Shanghai Pengxin's NZ Milk breaches ANZ banking covenant

Rural News

Shanghai Pengxin's dairy farming group breaches terms of ANZ loan, posts $9.4 mln annual loss

20th Jan 16, 9:44am by Gareth Vaughan

Milk New Zealand Holding Ltd, the Shanghai Pengxin Group operations that run the former Crafar farms, has breached conditions of its ANZ bank loans against the backdrop of falling dairy payouts.

A Companies Office filing from Milk NZ notes that as of June 30 last year it had drawn down $94.7 million of a possible $99.3 million worth of ANZ loans. And the company breached one of its bank covenants.

"The Group exceeded the interest coverage ratio as at 30 June 2015 and therefore all debt subject to this covenant measure is classified as current at year end," the financial statements say.

"The Group obtained a waiver for any breach of the interest coverage ratio post year end up to and including 30 November 2015. Management has been in a process of negotiations with the bank and anticipates to put a debt service facility in place for Pengxin Group Co Ltd (Shanghai Pengxin) that Shanghai Pengxin will continue to provide financial support to the group for the foreseeable future to enable the companies within the group to pay their debts as they fall due."

The interest rate coverage ratio breached must be of no less than 1.50, being earnings before interest, tax, depreciation and amortisation, profits or losses from the sale or revaluation of capital assets, extraordinary or abnormal costs and losses and extraordinary or abnormal gains, and unrealised losses or gains under derivative transactions, divided by interest expense. The report says NZ Milk was paying interest of 4.41% to 5.51% on its loans.

A footnote in the report says following the company's balance date $8.8 million was repaid to ANZ after cancellation of an agreement to purchase Lochinver Station and refund of the associated deposit.

Milk NZ, a Fonterra supplier, posted a loss of $9.4 million for the June 2015 year versus a profit of $32.8 million the previous year. From continuing operations, the loss was $7.65 million.

ANZ's economists are now tipping Fonterra will drop its forecast milk price for the current season from $4.60 to possibly nearer $4.25 per kilogram of milk solids. This follows another fall, albeit not a big one, in global dairy prices. The GlobalDairyTrade price index fell by 1.4%, while the key whole milk powder prices on average eased 0.5% to US$2188 per metric tonne. Fonterra re-affirmed its $4.60 price pick as recently as December 10, but has made clear that the forecast is dependent on an assumption that there will be reductions in production globally and that this will help to boost international prices this year. See here for the full dairy payout history.

Dairy NZ estimates the average farmer needed a payout of $5.28 to breakeven in the 2014/15 and 2015/16 seasons. The 2014/15 payout was $4.65 including 25 cents of dividends. This season's current Fonterra forecast, including dividends, is $5.05 to $5.15.

Last June ANZ, the country's biggest rural lender, said its dairy lending had been reduced by about 16% to $11.3 billion from $13.1 billion in 2010. At that time the bank also estimated about 5% of its dairy book would be stressed over the next 12 months.

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21 Comments

by Uninterested | 20th Jan 16, 1:21pm 1453249280

Bought at the peak of the market. Bad timing.

by notaneconomist | 20th Jan 16, 1:30pm 1453249850

Does this mean other ANZ clients are subsidising this lot?!?
Do any other farmers get awarded that special little interest rate?

Does the OIO take into account that off shore borrowers use NZ banks to borrow from ? Or perhaps they are just another bureaucracy asleep with the Wheel !!!

by Grant A | 20th Jan 16, 1:46pm 1453250783

Sorry notaneconomist, I don't under stand your point. Why is this company' affect on ANZ customer's any different to another NZ owned business that are struggling, and whats the relevance of whether they fund locally or offshore ?

by Uninterested | 20th Jan 16, 2:00pm 1453251618

The financial wisdom of the purchase would not have been within the scope of the OIO.
That is within the scope of the bank in question.

by Henry_Tull | 23rd Jan 16, 3:31pm 1453516295

Would there not be an interest in the funding structure.

Where is the benefit to NZ of borrowing more (point iconoclast made this morning).

by Henry_Tull | 23rd Jan 16, 3:35pm 1453516545

for there seems to be a cash float somewhere

(for completeness)
Chinese conglomerate Shanghai Pengxin Group is understood to have edged out other rival bidders including firms from China and Hong Kong, as well as a Canadian teachers' pension fund. The sale, believed to be worth around $300 million, could be announced as early as next week, sources close to the deal said.

http://www.smh.com.au/business/kidman-sale-imminent-with-shanghai-pengx…

or is the same lending funsters/syndicate 123Lend

by Henry_Tull | 26th Jan 16, 12:13pm 1453763626

Stop Press - about a year to November

The Auckland-based Australian is understood to have resigned late last year. Companies Office records show his resignation from the boards of Pengxin subsidiary companies started in November.

A dairy industry veteran and chemical engineer, Romano resigned as managing director of Fonterra's milk manufacturing operations after the big dairy company's false botulism contamination scare in 2013.

http://i.stuff.co.nz/business/farming/dairy/76244565/Romano-resigns-fro…

by notaneconomist | 20th Jan 16, 2:28pm 1453253296

Well Grant I am quite surprised that you have asked those questions.

I'm sure you know the OIO rules....so tell me what has this company brought to the table that a local investor couldn't bring??? It certainly hasn't been the brass to purchase the place with!! So what is the benefit??? If it is not dairy farm skills and we can now rule out the brass what the hell was it???

