TSB makes $5.4m provision against remaining $53.7m holding of Solid Energy bonds

By Gareth Vaughan

TSB Bank has made a $5.4 million provision against its outstanding $53.7 million worth of Solid Energy bonds with the struggling State Owned Enterprise not expecting to return to profitability until its 2017 financial year.

In October last year TSB was one of six banks to swap Solid Energy debt for redeemable preference shares (RPS) as part of a creditors' compromise for the beleaguered company. TSB had $13.757 million worth of bonds converted to RPS, leaving it with another $53.7 million of bonds.

"The ability of Solid Energy to continue to meet the contractual repayments terms of the bonds over time is contingent upon the successful restructuring of the core operations of the business and a recovery in market conditions. Given the uncertainty in the outcomes of these events a provision of $5.370 million against the bonds has been recorded in the accounts," TSB says in its latest General Disclosure Statement.

The bank lists this $5.37 million as a doubtful debts provision. It also lists the face value of its RPS as a doubtful debt provision, although it also says at March 31 this year the $13.757 million was written off as fully impaired.

In May TSB CEO Kevin Murphy told interest.co.nz the bank was "optimistic" about the future of its exposure to Solid Energy, but wasn't ruling out the possibility of taking another haircut.

TSB's ongoing concerns will be shared by the SOE's other lenders. Unlike TSB's bonds, the five are unsecured lenders. They are ANZ, BNZ, Commonwealth Bank of Australia, Westpac and the Bank of Tokyo-Mitsubishi. They also saw a chunk of their loans impaired and converted to redeemable preference shares in October last year, with the six banks taking a combined $75 million haircut.

The Bank of Tokyo-Mitsubishi unsuccessfully tried to block the debt restructure, which was supported by the other banks, in the High Court. It had $16.3 million of its $80 million loan converted into preference shares.

ANZ had $8.2 million of its $40 million of loans converted to redeemable preference shares; BNZ had $16.3 million of $80 million converted; CBA had $9.2 million converted with another $62.1 million of loans outstanding; and Westpac had $11.3 million of $96.5 million converted. That left Solid Energy with TSB's $53.7 million of bonds, and $306.5 million of loans from the other five banks. In terms of the size of the haircuts, ANZ's at 21% was the biggest, with Westpac's 12% the smallest.

Propped up by taxpayers, banks

Solid Energy's latest annual report paints a picture of a company surviving at the behest of its government owner and bank lenders.

"Recovery of the market price of coal and a continued focus on cost reductions are required to build a sustainable business. Based on current projections, the company will not return to profitability until the 2017 financial year," Solid Energy says.

The coal miner recorded a $182 million June year loss this year versus a loss of $335 million a year earlier. As of June 30 this year Solid Energy had bank and note debt of $321 million versus $396 million a year earlier, and cash on hand of $71.7 million versus $14.1 million. The weighted average interest rate of its bank loans and notes, including commitment fees, margin and net interest rate swap costs at June 30, 2014 was 7.04%, up from 5.63% .

In Solid Energy's annual report auditor KPMG says; "If the group was unable to continue as a going concern, adjustments may have to be made to reflect the situation that assets may have to be realised and liabilities extinguished
at amounts which could differ from the amounts at which they are recorded in the statement of financial position."

In February last year Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall announced Solid Energy, which had been one of four SOEs earmarked by the National-led government for partial privatisation, was in talks with its banks over restructuring options for its $389 million of debt. Then in October 2013 they announced a proposed financial restructuring deal for Solid Energy, including a contribution of up to $155 million from taxpayers.

In September this year Solid Energy effectively received a second taxpayer backed bailout. The Government agreed to cover Solid Energy's $103 million land remediation obligations so the company didn't fall into negative equity in its annual financial accounts. Solid Energy's annual report this year shows $160.9 million of equity, which includes $60.9 million of ordinary shares and $100 million of RPS. Of the latter $75 million worth is held by the lenders, and $25 million by the government.

On top of the $25 million of RPS taken by the Government, Solid Energy has a working capital facility of up to $50 million from the Crown, a secured term loan facility of up to "approximately" $50 million, and a secured stand-by facility of up to $30 million. As of Solid Energy's June 30 balance date, all three of these taxpayer backed facilities were undrawn.

Solid Energy's government and bank debt facilities are due to mature on September 7, 2016.

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