing loops in the main trunk line in the centre of the North Island as a priority for investment.