Correspondence
Back to Correspondence[copy typed from PDF of letter received from Allied Farmers Limited]
ALLIED FARMERS LIMITED
Level 1, 74 Princes Street. PO Box 423, Hawera
30 June 2009
The New Zealand Shareholders Association
C/- P O Box 6310
Auckland City
Attention: Bruce Sheppard, Chairman
Dear Sir
We are in receipt of your letter dated 21 May 2009 and respond to the various points raised by you in that letter.
The Board is very aware of its responsibilities to its shareholders and the market generally, and is committed to meeting its obligations in terms of clarity and content of market disclosures. Each of Allied Farmers Limited and its NZDX listed wholly owned subsidiary Allied Nationwide Finance Limited also makes a positive affirmation each month to the NZX that it continues to meet its disclosure requirements under the Listing Rules. A copy of that disclosure statement (made by Allied Farmers Limited) follows:
As requested by NZX, the directors of Allied Farmers Limited and its fully owned subsidiary Allied Nationwide Finance Limited, wish to disclose to the market that there is no material information (as defined by Listing Rule 10.1.1) that it is required to disclose to the market at this time.
Furthermore, the directors of Allied Farmers Limited and its fully owned subsidiary Allied Nationwide Finance Limited will continue to meet its obligations under Listing Rule 10.1.1 and disclose material information as and when it arises.
The first step to analysing the various ratios that are relevant to measuring the stability and performance of the Allied Farmers Group is to understand the Group’s structure and how it is funded. The most recent document issued to the market by the company is the “Allied Farmers Limited Short Form Prospectus and Investment Statement 2009 – Rights Issue”. A copy of this is included with this response and cross-references made in this letter are to page numbers in that document.
The prospectus sets out the risks of investing in the Allied Farmers Group in considerable detail on pages 15 to 22 and also the Group’s trading prospects on pages 8 to 10.
Structure of the Allied Farmers Group
The structure of the Allied Farmers Group is set out on page 9 of the Prospectus as follows:
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Allied Farmers Limited
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The West Coast Mortgage
and Deposit Company
Limited (non trading holding
company)
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Allied Nationwide Finance
Limited
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Allied Farmers Option
Schemed Limited
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SHELL AND NON TRADING
COMPANIES
Taranaki Farmers Liimited
Allied Farmers (New
Zealand) Limited
Allied Farmers Livestock
Limited
Allied Farmers Finance
Limited
Prime Finance Limited
Allied Prime Finance Limited
Nationwide Finance Limited
Allied Finance Limited
Speirs Finance Limited
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The Group trades through two legal entities:
Allied Nationwide Finance Limited
Allied Nationwide Finance Limited (Allied Nationwide) is a finance company, and as such lends money to customers throughout New Zealand and across a range of specific industries – details of these are on pages 70 and 71.
Allied Nationwide is operated autonomously from the parent and has its own board with two independent directors.
Allied Nationwide is funded by shareholder capital (provided by the parent Allied Farmers Limited), debentures and perpetual notes (from the public) and commercial paper (from the wholesale money markets) – details are on page 54.
Debentures and the perpetual notes have been issued by Allied Nationwide pursuant to the terms of a Trust Deed between Allied Nationwide and The New Zealand Guardian Trust Company Limited, and this Trust Deed establishes the covenants that must continue to be met by Allied Nationwide. Any breach would have to be notified to the trustee and the market straight away. There has not be been a breach of covenants to date. Please note that the covenants apply to Allied Nationwide on its own and not the parent Allied Farmers – there are no cross guarantees or cross default provisions.
Allied Nationwide has a guarantee under the New Zealand Deposit Guarantee Scheme. The guarantee was granted on 19 November 2008 and is for a period of approximately two years ending on 12 October 2010. Under the deposit guarantee, the principal amount of, and interest owed on deposits issued by Allied Nationwide are guaranteed by the Crown with a maximum amount guaranteed per deposit holder of $1,000,000. To have the benefit of this guarantee, the deposit holder must be a New Zealand resident or a New Zealand citizen.
Allied Nationwide’s commercial paper is secured by way of a Security Trust Deed between Allied Nationwide Finance Limited, Speirs Securities Limited, Perpetual Trust Limited and a Registered Bank.
This represents a fixed and floating charge over all the assets of Speirs Securities Limited – which is a separately constituted securitisation vehicle (described on page 64).
Allied Farmers Limited
Allied Farmers Limited (Allied Farmers) is a rural services company with Merchandising, Livestock and Real Estate operations throughout New Zealand. These activities are described on pages 9 to 11.
