PM Key downbeat on Solid Energy's future after Korda Mentha report arrives; says it probably has no equity and he expects banks will have to take haircuts on debt

PM Key downbeat on Solid Energy's future after Korda Mentha report arrives; says it probably has no equity and he expects banks will have to take haircuts on debt
Image sourced from

By Bernard Hickey

Prime Minister John Key has warned after receiving a report from potential receivers KordaMentha that coal miner Solid Energy probably had no equity left and all options were on the table, including a debt restructuring that would see New Zealand's biggest banks take 'haircuts' on some of the NZ$389 million they are owed by the State Owned Enterprise (SOEs).

Key told a post-cabinet news conference the KordaMentha report had detailed various unpleasant options for the government.

"There are many options on the table. None of them are terribly palatable. But we're doing our best to try and resolve what is a quite broken company," Key said.

"It's my expectation that they will," he said, when asked if the banks, which include ANZ, ASB, BNZ, Westpac and Bank of Tokyo-Mitsubishi, would have to take haircuts or write down the value of that debt. There are also unnamed institutional investors who hold NZ$95 million of bonds, who would also be subject to any restructure.

"I don't think there was any that believed there was a government guarantee. They were concious of the risks," Key said, when asked if any haircut would affect banks' approach to lending to SOEs in future.

Solid Energy announced a further 105 further job losses on May 8.

Solid Energy's accounts say its debt is unsecured.

Elsewhere, Key said he expected meat exports to China to resume within a week once the necessary paper work was sorted and he said he did not see anything sinister behind the stranding of frozen sheep and beef meat at China's wharves.

(Updated with extra detail)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


"Dirty deeds done dirt cheap"
Maybe thay will gift it to the banks, hey its not worth anything so you guys have it and sorry about loosing all your money.
It just smells bad
Company suddenly not worth anything- what about the coal reserves - are they not worth anything much at all?
wow , we were lucky to be able to give it away!

But government demanded dividends despite it being insolvent.

Which is probably why it and the other SOE's were/are so busy looking for other investments and not running as core businesses...its a back door regressive tax....however no diferent from any othe "investor" or institutions demands for a bigger payout.

however no diferent from any othe "investor" or institutions demands for a bigger payout.
Except they have a fiduciary duty to the private shareholder not the government representing the citizen's assets and their long term welfare. The citizens cannot exit the position through the stock exchange in exchange for the greater fool's money.

What long term welfare? The SOE model to my mind is to allow "business efficiency"into an essential public works.  There is nothing I am aware of that says the SOE has to worry about NZ's long term welfare? or benefit? outside efficiency?and paying a dividend.  
Hence there should be some hands off regulation specifying for the power sector degree of resiliancy of supply which comes at a cost...standby un-used plant costs $s but its essential.

In this instance we are talking about critical infrastructure assets - grow up
Who is going to rescue this outfit once those playing with it are finished?
Powerco, for example, is a highly profitable business but has paid next to no tax for the last three years. Here are the numbers.
In the nine months to March 2012, Powerco reported earnings before interest and tax of $79.6m. The previous year to June its ebit was $118m and the year before that it was $136.3m.
Nevertheless, over those three years Powerco had an interest bill totalling $465m, which converted those operating profits into huge losses and obliterated its tax bill. Indeed, Powerco reported a net tax benefit for those years of $32m.
The arrangement is beneficial to Powerco's owners - Brookfield and Queensland Investment Corporation - because more than a third of the company's debt is related party, allowing owners to extract profits from the business as interest while paying no tax.
There are tax rules designed to limit the ability of overseas owners to do this, known as thin capitalisation rules, but Chalkie reckons they have been as useful as a fart in a fishtank.
For example, Powerco's debt at the time fell well within the allowable ratio of debt to total assets of 75 per cent, but that did not seem to hinder its ability to create large tax losses.
Another overseas-owned lines company, Wellington Electricity Distribution, has an even higher proportion of related-party debt than Powerco and in Chalkie's reading of its accounts has paid no company tax at all since its sale by Auckland-based Vector in 2008.
The tax losses came despite healthy profits at ebit level of close to $50m a year.
Wellington Electricity Distribution, incidentally, is owned by Hong Kong-based Cheung Kong Infrastructure through a holding company in the Bahamas.
From last month the thin capitalisation threshold has fallen to 60 per cent.
It will also be interesting to see whether the NDRC gets in the way of future New Zealand transactions. For now, Chalkie reckons anyone who sees no difference between overseas and local buyers needs their head read.

