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PM says decision on Solid Energy's future due from next week; banks in control

PM says decision on Solid Energy's future due from next week; banks in control

By Bernard Hickey

State-owned coal miner Solid Energy could be put into receivership by its bankers from next week, Prime Minister John Key has told his weekly post-cabinet news conference.

"It's in a precarious position. Quite a bit of work is happening behind the scenes to see what the next step in the process is. We're conscious of a number of stakeholders, firstly those that work for Solid Energy. You've got a number of creditors, including some small ones, and finally you've got the interests of the banks," Key said.

"We've made it clear to the banks that they need to sort the situation out," he said.

"The Government and the board are working with the banks on what the next steps might be."

Solid Energy owes about NZ$300 million to ANZ, ASB's parent Commonwealth Bank of Australia, BNZ, Westpac and the Bank of Tokyo-Mitsubishi.

Earlier this year TSB wrote off its entire $53.9 million exposure to Solid Energy, which was through bonds issued by the SOE. The bulk of lending from the other five banks is via unsecured loans due to be repaid or refinanced in September next year.

Cabinet had discussed the issue earlier on Monday and had ruled out any form of equity capital injection or government guaranteed loan, but was looking at other unspecified options in discussions with the banks, Key said.

"Because the banks control the process, in a way it's a call for them to make about what the next step is. Liquidation isn't the number one preferred option of the Government, because liquidation is where the company ceases trading, the assets would be boarded up and the assets would be sold to repay the creditors, and there are other options which would find more favour with the Government, but the call is one that would be made by the bankers, because it is essentially their debt," he said when asked if a decision would be made imminently.

He later said a decision was not likely this week, "but potentially in a few weeks."

"They are the holders of the debt and therefore they eventually have the legal rights to recover their debts or work out a plan that will allow them to recover their debts. And they are leading the process, but the Crown obviously is an interested participant and also actively engaged in those conversations," Key said.

Key said the Government was not planning to put in more capital or more financial support, "but support could be in other forms or other ways."

He later ruled out a Government guarantee.

Solid Energy said in March it needed a bank debt restructure, even with coal prices around US$100/tonne, and was only sustainable with prices up over US$120/tonne. Prices have fallen since then to US$85-90/tonne. See our earlier article here.

Another loan?

Asked if the Government was considering another loan, he said: "The government injected a significant amount of capital into Solid Energy some time ago. I don't think it is looking to inject more. That doesn't mean there can't be other ways that the government could assist, but we need to work our way through that."

Key said he was not aware of any foreign buyers looking to buy the Stockton mine, which produces coking coal for steel mills in India and is seen as a potentially valuable asset, along with Solid Energy Huntly mines, which sell steaming coal to Fonterra and others.

"The least preferred option is liquidation but I can't rule out that at some point in the future that happens. It might happen if all the other things fall over," he said.

Already been two bailouts

In October 2013 the Government announced a debt restructuring deal for Solid Energy, including a contribution of up to $155 million from taxpayers. Then in September 2014 Solid Energy effectively received a second taxpayer funded bailout with the Government agreeing to cover Solid Energy's NZ$103 million land remediation obligations so the company didn't fall into negative equity in its annual financial accounts. 

In the 2013 restructure Solid Energy's lenders took a combined NZ$75 million haircut with a chunk of their loans impaired and converted to redeemable preference shares. The Bank of Tokyo-Mitsubishi unsuccessfully tried to block the debt restructure, which was supported by the other banks, in the High Court. It had NZ$16.3 million of its NZ$80 million loan converted into redeemable preference shares.

KPMG last year suggested the Solid Energy debt restructure reverberated far more widely than almost any other banking sector event in recent years, arguing it appeared to have changed a long-standing assumption that a SOE has an implicit government guarantee.

(Updated with more detail, background)

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"We've made it clear to the banks that they need to sort the situation out," he said.

"The Government and the board are working with the banks on what the next steps might be."

Solid Energy owes about NZ$300 million to ANZ, ASB's parent Commonwealth Bank of Australia, BNZ, Westpac and the Bank of Tokyo-Mitsubishi.

The RBNZ made it clear unsecured bank creditors will underwrite the losses if they become an issue of bank insolvency, hence financial instability. I guess they are one step closer to fulfilling that obligation, unlike the government.

How come the Board and CEO of TSB Bank Limited are still in their roles? Is there no accountability in NZ. $54million is a big error.

I wouldn't expect any mea culpa from neoliberal ideolgues John Key, Bill English, Simon Power, and their lackeys in Treasury, whose advice to the management of Solid Energy is directly responsible for the company's dire financial position.

"Treasury advised a movement towards a greater private sector involvement in SOEs, while observing that partial listing would not be consistent with, “the Government’s policy to retain 100% ownership of SOEs.” This report also recommended putting pressure on SOEs to increase their gearing (ie, the ratio of debt to equity or capital) by borrowing more from the private sector and paying special dividends to the Crown. These higher debt levels would, “put increased pressure on SOEs to perform, by committing a fixed part of their future cash flow to debt servicing, meaning they must focus more on core business profitability, and on selecting new investment projects carefully.” At the same time, disquiet was expressed about the limited public monitoring of SOEs and the lack of transparency about the process.[117]"

During 2009 Solid Energy started a borrowing programme to finance its growth objectives. This course of action was encouraged by the government. On 26 May Simon Power, Minister for State Owned Enterprises, told Solid Energy, “I have been advised by officials that Solid Energy may have the capacity to sustain a 40% gearing ratio. I urge the Solid Energy Board to give serious consideration to this proposal, and to release all surplus capital to the shareholder as special dividends. I note that Solid Energy currently has a gearing target of 35%, including the company’s rehabilitation liability as if it were debt. Given that the nature of the rehabilitation liability is significantly different from debt, I am sceptical that this is an appropriate treatment . . . I would also like to . . . ensure that a larger and more consistent share of profits is returned to the Crown as shareholder. In this regard, I propose that the Solid Energy Board give serious consideration to adopting a dividend policy equal to 65% of operating cash flows.” Solid Energy was also brought to task about its failure to provide comprehensive and timely information about planned capital expenditure, performance targets and a commercial valuation of the company.[120]

its called privatise by stealth. the banks will exchange the debt for equity and take ownership.
I have no problem with the government not owning solid energy just the way this government has gone about getting rid of it.

Not to mention the massive salaries paid to SOE CEOs and staff... To attract 'the best' of course.

Can we also compare the books of KiwiRail with Solid Energy?!!

Really - the writing was on the wall from the day Solid Energy produced a "trumped up" value based on false valuation methodology in order to try to sell it for public listing. When it was caught out, the government and its crown monitoring unit turned its back on it to avoid beings seen as conspiring. Since then the government has kept funding it in the hope the evidence will never come out.

In the meantime Three Years Ago This Coal Mine Was Worth $624 Million. Now It Sold for $1
by Jesse RiseboroughJuan Pablo Spinetto

July 31, 2015 — 11:31 PM NZST Updated on August 1, 2015 — 5:02 AM NZST at -

Can we have a detailed audit of where every one of the 300 hundred million dollars went?

How much was wasted on huge salaries and the Christchurch "Palace"?