PGG Wrightson Finance confident of investor, bank support ahead of NZ$412 mln funding maturity wall

PGG Wrightson Finance faces a NZ$412.2 million wall of funding maturities within 12 months across its debenture, bank and bond funding meaning about 86% of the rural lender's total financial liabilities are due to mature in the year to March 2011.

However, PGG Wrightson Finance CEO Mark Darrow told interest.co.nz the volume of debentures up for renewal within 12 months was nothing new, the relationship with its banks was very good, and he expected bondholders to support a one year maturity extension given the Crown guarantee and good interest payments.

Last Friday PGG Wrightson announced plans to seek bondholder approval to extend the maturity date of up to NZ$100 million worth of bonds by a year until October 8, 2011. The move follows the company's acceptance into the extended Crown retail deposit guarantee scheme. It replaces the initial guarantee scheme when it expires on October 12, running until December 31, 2011.

A short form prospectus issued for the proposed bond extension reveals that on a contractual maturity analysis as of March 31, PGG Wrightson had NZ$412.2 million of financial liabilities, including bank loans, debentures and bonds maturing within a year out of a total of NZ$477.9 million worth of financial liabilities. This includes NZ$65.5 million worth of deposits and other borrowings, NZ$32 million of bank loans, NZ$131.9 million of bonds and NZ$178.8 million worth of debentures.

The company also had NZ$454.7 million worth of loans and receivables due within 12 months of March 31 out of a total of NZ$557.9 million worth of total financial assets.

Darrow said PGG Wrightson Finance's total debenture book now stood at about NZ$250 million. Having a high percentage up for renewal within 12 months was nothing new.

"I think habitual investors tend to invest for terms of between three and 18 months, that's where most people put their money," said Darrow. "(So) that type of maturity profile has always been there and it's nothing unusual."

Nonetheless he said some investors' needed to get their heads around the fact that from next year investments in financial institutions were going back to a non-Crown guaranteed position.

"I think people should start getting comfort around that from the new (Reserve Bank) regulatory framework, from the credit rating process, from the information in prospectuses and annual statements," Darrow said. "And I think people should be able to make a good judgment call on what is a good company and what's not."

Standard & Poor's has a BB long-term speculative, or junk grade, credit rating on PGG Wrightson Finance and a B short-term rating, with a stable rating outlook. In its report S&P noted the lender had a concentrated exposure to the agribusiness sector, which was "inherently riskier" than some other sectors in the New Zealand financial services industry, such as residential mortgages. Nonetheless, S&P said PGG Wrightson Finance's operations and loan portfolio was geographically diversified across New Zealand. (See attached S&P report below).

PGG Wrightson Finance had resumed offering non-Crown guaranteed debentures in January. Since then more than half its debenture growth had been in unguaranteed debentures meaning it now held a total of about NZ$45 million worth of unguaranteed debentures, up from NZ$20 million in January. The company is currently offering 6.75% per annum over 16 months on guaranteed investments and 8.5% per annum over 24 months on unguaranteed investments.

"We've been surprised by the support we've had since January. We've grown our debenture book about 15% in the last six months and we're just offering market (interest) rates."

The prospectus shows that, for the nine months to March 31, PGG Wrightson Finance recorded net interest income of NZ$20.2 million, up from NZ$13.2 million in the nine months to March 31, 2009. However, earnings before interest, tax, depreciation and amortisation fell slightly to NZ$8.1 million from NZ$8.3 million and net impairment losses on financial assets jumped to NZ$7.6 million from just NZ$806,000.

Changes in fair value of cash flow hedges also took a NZ$2.3 million bite, compared to a gain of NZ$4.3 million in the previous period, leaving comprehensive total income for the nine months at just NZ$2.9 million, down 73% from NZ$10.7 million.

Meanwhile, PGG Wrightson Finance's term bank loan facility, with BNZ and ASB's parent Commonwealth Bank of Australia, expires on October 28, 2011.  Its limit has been progressively reduced to NZ$120 million at June 30 from NZ$180 million. Just NZ$32 million was drawn down at March 31.

The bank facilities include a risk share facility whereby a percentage of loans with "certain characteristics" are sold to the facility counterparty, which is an institutional bank.  In the case of default, PGG Wrightson Finance has first loss exposure up to its share of the loan with the sold element of the loan not held on the company's balance sheet. As of March 31, NZ$56.9 million worth of assets had been moved to the risk share facility with another NZ$23.1 million worth potentially set to join them.

Darrow said at the appropriate time the company would look to extend the bank facilities.

"I can only describe the relationship (with the banks) as very good. We're not quite ready to roll over yet but I'm pretty confident that we'll maintain at least that (existing) level of support."

Meanwhile, the planned bond roll over was an important part of maintaining funding diversity to help de-risk the business, with sources of funding also including equity. The firm had total equity of NZ$103 million at March 31 including NZ$65.35 million of share capital, incorporating NZ$33.85 million worth of preference shares issued to parent PGG Wrightson Limited in January, and NZ$35.7 million of retained earnings.

Darrow said the bond roll over is important to maintaining the company's diversified funding base, which also includes secured deposits, unsecured rural saver accounts, unsecured current accounts,
and wholesale borrowings.

"We have other options available but the key is diversity and having those four or five different sources of funding and we just want to keep that."

He said he was confident of securing bondholder support for the roll over, given the bonds carried the Crown guarantee and offered interest above market rates at 8.25% per annum.

"We don't see why everyone wouldn't support it," Darrow added.

Bondholders will meet in Christchurch on July 28.

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