Forests in bind over bank loan

By PAULA OLIVER

Fletcher Forests' already tense partnership with Chinese company Citic is in danger of breaching its banking covenants.

The partnership owns the giant Kaingaroa and adjacent forests in the central North Island.

Documents filed with the United States Securities and Exchange Commission (SEC) show that the Central North Island Forestry Partnership expects this financial year to breach a a key financial target set by its major lender.

That would allow the banking syndicate, owed $US880 million, to take control of the joint venture.

To prevent that happening, both partners will have to inject up to $US100 million.

A further problem is a debt payment of $US25 million that must be made by June next year. A further $US48.8 million is also due by June, but banks are expected to allow that to roll over on a revolving credit facility.

Since buying their asset from the Government in 1996 for $NZ2.2 billion, Fletcher and Citic have seen its value tumble. Log prices have fallen by 25 per cent or more, with the Japan indicator price dropping from $US80 a cubic metre to under $60.

In the partnership's audited SEC statement of financial position at June 30, the forest crop is valued at $US1.281 billion.

But auditors KPMG note that if "future market prices do not improve to the historic long-term median market prices in the next three to five years, then certain age classes of forest will be over-valued ... "

"It is not possible to quantify any potential future writedown in the value of the forest crop."

Under a banking facility agreement, the partnership must meet an ongoing financial target relating to its earnings before interest, tax, depreciation and amortisation and senior interest ratio.

Citic spokesman Greg Molloy said yesterday the partnership needed an injection of at least $US200 million to lift its books into line with banks' expectations.

Fletcher would contribute half the amount, and Citic was in a position to meet the other half now.

Fletcher's half could be met by the $NZ427 million Forests rights issue, to be voted on by shareholders today.

Mr Molloy said the amount needed was dependent on future prices and harvest levels, but recapitalisation had to be a priority.

It was difficult to forecast whether another cash injection would be needed if log prices continued to tumble.

Complicating the financial situation, Fletcher and Citic are locked in a dispute that appears headed for court.

Citic claims that Fletcher, which also manages the joint venture, sold logs to its own interests for unfairly low prices, a claim Fletcher disputes.

It is demanding $NZ318.9 million in compensation though Fletcher has a counter-claim for $NZ10.7 million relating to partnership administration costs.

Yesterday, Citic said its offer of $NZ218 million to buy Fletcher out of the partnership had been rejected.

Fletcher Challenge responded with a statement saying the offer was too low, and Forests would not sell its assets at values based on current low log prices.

Fletcher Forest shares closed down 1c at 36c.