SmartPay looks to raise NZ$6mln in redeemable preference share sale paying 10% to repay debt now paying up to 17.95%

By Gareth Vaughan

Eftpos terminal supplier SmartPay wants to sell up to NZ$6 million worth of redeemable preference shares paying a 10% annual dividend to the public to enable it to pay back mezzanine finance used to buy a business from failed rival ProvencoCadmus in 2009 and cut its annual interest bill by up to NZ$1 million.

SmartPay's managing director Ian Bailey told interest.co.nz the company wants to "get rid of all" its mezzanine finance providers, some of whom are associated with company directors.

SmartPay bought ProvencoCadmus' payments division from that company's receiver KordaMentha in August 2009 using NZ$4.29 million worth of debt to help fund the NZ$6.15 million deal. According to the last receiver's report ANZ, which pulled the plug on ProvencoCadmus after it failed to secure additional funding from its major shareholders Todd Capital and Navman founder Peter Maire, has got back just NZ$8.85 million of the NZ$23.8 million it was owed when KordaMentha was appointed.

Meanwhile, SmartPay has NZ$7 million of what it terms "corporate debt" with NZ$4.4 million worth of this accruing interest at between 16% and 17.95% per annum - plus fees - and is repayable on, or before, December 31 this year. The debt is with an array of lenders.

"The idea is that we consolidate that into one loan and just repay them all," Bailey said. "We're trying to get rid of them all. That's why we're going for the NZ$6 million."

SmartPay's last annual report notes a NZ$2 million loan from FBL Finance Limited paying 17.95% interest. SmartPay director Greg Barclay is a shareholder in one of FBL Finance's two shareholding companies.

There's also a loan from SmartPay shareholder Galileo Investments Trustee Limited, for an unspecified amount paying 15% on the principal, whose shareholders include Murray Henshall who was a SmartPay director until March last year. A further loan is from Riverhorse Holdings Limited, accruing interest at 20% per annum, where Bailey is a shareholder. SmartPay's also named in the annual report as the guarantor on a loan to one of its subsidiaries from Auckland Finance Limited, a subsidiary of the now in receivership South Canterbury Finance. SmartPay's interim report notes South Canterbury Finance's ultimate parent, Southbury Group, as its third biggest shareholder with an 6.81% stake.

Bailey said he didn't have available exactly which loans were part of the corporate debt grouping that SmartPay wants to repay through proceeds raised from the preference share issue.

The annual report notes other lenders include FE Investments, which funds rental contracts and whose directors include Peter Simunovich of Simunovich Fisheries, and a now repaid loan from Numeria Leasing Limited, a subsidiary of failed finance company Capital + Merchant. Bailey says mainstream banks are starting to show an interest in SmartPay’s performance after four straight halves of positive earnings before interest, tax, depreciation and amortisation (ebitda).

SmartPay, whose products include Voice over Internet Protocol, broadband, eftpos terminals, prepayment products and transactional processing services for the taxi industry, Wi-Fi and Internet enabled eftpos equipment for sale and rent, says its interest costs in the 2010 financial year were NZ$2.4 million, which is expected to rise over NZ$3 million for the year to March 31, 2011.

If the preference share offer is fully subscribed, and combined with the lower cost funding lines arranged for the company's rental book including one from Kiwibank, SmartPay expects interest costs to reduce by between NZ$700,000 and NZ$1 million in the coming 2011-12 year.

Seeking listing for shares on the NZX debt market

SmartPay says it's applying to sharemarket operator NZX for permission to list the preference shares on NZX's debt market, to provide a trading platform, even though they will be equity securities. The company says preference shareholders will benefit from an unsecured guarantee from SmartPay and indirectly benefit from security over a range of assets of the company that return ongoing recurring revenue streams. FE Securities Limited, formerly First Eastern Securities, is the arranger of the offer.

The redemption date for the redeemable preference shares is September 30, 2014. The offer opened on March 28 and is due to close on September 16 this year with minimum subscriptions of NZ$5,000 with the preference shares to be issued at NZ$1 each. SmartPay says the shares will pay a gross dividend of 10% per annum through a cash dividend of 7.2% and imputation credit of 2.8%. The company will have the right to redeem the shares at any time prior to the redemption date by giving at least 45 days notice to shareholders.

SmartPay's most recent financial statements, for the six months to September last year, record a bottom line loss of NZ$1.98 million after finance costs of NZ$1.94 million. Ebitda was NZ$1.7 million. As at February 28 this year, the SmartPay Group had indebtedness of about NZ$19.6 million and unsecured trade creditors of about NZ$2.6 million. The preference share dividends rank after all creditors and in priority to the ordinary SmartPay shareholders.

Aside from the NZ$7 million of “corporate” debt secured over the business and assets, SmartPay has a further NZ$12.6 million of debt secured over the future revenue streams under discounted rental contracts. The company's rental business involves it renting equipment out for which it charges an ongoing transactional fee.

Bailey said the ProvencoCadmus deal had gone "fantastically" for SmartPay.

"Our market cap(italisation) has gone from NZ$8 million to NZ$30 million, we've trebled the size of our business and got both New Zealand and Australia operations and probably the top 200 major corporates on board (as clients) now. It has taken us from a very small public listed entity to one five times the size," said Bailey.

'Our share price should be higher'

Nonetheless, he said SmartPay's share price should be higher.

"We've had about a NZ$7 million ebitda this year and if you divide that by the number of shares on issue and then multiply by a PE (price-to-earnings ratio) of eight or nine you'll see that our share price should be between 6 and 10 cents. At 2.5c, where it is at the moment, it's very undervalued," Bailey said.

SmartPay shares were unchanged at 2.2c today.

Asked whether he was confident of raising the full NZ$6 million in the preference share issue, Bailey said test marketing last year received quite positive feedback.

"(But) who knows, markets have changed, they continue to change," said Bailey. "We're hopeful . We don't need it all to be quite honest (as) some people (lenders) have already said they'll roll over existing facilities so if we have to we know we can (do that). It would be quite nice if we could (raise the full NZ$6 million) for the huge impact on shareholder value."

Meanwhile, Bailey said SmartPay will announce further detail of its plans to list on the Australian Stock Exchange within weeks. At this stage a secondary listing was planned but "everything" was up for discussion. See SmartPay's Investment Statement here.

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