Genesis seeks up to NZ$275 mln from equity 'junk' bond issue to help fund NZ$821 mln purchase of Tekapo power stations from Meridian

Genesis seeks up to NZ$275 mln from equity 'junk' bond issue to help fund NZ$821 mln purchase of Tekapo power stations from Meridian

By Gareth Vaughan

Genesis Energy, a state owned enterprise earmarked by the government for a possible partial privatisation, plans to issue up to NZ$275 million worth of bonds classified as equity to help fund the purchase of South Island power stations from rival Meridian Energy as part of the government's electricity sector shake-up.

Genesis says its offer of 30-year unsecured, subordinated, redeemable capital bonds will open on April 15 and close on May 18. The bonds will mature on July 15, 2041 and pay a fixed interest rate from issue date until the first reset date on July 15, 2016. Interest payments will be made quarterly until redemption. Investor applications must be for a minimum of NZ$5,000 worth of the bonds and in multiples of NZ$1,000 thereafter.

Credit rating agency Standard & Poor's (S&P) has assigned a 'BB-' speculative, or "junk", long-term credit rating to the bonds. S&P has a BBB+ investment grade rating with a negative outlook on Genesis itself. In a first for New Zealand and as tipped by interest.co.nz last month, S&P has classified the capital bonds as having a "high" equity content, meaning it will treat them entirely as equity and the interest payments as dividends in its financial ratio calculations.

The equity content assigned to the capital bonds will, however, be reduced to zero 20 years prior to their maturity date on July 15, 2021. Both Vector and New Zealand Post have previously issued bonds that have received 50% equity credit.

S&P says a BB- rating means the capital bonds are less vulnerable in the near-term but face major ongoing uncertainties due to adverse business, financial and economic conditions. S&P notes the capital bonds will rank behind Genesis' existing fixed-rate retail bonds, medium-term notes, and bank debt. Genesis had previously said it was looking to issue NZ$300 million worth of capital bonds.

Genesis' planned equity bond issue comes as the National Party-led Government eyes the potential sale of minority stakes in Genesis, Mighty River Power and Meridian should it be re-elected in November's election.

The net proceeds of the bond offer, which is seeking to raise NZ$225 million plus oversubscriptions of up to NZ$50 million, will be used by Genesis to help the acquisition of the Tekapo A and B power stations from Meridian. These comprise the 25MW Tekapo A power station, the 160MW Tekapo B power station and the Tekapo canal linking the two stations. Genesis says the Tekapo deal will cost it NZ$821 million - more than Meridian's NZ$643.9 million book value for the two power stations - and is expected to be completed this June.

Genesis says it will fund the acquisition, mandated by the government as part of its Ministerial Review of Electricity Market Performance which is designed to improve the electricity market's performance, through a mixture of the capital bonds, senior bank debt, and existing cash.

Genesis chairwoman and former Prime Minister Jenny Shipley, said the capital bonds would provide New Zealanders with an opportunity to invest in Genesis Energy, a State-Owned Enterprise and one of New Zealand’s largest energy companies with quality long-term energy assets, a substantial retail customer base and strong operating cash flows.

“The Government’s recent electricity industry reforms have provided an exciting opportunity for Genesis Energy to acquire the Tekapo Stations from Meridian Energy," Shipley said.

"This acquisition is consistent with Genesis Energy’s strategy of growing and renewing its generation assets and provides a growth opportunity that is available immediately and builds on Genesis Energy’s expertise in the management of hydro assets. It will give Genesis Energy access to long life generation assets that are not easily replicated in the New Zealand market, ensuring a more balanced and diversified generation portfolio with lower carbon intensity”, Shipley added.

Genesis had been "actively attracting" new South Island electricity and LPG customers signing up more than 20,000 new customers in Christchurch, Dunedin and Queenstown since February 2010.

The Genesis bond offer comes with Genesis at the centre of an Electricity Authority investigation into a huge spike in wholesale electricity prices in the upper North Island on Saturday March 26 during Transpower maintenance. Complaints from Meridian and Mighty River Power, who say the spike to prices as high as 200 times normal prices will hit their combined earnings by as much as NZ$40 million. Their complaints have been joined by a range of other firms including ASB, the New Zealand Refining Company, Telecom, Vodafone and NZ Sugar.

