The aged care sector is of concern to analysts, with one company deeper in debt than most. Photo / Martin Sykes
The aged care sector is of concern to analysts, with one company deeper in debt than most. Photo / Martin Sykes
Companies with concerning levels of debt could come under more scrutiny this year and be forced to raise capital, say analysts at investment management firm Forsyth Barr.
In a research note outlining equity strategy for the year ahead, analysts at the firm said aged-care debt had risen to seven timesearnings from four times, and real estate investment trusts to eight times from six in the past five years.
On a dollar basis, that took total net debt in aged care to $4.3 billion and real estate to $6.4b.
“These two sectors have added a lot of absolute debt. We have done our best to avoid companies [with] debt concerns.” The research note said.
Forsyth Barr senior analyst Aaron Ibbotson said while it was natural and understandable for companies to take on more debt while the value of assets was increasing in recent years, property values were now declining and that coupled with higher interest costs was concerning.
“I would not describe it as failure to be prudent, yet.
“Things have moved very fast. We’ve had a very short downturn in house prices, we’ve got a very dramatic increase in interest rates and a pretty rapid deterioration of general macro[economic] conditions. Eighteen months ago the market would have been on their backs to grow faster.”
Forsyth Barr estimated another 1 per cent increase to the average listed company’s debt levels would cost about $330 million - enough to wipe around $230m or 3 per cent off a bottom line.
Once that flowed through to investor expectations, it could potentially wipe $5b off the total market capitalisation of the New Zealand Stock Exchange, the analysts calculated on the sector’s current price-to-earnings basis.
Ibbotson noted some company balance sheets could need repairing this year to ensure they did not come close to breaching bank covenants.
Some companies had already implemented measures such as selling non-core assets, deferring building spending and reducing dividend payments. But risks remained, Ibbotson said.
He singled out Ryman Healthcare as the aged care company with the most debt recently, with an estimated $2b of core debt, some of which was on floating interest rates.
That came as it built more complex developments with multi-level houses, care facilities and expanded to Australia.
Ibbotson said its ability to recover that indebted spend by selling all units upon completing a new development was under pressure.
“That situation has deteriorated quite quickly for Ryman in particular.”
In response, Ryman group chief executive Richard Umbers said it had already made moves to manage its capital over the past 18 months.
“Including the recent introduction of a dividend reinvestment plan, which was announced in November, and a change to our dividend policy which was made earlier in the year,” Umbers said.
“The board and management are mindful of where our current debt balance is at, which reflects the investments we have made in new villages over recent years.”
Ryman group chief executive Richard Umbers says its management and the board are "mindful" of its debt position, which increased as it developed more retirement villages. Photo / Supplied
However, he declined to answer questions asked about the headroom it had to meet its debt obligations if interest rates rose further, if it had any plans to raise capital or lower its build rates this year, or if it had received a warning from its bank about nearing a breach of its covenants in the past 12 months.
Ibbotson said it would be prudent for Ryman to cut back on its plans to build more villages.
The company’s competitors appeared to have had it easier.
“Arvida, Oceania and Summerset can get rid of their debt if they really want to. They can stop acquiring land and finish up what they’re building at the moment ... and they should be largely debt free.
“On my analysis, the three non-Ryman ones can handle another 100 to 200 basis point additional increase [in the official cash rate]. Ryman I think is already in a situation where it is difficult to see how they can service their core debt, without making some meaningful changes.”
Aside from aged care, infrastructure companies such as Chorus, Vector and Auckland International Airport had also increased debt levels, but that was not of concern to Ibbotson.
He said consumer discretionary companies largely had very healthy balance sheets heading into 2023.
Other than debt, labour shortages and costs and a weakening domestic economy could dog listed companies this year too, Ibbotson said.
