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Re: Re: [sharechat] CITIC and Forests

From: "" <>
Date: Fri, 16 Aug 2002 12:54:36 +0000

Hi Gerald,

>Thanks, Shareholders
>Association, for your misleading and irrelevant talk of a 430%
>increase in debt. Could Fletchers have handled a 50:50 ratio of debt
>to net tangible assets? Sure they could, like many other companies.

I think it is worth commenting on this particular part of your reply. 
That is, the idea that a 50:50 debt to net tangible assets is OK.

I'd like to pose the analagous question of the timber worker in 
Tokoroa who has a mortgage over 50% over the family house.  By this 
single snapshot measure, you might say such a worker is in good shape 
financially.  But what if he has a child with special needs?  What 
say he is an 'off balance sheet guarantor' on the loan to his 
brother's house?  What happens if the family are going to have to 
sell the house and move to Auckland?  Conversely what happens if he 
is in line for a large inheritance?  What I'm saying here is that 
the bald fact that you have 50% equity in a house in Tokoroa is not 
sufficient information to know whether your situation is good or bad.

Ultimately it comes down to this.  Does the Tokoroa timber worker 
have sufficient free income to pay the bills?   That is what the bank 
manager wants to know about our worker, and that is also what the 
bank wants to know, reverting to the original question,  about 
Fletcher Forests.   

What happens if you take the free cash flow from the proposed 
expanded company and compare that to the balooned debt? How many 
years will it take to repay the debt if the company so expands?  
Compare that with how many years it will take to repay the existing 
debt based on existing free cash flows.  If you do that little 
exercise, I suspect you will find the proposed 50:50 debt ratio is 
not as conservative as it might have been painted.


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