Bonds hold steady after PPCS says in breach of banking covenants

By NZPA

Friday 15th June 2007

PPCS's three-year bond yields, which have risen as high as 20% this week, were steady on 19% today after the meat company said last evening it was in breach of banking convenants.

In response to a stock exchange query about why the bond yields had risen 6.5 percentage points since May 1, the Dunedin-based co-op said an export-unfriendly exchange rate had made trading conditions difficult.

It said its accounts to May 31 were likely to show it was in breach of banking interest coverage ratios.

"In the absence of a marked devaluation of the New Zealand dollar and otherwise improved trading conditions, it is also likely that PPCS's interest coverage ratios on both its bank facilities and its bonds will not be satisfied on August 31, 2007," chief financial officer Rob McFarlane told the exchange.

PPCS would request waivers from the bank.

Westpac is PPCS's main bank and a bank source told NZPA it was keeping very close tabs on PPCS and had "several heavy hitters" working on the company's account.

A Westpac employee yesterday requested a copy of NZPA's Wednesday article which prompted the stock exchange query.

McFarlane said PPCS's operating costs had been below budget and the 2006/7 accounts were expected to show significantly improved equity, debt and cashflow on a year earlier.

He said its recently introduced stock procurement scheme, where farmers are pressured to contribute to PPCS's equity if they want to supply stock for killing, had improved the company's position.

PPCS traditionally has an inferior first half when cashflow runs strongly negative and PPCS was in breach of its covenants after last year's half year accounts.

But Westpac continued to lend to it and the position turned around at the full year. The bank does not normally comment on about individual clients.

Bond trading specialist David Speight of Direct Broking said if a covenant is breached, "there is an event and a consequence, which doesn't necessarily mean they are entitled to immediate repayment. It could though".

Speight said yesterday's statement could be read as slightly mildly positive.

" They said life isn't that good, but they were also pointing out that over a season they are making some dough."

Speight said PPCS was a straightforward business -- paying farmers for stock at one end and selling it at the other.

It paid suppliers some money upfront and the rest via its rebate scheme depending on how much it sold the meat for.

However, apart from fixed overheads, PPCS had been caught with a large amount of stock on its books at a time when the exchange rate had turned heavily against it.

Nationally, 1.8 million lambs more than usual were killed at all freezing works because of the east coast drought and a signal from processors to kill early.

An early season surge in prices was not sustained and PPCS and other meat companies were caught in the middle.

While investment adviser Chris Lee of Project Resources said it was not a good sign for the bonds of a company to rise to 20% , PPCS farmer-supplier-shareholders spoken to by NZPA said they were unconcerned.

Rick Cameron, who has farmed sheep on 4060ha near Milton in Otago for over 30 years, said he was considering buying PPCS bonds at their current discount of 85% of face value.
"That really sums up what I think."

He agreed the extent of the rise in PPCS's bond yields was a warning signal and that PPCS had paid too much for Hawke's Bay's Richmond, especially once legal and other costs in the bitter seven-year battle were added in.

"It's tough going out there, but sometimes the tough have got to get going," Cameron said.

"The flame is at its hottest now, but we take a long-term investor attitude -- a 10-year view."

David Botting, a PPCS owner/supplier who is also an Otago Federated Farmers representative, said it was just a matter of trading through.

"I don't know how much pressure the bank is putting on (PPCS), but I would sooner see the lambs stuck on their books than selling them at a loss.

"The worst thing they can do is dump that in the marketplace at loss just to get the money."

Botting said few sheep farmers were making money at present and they would be very grumpy if at year-end rebates were minimal or even negative.
Another PPCS shareholder, who declined to be identified, said PPCS should not be particularly affected by a strong dollar.

The main risk was taken by suppliers, not meat companies which operated in the middle.

"It's basically over-capacity, unfortunate circumstances in the marketplace, coupled with inept marketing across the industry."

He said given that Affco had half PPCS's turnover and double the loss, PPCS in the circumstances had had "a bloody good result".

Like other farmers, the Hawke's Bay farmer said there was a strong need for further industry rationalisation and mergers.

"Just look at the Fonterra performance versus the meat company performance -- it's the ability of a strong farmer-owned entity to take a position in the marketplace and not be dicked around by anybody else."

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