Securities Commission alleges Nuplex non-disclosure avoided 30% share price slump

By Gareth Vaughan Nuplex’s shares would have slumped up to 30% if the firm had disclosed it was set to breach banking covenants when directors first became aware of this information, the Securities Commission claims. In a statement of claim filed in the High Court at Wellington, the commission says the resins and specialty chemicals group’s board became aware on about December 17, 2008 that the company would breach banking covenants for the half-year to December 31, 2008. In particular, Nuplex was set to breach its Senior Debt Cover Ratio (SDCR), which was not allowed to exceed a multiple of three times without the written consent of its banks. The commission alleges that on about December 17 Nuplex directors learnt the SDCR for the December half-year would be 3.30 times. The SDCR covenant related to an A$350 million revolving multi-currency cash advance facility Nuplex signed up to in November 2005 with four banks, - Westpac, Commonwealth Bank of Australia, HSBC and Citibank. Although Nuplex advised its banks of the forecast breach on December 22 and proposed a change to the way the SDCR was calculated to prevent the breach, the banks told Nuplex they wouldn’t be able to respond to the proposal until late January 2009. The commission says, therefore, not disclosing the forecast breach broke both sharemarket listing rules and the Securities Markets Act. These require listed companies to immediately release any material information to the NZX once the company becomes aware of it. “Had information about the forecast breach been released, the price of Nuplex’s shares would have decreased by up to 30 percent,” the commission claims. Failing to immediately release the information caused loss to buyers of Nuplex’s shares, material prejudice to the interests of those buyers, material prejudice to the members of Nuplex and material damage to the integrity or reputation of New Zealand’s securities markets, the watch dog adds. The civil proceedings were filed against both Nuplex itself and current and former directors including managing director John Hirst, chairman Robert Aitken, Barbara Gibson, director and just departed Securities Commission member David Jackson, Bryan Kensington and Michael Wynter. The commission is seeking fines of up to $1 million per defendant, declarations of contravention and compensatory orders. The commission says the banks advised Nuplex on January 13, 2009 they wouldn’t consent to an alternative method of calculating the SDCR but would consider resetting it, although this would take at least three to four weeks. Nuplex then became aware via its provisional half-year accounts that the forecast breach had indeed occurred without it obtaining written consent from the banks with directors made aware of the confirmed breach on January 21. Here, the commission again alleges that had the sharemarket been informed of the actual breach, Nuplex’s share price would have fallen by up to 30%. It wasn’t until February 19 last year – in response to an NZX share price inquiry – that Nuplex announced unless the SDCR was loosened it would breach the covenant in its December 2008 half-year results. Finally, the commission says, Nuplex disclosed the breach on February 26 with its interim results, noting the SDCR was 3.46 times and that all bank debt had been classified as current liability on its balance sheet. However, directors knew in December the forecast breach was material information or appreciated there was real risk that Nuplex was in breach of continuous disclosure obligations. “Nuplex’s failure to release to NZX information concerning a forecast breach led to the development or subsistence of a market which was materially influenced by false or misleading information,” the commission says. Ultimately Nuplex shares fell as much as 51 cents, or 27%, on February 19 before recovering somewhat to close down 36c at $1.50. On February 26 they fell as much as 20c, or 15%, before again recovering some value to end down 15c at $1.20. Following the commission’s revelation it was filing court proceedings on Tuesday, Nuplex said it was very disappointed, denied there had been any breach of continuous disclosure rules and said it and its directors would vigorously defend themselves against the allegations. Nuplex said negotiations with the banks had been successful and saw them loosen the SDCR following the firm’s results announcement for the December 2008 half-year. The discussions took place as soon as Nuplex had a clear understanding of the impact of the global financial crisis on demand and of the rapid devaluation of the New Zealand dollar. The banks indicated they would consider loosening the covenant which they did. Given the banks’ “positive attitude,” and after board consideration, Nuplex decided in January 2009 that there was nothing material to disclose beyond disappointing half year financial information. “Regrettably, the commission’s interpretation of the continuous disclosure required by the listing rules and the Securities Markets Act differs from the company’s directors’ considered judgement at the relevant time,” Nuplex said. After the covenant breach was disclosed, Nuplex ultimately resurrected itself by completing a NZ$159.5 million capital raising through completing the issue of hundreds of millions of heavily discounted new shares last April. And last month the company hit the acquisition trail, acquiring the goodwill of the Med-Chem group’s Australian and New Zealand ingredient business. This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.