Solid Energy sees coal prices lower for longer with board concerned about 'diminishing ability to repay or refinance debt '

Solid Energy sees coal prices lower for longer with board concerned about 'diminishing ability to repay or refinance debt '

Beleaguered State Owned Enterprise (SOE) Solid Energy says it will "defer" releasing its half-year accounts until its directors are confident the accounts reflect a true and fair picture of the coal miner's position.

The company said this in a brief statement issued on Friday afternoon. At the same time TSB Bank, one of Solid Energy's six bank lenders, has written off its entire $53.9 million exposure to the SOE. Five other banks, with unsecured loans, are - combined - owed more than $300 million. (See more detail on this below).

"Solid Energy will defer presenting its half-year accounts until the board of directors is confident the accounts reflect a true and fair picture of the company’s position," acting chairman Andy Coupe says.

The board held its monthly meeting today (Friday).

Coupe says Solid Energy's view is coal prices will stay lower for longer than has been predicted, and that they won't recover as quickly.

“We can see an issue coming,” Coupe says. “It is not about current performance or any immediate difficulty in meeting our commitments. It is about the impact on our balance sheet of future pricing for coal and our consequent diminishing ability to repay or refinance debt when it falls due from September 2016. We are acting early.”

"Solid Energy’s lenders and shareholder are aware of the company’s view and management is regularly updating staff members," says Coupe.

Coupe, a veteran sharebroker and investment banker, replaced Pip Dunphy as chairman earlier this week.

TSB takes a big hit

The write-off by TSB of its Solid Energy bonds sees the bank's unaudited profit after tax for the nine months to December 31, 2014 collapse to $9.5 million from $36.5 million in the same period of 2013. That's after impairment losses on loans surged to $55.8 million from just $11 million.

"Local and international market conditions for coal trading have deteriorated substantially and are not forecast to recover in the near term. The Bank’s assessment is that the bonds are unlikely to be repaid and as such the Bank has taken the decision to fully impair the bonds in the December 2014 accounts, which represents Management’s best estimate of the recoverable value of the bonds," TSB says.

"Potential recoveries, if any, appear unlikely and not determinable based on information available to the Bank at the time these financial statements were authorised for issue. The full $53.874 million value of the bonds has been charged to the Income Statement," says TSB.

Fitch said TSB's Solid Energy write-off won't affect its A- credit rating with a stable outlook. Standard & Poor's has a BBB+ rating with a stable outlook on TSB.

"The write-off should have no meaningful or lasting impact on TSB's balance sheet structure," Fitch said.

Meanwhile, the Solid Energy statement also quotes CEO Dan Clifford saying Solid Energy is making good progress in reducing costs, with the company outperforming plans. Clifford says cost of production was cut by 30% over the last 18 months.

"Notwithstanding that there has been some improvement in the exchange rate, current and expected coal prices mean the business will need to continue making structural change," Clifford says.

The financial results deferred are for the six months to December 31.

Solid Energy  recorded a $182 million June year loss last year versus a loss of $335 million a year earlier. As of June 30 last year Solid Energy had bank and note (bond) debt of $321 million versus $396 million a year earlier, and cash on hand of $71.7 million versus $14.1 million. The weighted average interest rate of its bank loans and notes, including commitment fees, margin and net interest rate swap costs at June 30, 2014 was 7.04%, up from 5.63% .

In Solid Energy's last annual report auditor KPMG said; "If the group was unable to continue as a going concern, adjustments may have to be made to reflect the situation that assets may have to be realised and liabilities extinguished at amounts which could differ from the amounts at which they are recorded in the statement of financial position."

Bailouts & haircuts

In February 2013 Finance Minister Bill English and then State Owned Enterprises Minister Tony Ryall announced Solid Energy, which had been one of four SOEs earmarked by the National-led government for partial privatisation, was in talks with its banks over restructuring options for its $389 million of debt. Then in October 2013 they announced a restructuring deal for Solid Energy, including a contribution of up to $155 million from taxpayers.

In September 2014 Solid Energy effectively received a second taxpayer funded bailout. The Government agreed to cover Solid Energy's $103 million land remediation obligations so the company didn't fall into negative equity in its annual financial accounts. Solid Energy's annual report last year showed $160.9 million of equity, which included $60.9 million of ordinary shares and $100 million of redeemable preference shares (RPS). Of the latter $75 million worth is held by the lenders, and $25 million by the Government.

On top of the $25 million of RPS taken by the Government, Solid Energy has a working capital facility of up to $50 million from the Crown, a secured term loan facility of up to "approximately" $50 million, and a secured stand-by facility of up to $30 million. As of Solid Energy's June 30 balance date last year, all three of these taxpayer backed facilities were undrawn.

Aside from TSB, the SOE's bank lenders, whose loans are unsecured, are ANZ, BNZ, Commonwealth Bank of Australia, Westpac and the Bank of Tokyo-Mitsubishi. In the 2013 restructure Solid Energy's lenders took haircuts with a chunk of their loans impaired and converted to RPS. The six banks took a combined $75 million haircut. <'s>

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 $16.3 million of its $80 million loan converted into RPS. <'s>

ANZ had $8.2 million of its $40 million of loans converted; BNZ had $16.3 million of $80 million converted; CBA had $9.2 million converted with another $62.1 million of loans outstanding; and Westpac had $11.3 million of $96.5 million converted. <'s>

That left Solid Energy with TSB's $53.7 million of bonds, and $306.5 million of loans from the other five banks. <'s>

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Sounds like Greece - poor ole banks!

This business needs to close or sell  all loss making operations as soon as possible , and sell off those its unable to run efficiently .
Or even let the banks take control of their security ( ie default)
To expect the Taxpaying public , at some future date , to keep this mess going is also not acceptable .
John Key should get some GUTS and sort the mess out right here under his nose as a priority .

Wow. Is anyone accountable at TSB Bank Limited including the Board and the senior executives who authorised the decision to go with investing in Solid Energy? I assume not. Hey its only $53.9 million. Peanuts.