Nuplex's banks refused to change the way key banking covenant was calculated

Nuplex's banks rejected a request to change the way a key banking covenant was calculated that would have fixed the covenant breach the resins and specialty chemicals group and its directors' are now being sued by the Securities Commission for allegedly not disclosing, court papers show.

This request is outlined in Nuplex and the directors' statement of defence, obtained by interest.co.nz. In it the defendants' rebut Securities Commission charges that they failed to disclose the banking covenant breach by saying they took all steps that were reasonable in the circumstances to ensure sharemarket listed Nuplex complied with continuous disclosure obligations.

Nuplex and the six current or former directors' - then managing director John Hirst, chairman Robert Aitken, Barbara Gibson, Nuplex director and recently departed Securities Commission member David Jackson, Bryan Kensington and Michael Wynter - deny they became aware on about December 17, 2008 that the company's Senior Debt Cover Ratio (SDCR) on its bank loans would be 3.30 times as of December 31, 2008, significantly in breach of Nuplex's deal with the banks that the SDCR would not exceed 3 times.

The company had loans worth up to A$350 million in place with banks. These included A$100 million revolving multi-currency cash advance facilities with ASB's parent Commonwealth Bank of Australia,  Westpac and the HSBC group, and another loan of the same type worth up to A$50 million with Citibank.

The defendants' say they wrote to Westpac, on behalf of all the banks, on December 22, 2008 acknowledging the potential breach would occur due to "sudden changes in exchange rates." To prevent a breach, they asked for a change to the way earnings before interest, tax, depreciation and amortisation (ebitda) in relation to the SDCR was calculated.

Nuplex asked that ebitda be calculated for the proceeding 12 months by using the exchanges rates as they stood at the reporting date. This would be instead of using the average exchange rate over the full 12 months, which was how Nuplex normally reported ebitda in its interim and annual accounts.

The directors' told Westpac that by using the exchange rates as they stood at the reporting date the SDCR should be 3 times, thus meeting the covenant requirement. But if it was calculated using the methodology in the banking agreements, the SDCR would be 3.30 times.

"Notwithstanding that facilities provided to Nuplex by its banking group - Westpac, CBA, HSBC and Citibank - are bilateral in nature, Nuplex consents to the banking group holding discussions on a group basis to consider the issues raised in this letter with a view to making a consistent agreed response," Nuplex's letter continued.

"Nuplex has asked Westpac to coordinate these discussions."

In an email response from an un-named staff member Westpac said: "Thanks for this. I don't anticipate that the banks will be in a position to respond until January. We will as requested, look to coordinate the banks' response. Phil McGivern and I will work out a process for this and keep you posted."

In terms of the Securities Commission charges, the defendants argue a reasonable person would not have expected information about Nuplex's negotiations with the banks, or the subject matter of those negotiations, to be disclosed.

"In particular because the release of such information while those negotiations were ongoing would have unreasonably prejudiced Nuplex."

Furthermore, they argue both the negotiations and their subject matter were confidential and the relevant information concerned incomplete proposals and negotiations between Nuplex and its banks.

Meanwhile, Westpac replied to Nuplex's request on January 13, 2009. The bank acknowledged the depreciation of the New Zealand dollar against the currencies in which Nuplex traded, and in which a significant chunk of its debt was denominated, hadn't been helpful to the company.

"However, addressing this issue by adopting a different approach for accounting and covenant reporting is not a viable solution," said Westpac.

"The group (of banks) would appreciate receiving a 'pro-forma' covenant calculation using the alternative methodology proposed by you in your letter, however, we do not wish to change the way in which the SDCR covenant is calculated."

Instead the banks' had agreed to seek approval for easing the SDCR to 3.5 times from 3 times for the reporting periods ending December 31, 2008, March 31, 2009 and June 30, 2009.

Nuplex and the directors' deny the commission's allegation that their failure to disclose the breach to the NZX, when they first became aware of it, prevented a fall of up to 30% in Nuplex's share price. The regulator alleges the non-disclosure allowed a false market to develop in Nuplex shares, causing loss to acquirers' of those shares at that time and material damage to the integrity or reputation of New Zealand’s securities markets.

The defendants' say that at all times during the period under question, December 17, 2008 until February 19, 2009, they:

Took all steps that were reasonable in the circumstances to ensure that Nuplex complied with its continuous disclosure obligations or the terms or conditions of continuous disclosure exemptions, including without limitation relying upon reports incorporating professional advice as to Nuplex's disclosure obligations and;

After doing so, believed on reasonable grounds that Nuplex was complying with its obligations or terms or conditions of a continuous disclosure exemption.

The banks ultimately waived compliance with the SDCR for the period up to April 2009, including the December 31, 2008 balance date. It was amended for the period from May 1, 2009 until September 29, 2009 with all this announced to the NZX on March 16, 2009.

For its part the commission points out it wasn't until February 19, 2009, in response to an NZX share price inquiry, that Nuplex acknowledged unless the SDCR was loosened, it would breach the covenant in its interim results for the period ending December 31, 2008.

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 a current liability on its balance sheet. However, the regulator argues, the directors knew in December the forecast breach was material information or appreciated there was real risk that Nuplex was in breach of its continuous disclosure obligations.

 The case is the first continuous disclosure one brought by the commission. The regulator is seeking declarations of contravention, penalties of up to NZ$1 million per defendant and compensatory orders. Declaration of contravention orders allow investors who suffered a loss in the relevant period, such as buyers of shares in the period before the covenant breach was disclosed, to seek compensation through the courts more cost effectively because liability has already been established.

Roger Wallis, a partner at Chapman Tripp who focuses on corporate and securities law, told interest.co.nz he expected the commission to lose the case.

* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.