"stand-by unused plant costs $s but it's essential"
True that it costs money.  If it's fossil fuel based it also costs carbon, since it has to be already running in order to be able to supply power at short notice in case others fail.
It's essential - that is not an absolute but a relative statement.  100% security of supply 100% of the time is not practically feasible.  So it is a matter of deciding how much we are willing to pay, and for how much security.
Thus, if there were (let us say) a 0.0005% chance that power would not be available to 100 consumers for ten minutes once every ten years, we probably wouldn't think it worth spending $10000000000000000 to reduce that probability to 0.0002%.   But if by spending $100 we could reduce the risk of a nationwide blackout from 50% to 10%, we'd probably think that was money well spent.
Those are made-up figures, obviously.   Your post implies that you know what the real figures in New Zealand's case are - what is the probability of power black outs, how often, how large and how long; and what would be the cost of reducing that probability, and by how much.   Perhaps you'd share that information with us?   Then we can have a better informed discussion about whether the level of security of supply we currently have is high enough, and whether the cost of improving it is a cost worth bearing.

I dont know the stats but what concerns me is that power should be a publically provided service with a view that it s there for a substantial amount of the time ie its resiliant.  The cost analysis would be the impact of not having it as a disruption to our National economy.  An occasional outage for not a long duration shouldnt impact  our economic output, so yes its a balancing act.    Lets look at dry years, if we had one and power was substantially distruped for long periods then the impact on our economy would be huge?

Yes, the benefit is the avoided cost of power shortfalls.  But in making the calculation,  you have to take the probability into account.  How probable is a dry year; how probable is it that it would lead to long periods of substantial disruption for long periods; and how great would be the disruption?  
That's the kind of calculation you have to do before you can decide how much it would be worth paying to avoid that cost. 
In the case of a publicly managed service, the Government has to strike that balance on behalf of everyody else.  They are likely to pay too much (that is what people spending other people's money tend to do).  Certainly there's no reason to think they are likely to make that call any better than would lots of individual consumers each deciding for themselves how much security of supply they're prepared to pay for (by choosing between a more expensive guaranteed supply, or a less expensive interruptible supply).
This is the essential contradiction that many on this forum never seem to recognise.  You think that politicians are all venal, corrupt, myopic and self serving, and that they are advised by clueless economists and bureaucrats who don't know the first thing about the real world.  How then can you possibly think that Government would be likely to make wiser choices on citizens' behalf than citizens are able to make for themselves?

Good argument...
To start on your last para, you only give two options/scenarios.  Many citizens are not able to make such calculations, or are not in a position of choice even if they could do the calcualtion or are gamblers, Ive seen this for 20+ years.  Pollies Im afraid seem to see  infrastructure as something they spend money on for little vote gain so if it can be put off for 3 years and the money spent on vote winners, well that seems to happen.  Now when you look at the past, we had infrastructure investment, so whats changed? has the entire system around the pollies become political? I suspect so.  Has  infrastructure got so expensie that expanding it is not economical? I wonder, I suspect so.
Lets look at a citzen's choices, install a petrol generator? what if there is a petrol shortage?  fat good then. So look at it from what are the most efficient options to give lowest xtra dam's cost  spread over X households probably works out cheaper and simpler for the nation than having a decent % install their own CHP generator. 
We can see from other countries say the US that has no national grid as its private utilities and that  is a problem.  Citizens for themselves can of course vote for the party offering them the "better" way forward pity we dont see much in the way of those choices being put forward.
So yes our pollies and indeed we need to do better, the other option is really the free market and that seems to be an utter disaster...

