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Feltex puts bonds issue on the line

By Duncan Bridgeman

Friday 2nd May 2003

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Feltex Carpets chairman Tim Saunders yesterday defended the company's recent high-interest bonds issue as investors moved quickly to swallow the $60 million on offer.

The company has received criticism over the timing of the issue and the reasoning behind it, with suggestions that over-eager mum and dad investors were being taken advantage of.

Mr Saunders said the decision to replace significantly cheaper bank debt with the 10.25% fixed interest bonds was to strengthen the company's balance sheet. There was no pressure from the Feltex's bankers to restructure the company's debt, he said.

"No, we are certainly working and living within our covenants ... The bonds offered us the opportunity to throw in some five and a half-year debt, which suited us perfectly."

The move would reduce interest payments on Feltex's $150 million ANZ Bank-funded purchase of Shaw Industries' Australian operations in May 2000, he said.

Feltex this week accepted $10 million of oversubscriptions to the initial $50 million bond issue after Neil Paviour-Smith, managing director of organising broker Forsyth-Barr, said demand had "substantially exceeded" expectations.

The issue included a right to any future initial public offering (IPO) with an interest rate step up of 1.5% if that did not happen before September 30, 2005.

Mr Saunders said Forsyth-Barr advised the company to build up an investor base by issuing bonds that came with an IPO opportunity.

"We accepted that advice ... the [extra interest] cost doesn't worry us. We are quite happy with the interest coverage ratios, which are more than adequate."

Feltex, 100% owned by Credit Suisse Group, returned earnings before interest, tax, depreciation and amortisation of $13.8 million and $14.4 million in the last two six month periods.

But since the Shaw acquisition in 2000, the company had reported a $13 million net loss to June 2001 and an $18.3 million loss in 2002.

The bonds issue has certainly raised eyebrows in the financial community.

"Everyone's concerned there should be no more Skellerups," one senior investment banker commented.

Rival brokers claim the issue was too soon for a company that had reported heavy losses in the 2001 and 2002 financial years.

"After doing the initial assessment we decided it wasn't one we were prepared to recommend to our clients," Arthur Lim of Macquarie Equities said.

Mr Saunders, also a director of the New Zealand Stock Exchange and several listed companies, said the reason for the relatively high 10.25% interest rate was the five and a half-year maturity stretch.

The company carried a good name but was not a triple A rated company, he said.

"There's no shortage of opportunities for this company, now we've got the Shaw merger together."

The Shaw purchase enabled Feltex access to the synthetic carpet business in Australia.

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