Standard & Poor's change to equity content criteria sees Genesis exercise right to change terms of existing capital bonds

By Craig Simpson

Genesis Energy plans to modify the terms of its unsecured subordinated capital bonds, which are listed on the NZX debt market under the code GPLFA, including a change to the 8.5% interest rate being paid.

As interest.co.nz previously reported last month, Standard and Poor's (S&P) has changed its equity content criteria. On the basis of S&P’s revised criteria, the highest equity content for which the capital bonds are
eligible is “intermediate”. This means S&P regards them as 50% debt and 50% equity. Previously they were classified as 100% equity when S&P calculated its financial ratios for Genesis, with the interest paid classed as dividends.

As a result of this change Genesis now has the right to redeem the capital bonds at par (being $1.00 for each capital bond) plus accrued interest (less any applicable withholding taxes).

Genesis will put a proposal to all existing New Zealand bondholders (as at close of business on Thursday June 6) who will be offered the opportunity to remain invested in the modified capital bonds.

Those New Zealand bondholders who do not elect to remain invested, and all overseas bondholders, will have their capital bonds purchased by Genesis Energy on 15 July 2013 (the next interest payment date for the capital bonds) at par (being $1.00 for each capital bond) plus accrued interest (less any applicable withholding taxes).

The proposed modifications are described below and bondholders will receive further information directly from the company shortly, along with details of the minimum interest rate and margin to apply to the modified capital bonds once this has been determined following a book build process.

- The interest rate applicable to the capital bonds until the first reset date and the margin will be adjusted to reflect the terms of a newly issued intermediate equity content instrument in current market conditions. The adjusted pricing will be set out in the explanatory notes expected to be made available to the market on or about June 7 and thereafter sent to all bondholders.

- An extension of the first reset date from 15 July 2016 to 15 July 2018. This also means Genesis Energy cannot, except in certain circumstances, call the capital bonds until 15 July 2018.

- The introduction of a distribution stopper which means that if there is any deferred interest outstanding on the capital bonds, Genesis Energy cannot pay any distributions to its shareholders.

- Genesis Energy having the right to defer an interest payment at any time. Currently, Genesis Energy must defer an interest payment if its credit rating falls to BB+ or lower or if Genesis Energy is insolvent or would become insolvent if an interest payment is made. As a consequence of the change to this provision, Genesis Energy is not required to defer interest should that event arise, but has the discretion to defer interest on the capital bonds at any time.

- Inclusion of a process whereby Genesis Energy can at its discretion propose new terms to bondholders prior to each reset date, and bondholders can elect to accept or reject the new terms. It is expected that, once the modifications take effect (which will occur on completion of the process on 15 July 2013), the issue credit rating of the capital bonds will be revised upwards by S&P from BB- to BB+.

Genesis Energy intends to have up to $200 million of modified capital bonds on issue following completion of the modification process.

If valid elections are received from New Zealand holders such that Genesis Energy will have more than $200 million of capital bonds on issue following completion of the process, Genesis Energy may scale applications accordingly.

Timetable

The table below outlines the expected timeline of events

Date Event
31 May 2013 Trading halt to commence for the Capital Bonds at market close
6 June 2013 Record Date & Minimum interest rate and margin set
7 June 2013

Election period commences; Election Notices and Explanatory Notes made available to the market on www.nzx.com and on Genesis Energy's website (at www.genesisenergy.co.nz), and thereafter dispatched to bondholders.

3 July 2013 (or date set by Genesis)
Date by which New Zealand bondholders wishing to remain invested
in the modified Capital Bonds must have returned their duly
completed Election Notices.
10 July 2013 Rate set date on which the interest rate applicable to the modified
Capital Bonds is determined and announced to the NZX.
15 July 2013 Interest Payment Date.
Modifications to the Capital Bonds will take effect.
Trading in modified Capital Bonds expected to resume.
Genesis Energy purchases Capital Bonds not being retained by
existing bondholders.

Genesis Energy has hired Craigs Investment Partners Limited (Craigs) to act as its structuring adviser for the election process, and Craigs and Forsyth Barr Limited have been appointed joint lead arrangers.

Genesis Energy is a state enterprise under the State Owned Enterprises Act 1986. The Crown does not guarantee the capital bonds or any other obligations of Genesis Energy.

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