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Tranz Rail vulnerable despite 11th hr plan


Friday 22nd November 2002

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The Shareholders Association says Tranz Rail's policy of selling assets and then leasing them back was to blame for almost pushing the rail operator to the brink yesterday.

The company last night buried the hatchet on its dispute with banker Citibank, agreeing at the 11th hour to break a $US88 million ($NZ175 million) hedge contract central to the company's intricate financial restructuring plan.

That gives the green light to a $NZ66 million rights issue to raise money to pay off debt and provide extra security to the United States owners of Tranz Rail's inter-island ferry Aratere.

But Shareholders Association chairman Bruce Sheppard said the asset-selling policy was a flawed one, in that it led to a high level of overheads.

He warned that the Government could be forced to bail out the beleaguered rail company, despite the last minute resolution of the refinancing plan.

Tranz Rail's leasing arrangements basically equated to debt, Mr Sheppard said.

"It's a bit like a company that owns its own premises selling its premises off and then agreeing to pay rent to continue occupying it," he told National Radio.

"Tranz Rail has done that with a number of its major assets. Operating leases are really just debt."

The refinancing deal almost unravelled yesterday after Citibank, one of Tranz Rail's four lenders, refused to agree to new banking arrangements unless the rail operator broke the hedge contract connected to the Aratere lease.

Citibank's New Zealand chief executive, Andrew Au, said his company had made it clear to all concerned throughout the financial restructuring that it would require a collateral commitment on the foreign exchange hedge contract.

Citibank's hedge contract position with Tranz Rail was unique among the rail operator's bankers.

"It is not an 11th hour thing," Mr Au said. "In the restructuring we told everybody that the hedging arrangement would need to be an integral part of the restructuring."

Mr Au said an alternative had been presented to Tranz Rail.

"They did not want to use it," he said.

Late last night, Tranz Rail caved in, with chief financial officer Wayne Collins saying the company had agreed to break its hedge contracts as demanded by Citibank.

This means only the next four US dollar payments on the Aratere lease are hedged.

The banking syndicate backing Tranz Rail -- Citibank, National Bank of New Zealand, Bank of New Zealand and Westpac -- have now agreed to extend the company's banking facilities to December 20.

The extension was a requirement of an underwriting deal with ABN Amro supporting the rights issue. The books close on the rights issue today and the rights become tradeable on Monday.

It was a Standard & Poor's credit downgrade that set off the chain of events of the last couple of days. The decline in credit rating meant that the owners of the ferry could require a letter of credit from Tranz Rail as security.

They did not do that and negotiations followed which led to the rights issue deal, conditional on agreement of everyone involved.

At the same time, a cash advance facility with the four banks, due for renegotiation by October 16, was extended to November 30 -- another looming deadline.

Analysts said negotiations can go to the brink before agreement but it was highly unusual for them to be played out in such a public manner.

One shareholder, who declined to be named, said it would be absurd if a receivership or statutory management had resulted from the situation as there had been no default of payments.

Tranz Rail chairman Wayne Walden said the company had resolved most of the issues relating to its capital structure and was making good progress on renewing its bank debt facilities.

A tired Mr Collins could last night reflect on a modest sweetener to the unseemly row. After closing out the hedge contracts, Tranz Rail was left with proceeds of $10 million.

The money would be used for a new hedge contract when the time was appropriate.

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