Funding of the parent’s activities is by shareholder capital, Capital Notes maturing November 2011 and bank debt. Details are on page 55. The debt obligations of Allied Farmers are not covered by the New Zealand Deposit Guarantee Scheme.
Shareholder issued capital has changed in May 2009 following the rights issue, which raised $6.3m before issue costs ($5.9m after issue costs).
The Capital Notes issued May 2007 totaled $12.605m and the number of notes on issue has not changed – the book value of the Notes is changing gradually as issue costs are being amortised.
Bank debt comprises a term debt facility that is amortising at $500,000 per quarter (current balance $21.0m) and a working overdraft with a limit of $2.5m.
You can find detailed commentary on the parent bank’s facility covenants on pages 17 and 18. This includes details of changes to bank covenant levels that have been agreed with the bank over the last two years. There has not been a breach of the covenants to date; all changes have been agreed with the bank in advance. Please also note that the covenants apply to a ‘charging group’ that includes all companies in the Allied Farmers Group with the exception of Allied Nationwide.
The parent has very limited and tightly controlled access to the debenture based funding of the finance company. Any transactions between Allied Nationwide and Allied Farmers are described as Related Party Transactions and these are disclosed on pages 68 and 69. Related Party Transactions principally comprise factoring of parent company receivables. This factoring arrangement is with full recourse and has been in place for a number of years. There have been few losses on receivables over the years and all have been made good by the parent company.
Any transactions proposed to occur between Allied Nationwide and Allied Farmers must be within the constraints of the Trust Deed, the Crown Deposit Guarantee and also be approved by the Conflicts Committee of the Allied Nationwide Board. The Conflicts Committee of Allied Nationwide has a majority of independent directors.
Specific Points Raised
You have provided four ratios in your analysis.
Recalculating these ratios using parent company data shows the following:
Allied Farmers Limited (parent only):
Covenant Ratio Analysis
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Covenant
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Calculation
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Prospectu Ref
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Result
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Debt to EBITDA
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Bank Debt
Profit before Tax
Add back Bank and Capital
Notes Interest
Add back Depreciation
EBITDA for 6 months
EBITDA annualised
Ratio calculation
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15
1
4
7
4
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22,000
2,355
1,811
516
4,682
9,364
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2.35
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Interest Bearing Debt to Book Equity
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Interest Bearing Debt
- bank debt
- capital notes
Book Equity
Ratio calculation
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15
15
p33
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22,000
12,172
34,172
20,532
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1.66
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Interest Bearing Debt to Net Tangible Assets plus Interest Bearing Debt
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Interest Bearing Debt
- bank debt
- capital notes
Net Tangible assets plus
Interest Bearing Debt
- net assets
- less intangible assets
- equals net tangible assets
- plus interest bearing debt
Ratio calculation
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15
15
p33
p33
15
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22,000
12,172
34,172
20,532
1,196
19,336
34,172
53,508
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63.86%
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EBIT to Interest Paid
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Profit before Tax
Add back Bank and Capital
Notes Interest
EBIT
Interest Paid – bank debt
Ratio calculation
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1
4
4
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2,355
1,811
4,166
1,206
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3.45
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Please note that the definition of the various Allied Farmers bank covenants are not the same as the ratios you have chosen for your analysis.
Allied Farmers does not routinely disclose its Capital Notes covenants – however they were included in the Capital Notes Prospectus in May 2007 and have not been changed. For your information there is only one financial covenant, and that is that secured debt must not be greater than 1.5 times the total of book equity and the capital notes balance. Allied Farmers has always complied with this covenant and would disclose to the trustee and the market any beach in line with the Listing Rules.
Allied Nationwide’s covenants are covered in detail in its audited financial statements published six monthly. The key ratio is that the total liabilities of the Allied Nationwide ‘charging group’ (which excludes Speirs Securities) must not exceed 90% of total tangible assets. Allied Nationwide has always complied with this covenant and would disclose any breach to the trustee in line with the Trust Deed and the market (given the perpetual bonds are a listed security) in line with the Listing Rules.
In closing I would like to reiterate that the Board takes its responsibilities to its shareholders and the market seriously and the Directors strive to meet our obligations in terms of clarity and content of market disclosures. Allied Farmers Group financial statements are audited annually and meet the requirements of the International Financial Reporting Standards, and Allied Nationwide is audited six monthly in line with Reserve Bank best practice for a finance company. PricewaterhouseCoopers are Allied Farmers’ and Allied Nationwide’s auditors.
Please do not hesitate to get in touch with me again if would like clarification of any of the analysis in this letter.
Yours faithfully
Allied Farmers Limited
John Loughlin
Chairman