Banks await forestry partnership figures

By Phil Boeyen, ShareChat Business News Editor

Thursday 4th January 2001

Time may be running out for the Fletcher-Citic forestry partnership as bankers wait in the wings to decide what to do about a possible breach of banking covenants.

The Bank of New Zealand heads a syndicate of 12 banks which is owed around US$650 million by the partnership. Under the loan agreement the partnership must reach certain financial targets which relate to the amount it earns and the amount it pays in interest on its loan.

Fletcher Challenge, which manages the forestry assets, is currently crunching the numbers on earnings up to the end of December, but Forests' boss Terry McFadgen indicated in the New Zealand Herald this week that a breach of covenants has "almost certainly" occurred.

As partners in the venture both Fletcher Forests (NZSE: FFS) and Citic share equal ownership of around 190,000 hectares of central North Island forests, which were bought from the government in 1996 for NZ$2.2 billion. Brierley Investments was another original partner with a 25% stake but sold out to FFS and Citic in 1998 at a loss of $140 million.

Both Citic and FFS have flagged the banking issue for the past couple of months as log prices continued to fall, indicating lower earnings which would put the loan agreement in breach.

If the December figures confirm a covenant breach then the banking syndicate's options are believed to include taking control of the forestry assets, drawing up a new loan agreement, or asking the partners to inject further cash into the joint venture.

The current situation follows a year of bickering after Citic accused Fletcher Forests of selling logs to Fletcher mills at a lower price than it could have gained from other local or export customers. The matter has been edging towards court action all year, and has been a thorn in the side of the already poorly performing FFS share price.

Citic New Zealand is a subsidiary of the giant Chinese-government controlled China International Trust and Investment Corporation whose stake in the forestry partnership is reportedly its largest overseas investment.

Citic has said previously that it is not keen on splitting up the partnership's assets because it will destroy value. In November it offered Fletcher Challenge $218 million for its equity and secured debt position but Fletcher rejected the offer for being "significantly below fair value".

Comments from our readers

No comments yet