Retail customers don't actually have the choice at all, they pay a high price for a high level of security whether they want it or not.  It would be very interesting to see how they resopnded if they did have a choice, but I don't know of anywhere where that actually happens.  Larger industrial customers, however, do have options and are able to signal through their buying and contracting choices whether they'd rather keep consuming power whatever the price, or go without if and when the price gets above a certain point (that point will be different for different users). 
That's what tells the supply side whether it's worth building in additional security or not.  Or the government can do it.  But there's precious little evidence to demonstrate that Governments - also under pressure from political considerations and other demands on the public purse, as well as being venal, corrupt and advised by incompetent and clueless bureaucrats and know-nothing economists - do a better job of second-guessing what the demand side wants and how much it's worth paying for it on their behalf.
Certainly it's likely to be more economical, and more environmentally friendly, to build a single large electricity generator than have citizens each building a small one.  But there is no reason why a private company would not do that in the expectation of earning a return on its investment by selling the electricity to those citizens.   Just as, for example,food retailers build large supermarkets in the expectation of earning a return on the investment by selling groceries to consumers, and hotel companies build large hotels in the expectation of earning a return by renting out the rooms to visitors.  The Government doesn't need to tell them to do it.
Provision and maintenance of a national grid is a different matter.  That is a natural monopoly and so has to be regulated so as to avoid monopolistic rent seeking, inefficiencies etc. 

How probable is of course only part of the calculation.  Another word for probable is risk....the other part of the equation is impact.
65% (or thereabouts) of NZ's electrical power is hydro, the capacity of the lakes isnt changing (though maybe decreasing slightly from silt up).  As our yearly demand increases at 3~4%? (pre-GFC) then the capacity of the lakes is used up sooner.  With climate change its likely that dry years will happen more frequently and be dryer, so the odds/probablity is getting worse.
The impact of having to ration power on our economy would be severe I suspect, depends on how bad. 
So what's the future hold? its highly probable we will be moving to more solar power but also more electrical use as fossil fuels cost becomes un-economic. That of course is a challenge....

So which one (or more) of these guys loses a job?
And what Ministers ought to go with them?

Dont be silly, of course its none. They are all appointees with the same philosophical outlook as Treasury and National.  All they do is report that the SOE's are working to their idealogical model...bound to fail, and we can see it has, but it will be a collective duck'n'dive.
Solid energy seemed to be dabling in non-core areas as does Meridian, one has to wonder what the increased risk and eventual cost is to us the tax payer....

Just can't wait  till John Boy finds himself telling Mom n Pop the power shares they bought  have some conectivity.
 This is one case where you don't respect your Elder........what a piece of work.

hold ya powder for a while christov .. the promoters will support the price for at least a month .. although the price might disappoint during the AM and early running of the PM sessions .. they will hit the screens in the final minutes every day, just before, or right on the close, and bob's-yer-uncle ..

I'd be looking towards those appointed by the relevant minister to oversee the Crown's best interest. Andrew Turner would do for starters. As an accountant he surely knew the dividends accepted by the Crown from Solid Energy were not derived from anything but inappropriately derived balance sheet debt.

How right you are. Can't see the banks taking this lightly.

I dont think the banks will have a say.  Politically its to out there in the public's face. If ol'JK bails them out thats just going to explode back while banks make huge profits for what will be seen as no risk.
maybe the banks will have to start acting sensibly all of a sudden and not lend on a whim and a %.
I can but hope.

Yes.... Brings back memories of the Hanover dividends..before it folded

Why am I not surprised!...the haircuts call is humbug as the same 'banks' will work in tandem to screw the 'losses' from this economy...
Key knows he must allow this or accept that they will drive up the cost of govt debt sales because they will operate as one entity and he can do nothing about it....
Look not at Soiled Energy...keep your eyes on the deals to be done as 'payback' to these 'banks'.

They don't even bother with scapegoats anymore.

Ever been in a negotiations with an SOE?
They want the best price because they are owned by the government. Directors don't/won't sign personal guarantees.

Why can't the banks call in the receiver? Is that not possible for an SOE? Maybe the Government stands first in line for any money recovered?  What recourse do the banks have if they believe that the Government has been extracting excessive dividends? This could get quite messy.

Soild energy indeed! Ooops, I meant solid, solid as!
Have y'all stocked up on MRP...? Don't forget we need your money...