Correspondence
Back to Correspondence[copy of letter sent to Nuplex Industries Limited]
21st May 2009
Nuplex Industries Industries Limited
PO Box 12841
Penrose
Auckland 1642
Attention: The Chairman
Dear Sir,
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 following your very public debt crisis, debt has become an issue that the market should be concerned about.
Of those 47 companies 20 were, based on the knowledge that we now have of banking covenants, potentially in debt difficulties. Your company was one of those companies and it was obvious as at June 2008.
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 my capacity as NZSA Chairman.
Based on your last full year published result, the key bank covenant ratios for your company are as follows:
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Covenant
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Likely level of bank discomfort
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Your result
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Debt to Ebitda
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Above 4 likely default, based on Nuplex disclosure, above 3 discomfort.
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3.52 your disclosed covenant was 3.0
Debt $403503k
EBITDA $114558k
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Interest bearing debt to book equity
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Above 1 discomfort above 2 likely default
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1.11
Book Equity $365061
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Interest bearing debt to net tangible assets plus interest bearing debt
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Above 90% default, above 75% discomfort
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65%
NTAs Plus Interest bearing debt $618390k
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Earnings before interest and tax to interest paid
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Less than $3 discomfort, less than $2 default.
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$3.37
Interest paid $28078k
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To provide some clarity regarding 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.
Now clearly you have subsequently been forced to complete a punishing capital raising. This will have altered the figures, but as they were in June is relevant to our comments below.
We acknowledge that the Chair did engage with the NZSA when we made enquiry and comment regarding the unusual and apparently unfair way in which your capital raising was presented and we commend you for the full reply which was also promptly released to the market.
Our issue now is one of governance.
If it was obvious on any objective analysis of your June 2008 results that you were in breach of your banking covenants you claim that as you obtained an emergency waiver that this was not the case. , Why was this situation not disclosed to the market at that time? This would seem to us a clear breach of the continuous disclosure rules. We understand that NZX are investigating this issue.
Further armed with the knowledge of burgeoning debt due to exchange rate volatility and declining earnings it seems to us that the board and did not provide the necessary vigorous challenge to management nor did it act as a prudent fiduciary for the owners in disclosing these issues and acting in advance of crisis. The punishment of the capital raising was a direct result of you not acting earlier.
It seems clear to us that the board is in substantial need of new blood, and we inquire of you what steps you are taking to introduce new directors prepared to challenge management and ensure similar situations cannot arise in the future.
In the circumstances we ask that you comment on our analysis and the issues raised in such manner as you see fit, and further ask that you disclose your current bank covenants in detail and the relevant ratios to show that you are now compliant.
The Association usually publishes its correspondence within 7 days of the letter being issued: however the issues raised 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.
However please note that if you fail to reply within 30 days we will forward a copy of this letter to NZX with a requestfor them to make inquiry of you under the continuous disclosure regime. We will subsequently publish this letter regardless of NZX’s action in response.
Yours faithfully
NEW ZEALAND SHAREHOLDERS ASSOCIATION
Bruce Sheppard
Chairman