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Banks take $75M quasi-haircut on Solid Energy debt

Tuesday 1st October 2013

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Banks that lent unsustainable amounts of debt to state-owned coal miner Solid Energy are taking a $75 million "hair-cut", dressed up as an issue of redeemable preference shares that may never be repaid.

After eight months of negotiations between the Treasury and the group of Australasian and Japanese lenders to the troubled coal company, Finance and State-Owned Enterprises Ministers Bill English and Tony Ryall announced the broad terms of its restructuring.

Fuller details will only become available when Solid Energy's full year accounts are tabled in Parliament, expected in coming days.

Under the arrangements, the government still makes the largest contribution to the bail-out, contributing $100 million in secured working capital and mortgages, as well as a $30 million standby facility that will allow Solid Energy to continue trading and developing its coal assets.

The company came close to collapse in January, carrying almost $400 million of debt, and has only continued to trade by relying on an implicit government guarantee while debt restructuring negotiations occurred.

Today's announcements suggest the solution accepted by the banks is a face-saving way for them effectively to write off a portion of their exposure to Solid Energy by reconstituting $75 million of loans as redeemable preference shares, a form of equity that may never be repaid. The Crown will take $25 million in redeemable preference shares.

In effect, these preference shares amount to a $100 million capital injection for Solid Energy, whose assets are likely to have been heavily written down in its accounts, owing to low global coal prices.

The preference shares rank above the Crown's equity in the company, but below the secured lending arrangements announced today, whereby the government will make a $50 million working capital loan, repayable in three years, and a $50 million loan secured over Solid Energy land holdings, also repayable within three years.

An additional secured $30 million standby facility is also available, should it be required.

"Holders of the company's medium term notes are being asked to agree to waive some of their rights to enable the company to put the financial restructuring proposal forward to lenders," Ryall said in a statement, which did not detail what rights were at stake.

"The process to formally adopt the proposal is now under way and is expected to complete by the end of the month," he said. Solid Energy's ongoing levels of debt have also not been disclosed.

English signalled in February, when the problems were announced, that the government expected the banks to take a share of the burden of adjustment created by Solid Energy investing too heavily in experimental new energy forms.

When international coal prices dived in 2012, the company found itself caught with unsustainable debt levels. The board was largely replaced and former chief executive Don Elder stepped down to be replaced by Mark Ford as the scale of the problems for the company emerged. Solid Energy had previously been slated for partial privatisation, but now faces years of government support as it seeks to become profitable again.

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