Correspondence
Back to Correspondence[copy typed from PDF of letter faxed from Freightways Limited]
Freightways Limited
Freightways House
32 Botha Road, Penrose
Mail address: DX Box CX10120, Auckland, New Zealand
4 June 2009
Bruce Sheppard
Chairman
New Zealand Shareholders Association Inc.
PO Box 631
AUCKLAND
(Sent by fax: 09 309-5260)
Dear Bruce
PRIVATE AND CONFIDENTIAL
Freightways Limited (FRE) – Banking Covenants
We are in receipt of your letter dated 27 May 2009 relating to your review, from a banking perspective, of a number of public companies published financial statements.
As you note, debt levels and banking compliance has become of heightened interest to market participants. As you also correctly point out, each company invariably will be operating under differing covenants. These are often quite unique to each company’s respective circumstances.
FRE has maintained a very good relationship with its lenders over many years and our banking arrangements, including financial and non-financial covenants, have been well considered and tailored in recognition of FRE’s business model. Our lenders particularly recognise the uniquely strong cash flows generated by FRE and our level of intangible assets (as opposed to tangible assets) typical of a service business.
While the example covenants you have listed and calculated using our June 2008 financial statements disclosure are no doubt common benchmarks in some industries, FRE does not have any of these specific covenants. We do however have variants of some of these covenants relating to:
· interest cover
· debt servicing capability and,
· operating leverage
We do not have the below two covenants or variants of them:
· ‘Interest Bearing Debt to Book Equity’ covenant
· ‘Interest Bearing Debt to Net Tangible Assets plus Interest Bearing Debt’ covenant.
This latter covenant is the one you have taken particular issue with. Clearly this covenant would be inappropriate for a ’service’ business such as FRE which has very few tangible assets.
FRE does not disclose its banking covenants in detail as they are subject to confidentiality between the Company and its lenders. We have however always made a definitive statement as to our compliance with our banking covenants. In addition, we have provided, in our view, sufficient information to the readers of our financial statements regarding FRE’s banking arrangements and the Company’s financial risk management approach to its bank borrowings, so as to enable a reasonable assessment to be made of FRE’s position.
Further, FRE is extremely cognisant of its obligations under the NZX continuous disclosure regime. The Company has successfully operated within its framework of banking covenants and has never breached a covenant and does not expect to in the foreseeable future. If the Company was expecting a breach or did breach a banking covenant, appropriate disclosure would be made to the NZX, as required.
With regard to governance at FRE, the Board of Directors is kept fully informed of operating and financial performance, both current and forecast. This information is considered alongside the environmental factors that may influence the Company’s overall future performance. It is in this context that strategies are subsequently developed to appropriately position the Company for the future. In recent times, the recessionary operating environment and how it has and may in the future affect FRE has obviously been a key focus for the FRE Board. Evidence of this governance process is the recent equity raising completed by FRE and referred to in your letter. This strategy was a proactive move to strengthen FRE’s balance sheet to better position the Company against an earnings shock should it eventuate and provide greater flexibility to support future growth initiatives.
You have asked that we ‘provide guidance as to the likely value of ratios’ detailed in your letter, allowing for our equity raising. As none of the covenants you have used are relevant to FRE I trust that you will agree that there is little point in doing so. Nevertheless, the headroom that has been created through FRE’s capital management initiatives, that include its recent equity raising and sale of a property, naturally better position the Company when measuring compliance against its banking covenants.
Your letter talks of delaying publication of your correspondence until you have received our reply. I urge you strongly not to publish this correspondence at all. Given your benchmark covenants are not relevant to FRE, I would be most concerned about FRE being lumped in, in any respect at all, with companies that may indeed be under covenant pressure. The negative perception that this might create (ill founded as it would be) will potentially be damaging to FRE shareholder wealth.
I trust that my response allays any concerns that your analysis of FRE might have raised. I would appreciate confirmation from you that your correspondence and ours on this topic will not be published.
Yours sincerely
Wayne Boyd
Chairman
cc: Dean Bracewell