Correspondence
Back to Correspondence[copy of letter sent to TeamTalk Limited]
21st May 2009
TeamTalk Limited.
Level 2, 84 Tory St,
Wellington
Attention The Chairman, Joe Pope
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 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.
Of those 47 companies 20 were, based on the knowledge that we now have of banking covenants, on the face of it in debt difficulties. Your company was one of those companies.
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 capacity of the Association.
It is disappointing that your website does not include publication of your financial statements and thus I have had to base my analysis of what is now very dated data, being the summary data form the NZ investors Year book. Thus your results for June 2007 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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$4.57
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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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$1.40
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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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86%
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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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$2.81 ( assuming Deprecation of $2m)
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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.
The last published data for your company is the December 2008 half year, ( NZX). The disclosure is woefully inadequate as it discloses income but there is no disclosure of key balance sheet ratios.
Your EBITDA for the half year was $6,275k, and you have signalled difficult trading conditions , if we assume a full year EBITDA of say $11m and no change in debt to your historic debt position, which is unlikely as you have been expanding as I understand, the Debt to EBITDA ratio which it’s the critical one would be a comfortable $2.7. The interest cover might however be an issue, if we estimate your interest cost at $2.32m, (I note your announcement of losses on forward interest swaps which may have adversely further effected equity) then your interest cover ratio would be $2.67, and based on our knowledge of bank covenants a level at which default is likely
To date you have made no disclosure to the exchange or your shareholders on these issues.
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 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.
We would also ask that you refresh your website to include a full investor section. The inadequacy of your disclosure for potential investor is stark.
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.
But also please note that if you fail to reply within 30 days we will forward a copy of this letter to NZX with a requestto 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,
B R Sheppard
Chairman