The surge in prices took place while Transpower was undertaking planned maintenance on circuits between Auckland and the Waikato significantly reducing the transmission capacity from the Waikato region to the Auckland region. As Meridian Energy puts it in its complaint, fellow state owned generator and retailer Genesis' Huntly generation was required to support load in the upper North Island and Genesis could "effectively name its price." Prices rose to between NZ$19,000 and NZ$20,000 mega watts per hour (MWh) from normal prices of about NZ$100 MWh.

Genesis has rejected criticism it had acted unreasonably during the "well-signalled" transmission outage. Genesis notes it had offered customers the opportunity to hedge their risk, it wasn't Genesis’ role to cover and pay for the spot market risk some market participants chose to take, and Genesis has high operating costs and "will recover those costs when the opportunity arises."

Read Genesis' statement below:

Genesis Energy today confirmed it is seeking to raise funds through a Capital Bonds offer. A Prospectus for the Capital Bonds offer was lodged today with the Companies Office and an Investment Statement for the offer is now available. The Capital Bonds offer will open on 15 April 2011 and close on 18 May 2011. Interested investors should talk to their usual financial advisers or contact one of the joint lead managers or the co-manager to the offer listed below.

The Capital Bonds will be unsecured, subordinated, redeemable, cumulative debt securities maturing 15 July 2041. The Capital Bonds will carry a fixed rate of interest from the Issue Date until the First Reset Date on 15 July 2016. Interest Payments are to be paid quarterly until redemption of the Capital Bonds.

The minimum holding for the Capital Bonds is $5,000 and applications must be for a minimum of $5,000 and multiples of $1,000 thereafter. The net proceeds of the Capital Bonds offer will be used by Genesis Energy as part of the funding for the acquisition of the Tekapo A and B power stations, which comprise the 25MW Tekapo A power station, the 160MW Tekapo B power station and the Tekapo canal linking the two stations (the “Tekapo Stations”). The Tekapo Stations have an average annual output of 967 GWh.

The purchase price for the acquisition of the Tekapo Station is $821 million and the acquisition is anticipated to be completed in June 2011. The acquisition will be funded by a mixture of senior bank debt, existing cash and proceeds from the Capital Bonds offer, which is seeking to raise $225 million plus oversubscriptions of up to $50 million.

The Chairman of Genesis Energy, Dame Jenny Shipley DNZM, said the Capital Bonds will provide New Zealanders with an opportunity to invest in Genesis Energy, a State-Owned Enterprise and one of New Zealand’s largest energy companies with quality long-term energy assets, a substantial retail customer base and strong operating cash flows. “The Government’s recent electricity industry reforms have provided an exciting opportunity for Genesis Energy to acquire the Tekapo Stations from Meridian Energy.

This acquisition is consistent with Genesis Energy’s strategy of growing and renewing its generation assets and provides a growth opportunity that is available immediately and builds on Genesis Energy’s expertise in the management of hydro assets. It will give Genesis Energy access to long life generation assets that are not easily replicated in the New Zealand market, ensuring a more balanced and diversified generation portfolio with lower carbon intensity”, Dame Jenny said.

Disclosure Statement 7 April 2011

Genesis Energy Chief Executive, Albert Brantley, said “since the proposed transfer of the Tekapo Stations to Genesis Energy was announced, Genesis Energy has been actively attracting new South Island electricity and LPG customers. The company has signed up more than 20,000 new customers in Christchurch, Dunedin and Queenstown in the period from February 2010 to April 2011.

Genesis Energy continues its drive for more South Island customers. A number of workstreams to fully integrate the Tekapo Stations into its Production and Trading portfolios are underway.

A team based at Tekapo A has been appointed to maintain the Tekapo Stations and their daily despatch into the wholesale electricity market will be managed remotely from the company’s Renewable Energy Control Room, based at the Tokaanu Power Station near Turangi. The Arranger and Joint Lead Manager of the Genesis Energy Capital Bonds offer is Craigs Investment Partners Limited.

The other Joint Lead Managers are ANZ, Forsyth Barr Limited and Westpac Institutional Bank. The Co-Manager is First NZ Capital Securities Limited. All applicants will need to complete the application form that accompanies the Investment Statement.

This advertisement is not an investment statement or prospectus and does not constitute an offer to subscribe for or buy Capital Bonds. Application has been made to NZX for permission to list the Capital Bonds on the NZDX market and all the requirements of NZX relating thereto that can be complied with on or before the date of this Investment Statement have been duly complied with.