If this company were funded offshore then it would not be placing any pressures on our banking depositors in say an OBR situation....or the taxpayers if a bailout were offered.......by allowing all this local funding on these assets we will easily turn into a charity shop in the event of bank failure.

Are Pengxin getting different treatment to other NZ farmers from the ANZ? Because from where I'm looking this seems to be the case......Why aren't all farmers with similar equity receiving the same interest rate advantage? Looks to me like Pengxin have got themselves a discounted interest rate while other farmers with more equity are paying higher rates. There is nothing wrong with same equity same interest rate......no one wants to be the interest rate mule for someone else.

by Grant A | 20th Jan 16, 3:54pm 1453258449

So it was a criticism about whether we permit foreign investment into NZ farm land - sorry, I couldn't determine that from your posting. Without getting involved in that debate yet again, frankly from a fellow ANZ customer's perspective if youre worried about poor offshore investors being a banking risk to the system, don't worry, we have a multitude more that are NZ owned as well and on occasion equally poorly run - yet to be fair, we don't know the issue here except that anyone in dairy won't be looking currently like the good credit risk they were 2 years ago (hindsight is a wonderful thing and fully used by the uninvolved/uninformed observer/commentator)

And with regards your comment about the interest rates ANZ are charging them, which is interesting considering you don't have their credit details no doubt to make an assessment, I can personally assure you most high quality NZ farming credits are paying interest rates in that range, especially those that have been poached off other banks at what could be seen as below market rates - nothing special there but always a good red herring to throw into an argument to make someone think it adds to it.

Frankly both you and I do not have anywhere near enough information to know and therefore make informed comments, and uninformed speculation adds little.

by Stephen Hulme | 20th Jan 16, 4:19pm 1453259995

by Stephen Hulme | 20th Jan 16, 4:21pm 1453260106

Possibly. But the RBNZ recently stated it was investigating risk weightings and undertaking studies to stress test the banks' dairy assets.

However, the Reserve Bank said it had asked the five biggest dairy lenders (ANZ, ASB, BNZ, Westpac and Rabobank) to undertake stress tests of their dairy portfolios, "providing an institutional level view of potential losses under similar scenarios." The bank said it expected the results to be returned by the end of the year and would be reported on at a later date.

Although non-performing dairy loans were still low at 1%, up from 0.6% a year earlier, the Reserve Bank said "watchlist loans," that provide a leading indicator of non-performing loans, have increased over the last year and are now running at 5.8%.

The bank also reiterated that it was reviewing capital requirements for banks over the next year.

"That is motivated, in part, by potential changes to the Basel capital adequacy framework and a likely increase in bank capital requirements in Australia as part of the Financial System Inquiry," it said.

The first stage of the review would deal with issues around the big four banks' internal models approach to risk weighting. Read more

Unsecured creditors have a peremptory right to undertake due diligence where their bank funding is a matter of concern. The RBNZ is too slow to satisfy their need to understand their risk exposure.

by Ergophobia | 20th Jan 16, 4:33pm 1453260820

Someone who should know told Ergophobia yesterday that fontera have demanded their goods and service contractors discount charges 10% and hold any new invoices for three months. It may be a local thing peculiar to his area?

by Kate | 20th Jan 16, 4:36pm 1453260999

Yeah, that was reported by MSM some weeks ago.

by KH | 20th Jan 16, 4:48pm 1453261707

"hold invoices for three months" Another case of the big screwing the small. There is always some twerp in accounting who thinks this is a good idea and good business. Even some DHBs have done it.
My view is that it is unacceptable and I would applaud if it was illegal. (cops to lead the twerp away in cuffs - yes)

by notaneconomist | 20th Jan 16, 5:34pm 1453264466

No it was not a criticism about whether we permit foreign investment into NZ.......It is a criticism of the OIO and how they arrive at their decisions.....!!

I have undertaken a quick survey of ANZ farming clients who I know and none are in the interest rate range of Pengxin. My own ANZ bank manager tells me a fraction over 6% is the lowest......obviously I will be making further inquiries given your comments above!!!

by Grant A | 20th Jan 16, 5:55pm 1453265744

Please do notaneconomist - 1.70% or lower over bank bill is commonplace for very high quality larger credits, whereas 2.10 - 2.20% (4.85ish) is about where it is for the average credit

by Andrewj | 20th Jan 16, 5:59pm 1453265988

Quality?

by Belle | 20th Jan 16, 2:39pm 1453253947

So where does this leave Landcorp as their sharemilker. ie us the taxpayer. Its well known sharemikers are at the coalface of financial woes at the moment. Why is the government trying to be farmers at all?

by Kate | 20th Jan 16, 4:35pm 1453260931

Why is the government trying to be farmers at all?

Seems to me they used Landcorp as a means to keep land prices in the sector inflated and to provide the illusion of competition to overseas buyers.

by iconoclast | 20th Jan 16, 6:16pm 1453266965

Must be time for Bernard Hickey to do a reprise drive-by of the Crafar Farms and give us his assessment of whether things have improved (or not) - compared to his first drive-by

by skudiv | 20th Jan 16, 8:56pm 1453276590

The milk price is so low now, it doesn't matter what a dairy farm is worth, you can't afford to buy one. 1.5 is a pretty impossible interest cover ratio when you are making a loss. Watch this space I guess, because there can't be too many farmers who aren't making a loss this year, and breaking even is hardly any different.