Fletcher likely working hard to get lenders onside
Fletcher Building, which expects to breach its debt covenants because of further "material losses" at its building and interiors (B+I) business, is probably in urgent talks with its banking syndicate and investors in the private placement market to avoid having to issue new capital.
Auckland-based Fletcher had net debt of $1.95 billion as at June 30 last year. Its biggest source of debt funding is the private placement market at about $1.26 billion and it had $389 million in loans via its syndicated revolving credit facility with ANZ Bank New Zealand, Bank of Tokyo-Mitsubishi UFJ Ltd, Bank of New Zealand, Commonwealth Bank of Australia, Citibank, Hongkong and Shanghai Banking Corp and Westpac New Zealand. Undrawn bank facilities stood at $536 million.
The company had its stock and capital notes halted from trading today, pending a review of key projects at B+I as it prepares its first-half accounts. The trading halt will be lifted at the start of trading next Monday, by which time it will have made the results of the review public, it said today. Both the bank facility and private placements have borrowing covenants relating to net debt to ebitda (earnings before interest, tax, depreciation and amortisation) and interest cover. The debt-ebitda ratio stood at 2.7 times last June, above Fletcher's 2-to-2.5 times target but within its covenants.
"All that debt discussion will be happening now," said James Lindsay, senior portfolio manager at Nikko Asset Management. "I would say an equity raising would appear to be reasonably likely. It will depend whether they can get debt holders to 'look through' it (the breach) or they will be raising money."
Working through its covenant obligations would be a significant exercise because some contain provisions that are triggered by others being breached and the US private placement market is known to include debt being callable in the event of a breach.
Today's announcement is "incredibly disappointing from the company's point of view — this is the fourth downgrade to earnings. To be material means it is a significant drag on the group's earnings," Lindsay said.
Fletcher shares last traded at $7.77 and have tumbled 23 percent in the past 12 months. Over the past five years, as the S&P/NZX 50 Index has climbed 94 percent, Fletcher fell 13 percent and was seemingly unable to capitalise on New Zealand's building boom.
"Although the project reviews are not yet complete, the current expectation of the board is that there will be further material losses in the B+I business beyond what was provided for in October 2017," Fletcher said in a statement today. "Once the extent of those further losses is determined and provided for, it is expected that this would result in a breach of one or more of the covenants in the group’s financing arrangements."
In October, chair Ralph Norris apologised to shareholders at their annual meeting for Fletcher's mistakes as the company took a further $125 million provision against problematic construction contracts including the Convention Centre and the Justice Precinct in Christchurch and said its B+I unit would report a full-year loss of $160 million. Losses on the Convention Centre and the Justice Precinct accounted for about two-thirds of the $292 million loss recorded for B+I in 2017.
Auckland's Commercial Bay development was the other major B+I project reviewed by KPMG last year. The review hasn't been released publicly.
Its 2018 full-year earnings guidance, excluding B+I loss, is $680 million to $720 million, suggesting full-year earnings including B+I could be as low as $520 million. Fletcher dumped chief executive Mark Adamson amid the problems at B+I. His replacement, Ross Taylor, started in November and one of his first tasks was to review Fletcher's strategy.
Norris warned at the AGM that it wasn't possible to ringfence the B+I losses, saying at the time that Fletcher is "aware that further downside risk and uncertainty exists in Building + Interiors, and are cognisant of wanting to provide the market with as much transparency around these risks as possible."
Nikko's Lindsay said his firm has been "very cautious on the company because of the possibility it would have to make further write-downs". Requirements of its auditors probably meant it had to be specific on its provisions and couldn't take a big charge to allow for future losses and effectively wipe the slate clean, he said.