However, the Capital Bonds have not yet been approved for trading and NZX accepts no responsibility for any statement in this Investment Statement. NZX is a registered exchange, regulated under the Securities Markets Act 1988. The Crown does not guarantee the Capital Bonds or any other obligations of Genesis Energy.

And here's Standard & Poor's statement:

Standard & Poor's Ratings Services today said that it had assigned its 'BB-' long-term issue rating to New Zealand-based Genesis Power Ltd.'s (trading as Genesis Energy; BBB+/Negative/--) proposed capital bond issue.

Also, we classified the capital bonds as having a “high” equity content, meaning that we will treat the bonds entirely as “equity” and the coupon payments as “dividends” in our financial ratio calculations. This assessment remains subject to a review of the final terms and conditions, and if there are any material changes that could affect the “high” equity content classification.

The bonds are not guaranteed by the New Zealand government (local currency AAA/Stable/A-1+, foreign currency AA+/Negative/A-1+).

Proceeds of the issue will partly fund the acquisition of the Tekapo A and B hydro assets.

"Our view of the proposed capital bonds' “high” equity content is based on the following key features: the mandatory deferral of coupon payments for up to five years if the corporate credit rating on Genesis Energy falls to ‘BB+’ or below, and the instrument's deeply subordinated recovery position relative to all senior unsecured creditors of the group. The proposed capital bonds rank behind the company's existing fixed-rate retail bonds issued to the New Zealand market, medium-term notes, and bank debt," Standard & Poor’s credit analyst Alicia Low said.

"Furthermore, the heightened risk of interest payment deferrals and deeply subordinated recovery position underpin our view of the four-notch differential between the 'BB-' rating on the capital bonds and Genesis Energy’s stand-alone credit profile of 'bbb'. Nevertheless, we consider that the mandatory deferral trigger, set within three notches of the 'BBB+' corporate credit rating, supports the issuer's credit quality because of the retention of cash in the company, which would have otherwise been used to pay interest on the capital bonds. O

ther key features of the capital bonds include:

A 30-year term to maturity;

A 25 basis points step-up of the interest margin at year five;

A first call date from year five at the issuer's option;

Redemption rights for the issuer if the government of New Zealand's ownership of the voting shares in Genesis Energy reduces to 50% or less (change of control); and · Investors have redemption rights if the change of control results in an associated rating downgrade of one notch or more, and the resulting corporate credit rating of the company is below 'BBB+'.

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I love it.  Not one comment.  Say one thing about property or debt and it brings out the crazies - have a good old fashioned bit of financial journalism (which I like) and no one stirs.  Keep publishing these types of articles interest.co.nz !

Cheers Keyser. And good to see a few more comments came in over the weekend. Not so thrilled with the thread on my interview with Sean Hughes though...

With Shipley involved, I wouldn't go within a bull's roar of this.

30 years....... GRRRRRRR...... no way!  Not secured... no guarantee, credit rating, rather would keep money under mattresse.

4 reasons to tread carefully for this M&D investor

1. 30 yr investment - who knows what the alternative energy market will be like in the next 10 years, let alone 30

2. Junk bond rating

3. Investor is at the end of the queue

4. This company's recent irresponsible greedy profit-making behaviour

Too much risk for me.

Don't be concerned. This junk will fly off the shelf. The investor sees SOE and BBB+ and a coupon rate that will probably end up about 200 basis points above anything on the risk free market. What could possibly go wrong? Thanks Tut Tut for your list. Can we add a few more?

1. Genesis executive's ability to negotiate. They've paid how much more than book value? A cool $197 million or 31%. Ari - you were wrong the smartest guys in the room are undoubtedly the Meridian team who stitched up the retards from that nasty coal burning generator in Huntly.

2. Dubious comments from the chair.  

The Chairman of Genesis Energy, Dame Jenny Shipley DNZM, said the Capital Bonds will provide New Zealanders with an opportunity to invest in Genesis Energy, a State-Owned Enterprise and one of New Zealand’s largest energy companies with quality long-term energy assets, a substantial retail customer base and strong operating cash flows. “The Government’s recent electricity industry reforms have provided an exciting opportunity for Genesis Energy to acquire the Tekapo Stations from Meridian Energy.

