Correspondence
Back to Correspondence[copy of letter sent to Tourism Holdings Lmited]
8th June 2009
Tourism Holdings Limited.
PO Box 4293
Shortland Street
Auckland 1140
Attention: The Chairman, Keith Smith
Dear Keith,
I recently completed an analysis of the published financial statements for 47 public companies for the June 2008 or equivalent year end from a banking perspective. Obviously with the public default of Nuplex and the disclosure by them of critical banking covenants, debt has become an issue that the market should be concerned about.
20 of those47 companies were, based on the knowledge that we now have of banking covenants, potentially in debt difficulties. Your company was likely to be one of those companies. Clearly each company has differing covenants, and you certainly were not outside the guidelines on most of the common benchmarks, and on some actually demonstrated some strength.
However by the time we have received published 2009 data, if EBITDA or EBIT decline while debt remains at current levels you may well face difficulties. Equally if your assets suffer impairment write downs you may well find yourself constrained by equity.
Rather than publishing this research which would have been irresponsible, I have instead elected to pass it to the New Zealand Shareholders Association to deal with in its usual manner.
I thus now write to you in the my capacity as Chairman of the Association.
Your results on these key ratios were as follow for the June 2008 or equivalent year end.
|
Covenant |
Likely level of bank discomfort
|
Your result
|
|
Debt to Ebitda
|
Above 4 likely default, based on Nuplex disclosure, above 3 discomfort.
|
2.04
|
|
Interest bearing debt to book equity
|
Above 1 discomfort above 2 likely default
|
0.50
|
|
Interest bearing debt to net tangible assets plus interest bearing debt
|
Above 90% default, above 75% discomfort
|
40%
|
|
Earnings before interest and tax to interest paid
|
Less than $3 discomfort, less than $2 default.
|
$2.01
|
To provide some clarity to the basis on which this analysis is prepared, I refer you to my personal Blog onStuff (Stirring the Pot.) The final in that series is attached as it explains how these numbers were compiled and will assist you in reconciling your reply.
While you had a strong equity and asset backing to secure your debt as at June 2008, your income cover for this debt is much less satisfactory. This has clearly worsened considerably over the past 6 months notwithstanding that you have sold assets and moved to reduce costs. Your debt/ebitda ratio has now increased to around 2.6 and ebit/interest is negative.
You have confirmed your compliance with Bank covenants, but have not disclosed the details of these.
In the circumstances we ask that you comment on our analysis, and further ask that you disclose your bank covenants in detail and the relevant ratios to show that you were in compliance at your last balance date and remain compliant at the date of your letter.
The Association usually publishes its correspondence within 7 days of the letter being issued: however the issues we raise are in our view so fundamental to the wellbeing of both the company and its owners that we will delay publication until we receive your reply and our board has considered it.
However please note that if you fail to reply within 30 days we will publish this letter regardless.
Yours faithfully
NEW ZEALAND SHAREHOLDERS ASSOCIATION
Bruce Sheppard
Chairman