SOE Genesis' bond offer delayed as S&P mulls classifying them as equity ahead of potential government sell down

By Gareth Vaughan

Genesis Energy's planned NZ$300 million retail bond issue appears to have been delayed due to the Government's plan to partially list the State Owned Enterprise (SOE) on the sharemarket and Genesis' desire to have the bonds classified as equity by Standard & Poor's (S&P).

Genesis yesterday released a brief statement saying it was delaying the offer of unsecured, subordinated Capital Bonds which had been due to open last month, due to "a delay in the process." This was out of the hands of both Genesis and the offer's arranger and lead managers - Craigs Investment Partners, ANZ and Westpac Institutional Bank, they said.

Since Genesis announced its intention to make the bond offer in December, the National Party-led Government has announced that, should it be re-elected in November's election, it may sell minority stakes in Genesis, Mighty River Power, Meridian Energy and Solid Energy.

Interest.co.nz was told that Genesis has been hoping to copy the style of a subordinated note issue by Australian oil and gas explorer and producer Santos last year which was treated by international debt rater S&P as an equity raising. This type of offer, with the capital bonds regarded as 100% equity, would be a new structure for New Zealand and negotiations with S&P were said to be taking longer than expected.

On the Santos offer, S&P said the notes received equity credit classification meaning it treats them entirely as equity in its calculations.

"Key features of the (Santos) subordinated notes include a mandatory deferral of interest for up to five years if the long term corporate credit rating on Santos falls to ‘BB+’ or below (it's currently BBB+, the same as S&P's rating for Genesis)," S&P said.

"Other features of the instrument include a 60 year term to maturity; a 100 basis point step-up at year seven; a legally binding replacement capital covenant, which requires that the issuer fund any redemption of the instrument with a similarly equity-like instrument; and a first call date from year five."

S&P rates the Santos notes BB.

Both Vector and New Zealand Post have issued bonds that have received 50% equity credit.

'Wait for the real thing?'

Meanwhile, interest.co.nz was also told the Government's announcement that it could sell a stake in Genesis might have raised some questions around whether buyers would want to buy hybrid equity in the SOE when they may be able to buy shares down the line.

A Genesis spokesman declined to elaborate on the reasons for the bond offer's delay, only saying it was due to procedural matters. S&P officials were not immediately available for comment.

Genesis plans to use proceeds raised from the offer to help fund the acquisition of the Tekapo A and B power stations from Meridian. This deal is part of the Government's Electricity Market Ministerial Review announced in December 2009. The review's recommendations included the sale of the Tekapo A and B power stations to Genesis by Meridian and the establishment of Virtual Asset Swap (VAS) agreements (long-term swaps of electricity) between Meridian in the South Island and Genesis and Mighty River Power in the North Island.

Meridian has a book value of NZ$643.9 million on the two power stations. The Genesis spokesman said the two SOEs had been in negotiations over price and other issues such as water arrangements for several months but this wasn't why the bond offer had been delayed. He said he couldn't say how Genesis planned to fund the balance of the purchase but said the Government expects Meridian to sell and transfer the power stations to Genesis during the first-half of the 2011 calendar year.

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