Let's be clear - the ministerial review directed Genesis to acquire Tekapo A & B and the omission of any reference to profitability isn't an oversight. The financial performance of the weakest of the SOE's and dividend stream is rather embarrassing when compared to your peers. In the soon to be new environment of transparency and full public disclosue (assuming partial privatisation can be sold to the NZ public by Mr Smiley Wavey and Double Dipton), you really do need to be more circumspect. 

3. Huntly is becoming very expensive and a liability. Book value is about right at Nil. Carbon price can't be recovered. Average wholesale for the last 24 months $60/$70 MWh?

4. Desperate actions from two weekends ago (abuse of market power) are indicative of an organisation that is under severe financial pressure and has lost its sense of corporate responsibility.

Anyway can't wait to read the Investment Statement along with the Daily Dilbert. 

This will fly off the shelf.

If it gets in trouble Government will bail it out pure and simple - it's Principal is a Risk Free Investment.

NZ Gov't is proud to bail out -

Airlines

Railways

Banks

Finance Companies

Insurance Companies

Schools

Local/Regional Councils

Media Companies

Telecomunications Companies

probably missing a few out

 

 

I agree Goldenfox - I think the risk is overstated by some here. The biggest risk here is if Genesis is sold outright. If the government keeps a stake in Genesis then the risk of default is very low.

The 30 year term is long but Genesis will be likely to redeem early if they have cheaper sources of capital.

FYI, the investment statement is now available - http://www.genesisenergy.co.nz/capitalbonds/resources/pdf/Genesis-Energy...

It notes a NZ$74m reduction in Genesis' shareholders equity due to a NZ$103m non-cash accounting revaluation charge against the NZ$821m Texapo acquisition cost with capital expenditure and lost generation outage costs expected as part of future remedial work.

I am kind of surprised that a financial website didnt cover a little more detail on the nature of the bond. Yes, its a 30 year bond however it is callable in 2016 and 2021. Further to that, it makes absolutely no sense for them not to call it in 2021... its just very expensive debt as it doesn't retain 'equity credit' with the rating agency. A yield around 8.75%-9% for 5 years and reset for another 5 years (ultimately upward with interest rates rising) is very healthy and with the government maintaining a 50+% stake will ensure the bills get paid. The only question for me is can the retail public find $225m (+ a possible extra $50m) for this deal... me thinks the yield will get this deal off the ground but the intermediaries are going to have to work to do it. 

FYI, this from Genesis today:

Genesis Power Limited, trading as Genesis Energy, has today announced that the
Genesis Energy Chairman, Dame Jenny Shipley, said today she was delighted with the
outcome of the offer and the widespread support shown by the New Zealand
investment community and that the Company looks forward to welcoming many new
investors to Genesis Energy.

Genesis Energy has set the minimum interest rate and the margin for the Capital
Bonds. The minimum interest rate is 8.50% per annum (up until the First Reset Date on
15 July 2016) and the margin is 3.87%. The final interest rate will be set on 23 May as
the higher of this minimum interest rate and the swap rate on this date plus the margin.
The offer opens today and closes on 18 May.

Interest on the Capital Bonds will accrue at the final interest rate from the time an investor’s application money is banked. Investors are therefore encouraged to lodge their applications as soon as possible to
take advantage of this. The final interest rate will be announced on 23 May.

To obtain an Investment Statement, investors should talk to their usual financial
advisers or contact one of the Joint Lead Managers or the Co-Manager to the offer.
The Arranger and Joint Lead Manager of the Genesis Energy Capital Bonds offer is
Craigs Investment Partners Limited. The other Joint Lead Managers are ANZ, Forsyth
Barr Limited and Westpac Institutional Bank. The Co-Manager is First NZ Capital
Securities Limited. The Investment Statement is also available on Genesis Energy’s
website at www.genesisenergy.co.nz/capitalbonds

The Capital Bonds are unsecured, subordinated, capital bonds, with interest paid
quarterly. The issue price is $1.00 per Capital Bond with a minimum holding and
application amount of $5,000, thereafter in multiples of $1,000.

Reads like an ad Gareth, hope they're paying for it... Strictly entre nous my broker (from one of those eminent organisations you have listed) told me that the way they are structured makes them look pretty dodgy... ;-)

A little update on this. The offer closed on Friday, bonds worth NZ$275m issued today, will start trading on the NZDX tomorrow.
The interest rate payable up until the first Step-up Date (15 July 2016) has been set
at 8.50% per annum.