Correspondence

[copy of email sent to Nuplex Chairman]

From: Bruce Sheppard [mailto:Bruce@gilshep.co.nz]
Sent: Thursday, 4 June 2009 9:05 AM
To: rmaitken@bigpond.com
Cc: Des Hunt; Chris Curlett; Alan Best; Kevin McCaffrey; patrick flynn; John Hawkins; Jacquie Staley
Subject: Thanks for your partial reply.

Hi Rob,

Your reply.

The editda number I used was the EBIT number from your income statement plus the depreciation and amortization in note 2, i.e. $94,607k plus $19,951k equals $114,558k. I noted the impairments and other write downs totaling $5081k but in the absence of detail on whether these were recurring or not, elected to ignore them, if I add them back I get to $119,639.

Capital notes are a hybrid, NZIFRS32 is instructive on how to treat such instruments. They are treated as debt in your accounts so I think we were entitled to treat them as debt in our analysis. This said if you have read all my blogs on this issue you will see that I too agree they are equity instruments and likely on a case by case basis, banks will regard them as equity also.

When the company eventually announced its default, or was it discussion, the company advised the critical covenant was a debt to EBITDA ratio of 3. If you were at 2.47 treating capital notes as equity then your non disclosure at that time is fair, however when such instruments are debt for reporting purposes, our letter to you is fair comment not misleading nor on the accounting treatment factually incorrect.

You have also netted off against your debt position your cash holdings, unless your bank covenants allow you to do this contractually this is not, to my knowledge, common practice as cash is simply an asset to facilitate trade and only gets set off on a cease trading event. Worse in most circumstance that I have seen banks tend to ignore cash as an asset at all as they regard it as totally transferable.

While you have commented on the analysis, which is helpful, you have not answered the substantive questions on governance and further board reform. You may well answer that this has already a occurred, but answer it your should.

The salient points in your letter when distilled to there essence are these:

The EBITDA number should be adjusted to ignore the minority interest in that EBITDA and all impairment and unusual adjustments, the later may be fair enough, but forgive me I couldn't form a view on that due to lack of disclosure.( or my inability to find it easily)

Your debt should be reduced by your cash holdings, sorry did not do that, as to my knowledge banks don't look at things that way, thanks for confirming your bank does.

Your capital notes treated as debt in your accounts should be treated as equity.

So sorry Rob, the letter is not factually incorrect, nor is it misleading, and was thus not issued in error.

The board of the NZSA will be considering publication of our letter at its next meeting along with your reply. If you intend to intimidate either myself or the NZSA by your last 4 words I must tell you that it will generally have the opposite effect. If rather you actually think the letter or your reply is damaging we will consider this when we meet to decided on publication. However if this is actually the case then perhaps you need to make a market announcement. You are welcome to attend if you wish, it is at 3.30pm on June 10th at our office in Smith and Cuaghey Queen St.

The key issue of interest to the market is yours and the financial communities view of capital notes , as I am sure your holders do not see them as equity. The second issue of note is the trend of banks to hide the terms of their arrangements with public issues, this is a public policy issue.

So Rob in the absence of a very clear view of real damage, which frankly I cannot see, my vote will be for publication onthe 11th of June.

Bruce