Is PGG Wrightson Finance Stuffed?
Quote:
Originally Posted by
Snoopy
Specifically, I want to address some critical questions.
Funding a finance company is a combination of taking term deposits from the public and ironing out any mismatch (both in timing and magnitude) between borrowing arrangements and on-lending arrangements via your finance company bankers.
Page 61 of the PGG Wrightson (Finance Division) Explanatory Memorandum (14th June 2011), (hereafter referred to as PWFEM) purportedly shows a dramatic fall off in PWF deposit reinvestment rates this year. The implication is that the public is liable to lend far less money to PWF in the future. However I read this graph rather differently.
The (most recently plotted) March 2011 reinvestment rate dropped to an all time low of 50% -that’s true. But just two months previously the reinvestment rate was a record high of 90%. The drop in reinvestment rate for the month of March 2011 looks to be a repeating seasonal factor over the last two years. I think it is incorrect to interpret an historically repetitive two month decline as an imminent portent of permanent finance gloom. An alternative explanation could be reduced promotion (p63 ‘Outlook’ states the three-year business plan has been suspended as a result of the possible change of ownership of PWF). A counter argument might be that the demise of so many finance companies in New Zealand could see more investor interest in those few with their good names still intact, like PWF.
A legitimate concern for PWF is the imminent expiry of the Crown retail debenture guarantee. That could effect depositor’s reinvestment decisions. PGW has a credit rating of BB (stable) which is not an investment grade rating. The proposed new owner, Heartland Building Society (HBS), has a credit rating of BBB- (stable). That is investment grade, albeit only a step above the credit rating that PGWF now has. However there is no guarantee that HBS will retain this BBB- rating if it acquires the PGWF loans. In fact it is implicit that HBS will not, as the proposed transaction will be accompanied by a capital raising by HBS.
Of further concern is the demise of the ‘risk sharing agreement’ with ASB Bank (p42), should this deal go through. Since ASB has a higher credit rating than either PGWF or HBS, IMO taking ASB out of the banking facilities loop is a negative for the whole transaction. Another negative will be the demise of PGWFs separate $100m presently unused overdraft facility. My conclusion then is that despite a projected (and I stress that word) one step higher overall credit rating applying to the loans if the deal goes through, HBS will in effect be ‘on its own’ afterwards. Without any equivalent replacement of the ASB risk sharing facility and the removal of the cushion of PWFs currently unused but existing overdraft provision, I can’t see how the overall security rating of the transferred loans is improved by this deal.
No matter what the result of the vote, it is a given that $95m of selected loans will be transferred to a Special Purpose Vehicle that will be retained by PGW. These loans are apparently so toxic that HBS doesn’t want a bar of them at any price. I presume these loans will be written off in the current financial year by PGW. Doing it this way means that if, in the future, PGW is able to recover any value from these loans they will be able to claim these recoveries as ‘extraordinary profits’ and look good. The reality unfortunately for PGW shareholders is that these write-downs were actual shareholders cash once.
The whole deal is being sold as PGW ‘getting out of finance’. But part of the deal is predicated on PGW supplying $10m towards a Heartland Building Society (HBS) recapitalisation. This more than cancels out the net $7.5m that HBS will pay to PGW for taking control of their ‘good’ loans. This much-touted sale of PGG Wrightson Finance is in reality yet another cash drain for PGW – the exact opposite of what is needed!
So, to answer my question: Is PGG Wrightson Finance Stuffed? I don’t think it is possible to answer that question definitively. But one thing that is obvious is that PGW has no spare cash to support their finance division should it get into further trouble. And it is doubtful that 50.01% shareholder Agria can inject any more funds into the company either. Given this, you can see the appeal to PGW management in sweeping everything under the carpet. I can’t see how ‘focussing resources on core business activities’ (which sounds admirable) translates to the reality of:
1/ Hiding $95m of debt while you concentrate your resources on other branches of the business that can contribute $25m profit the next year at best, while all the time:
2/ Your cashflow drains away by another $2.5m.
I don’t like this proposed 'sell the finance arm scheme' in concept, because having studied the detail I don’t think it does remove the financial arm from PGW management’s worry list as claimed. Nevertheless I do accept this conclusion is a matter of opinion. I would be interested to hear from those that feel differently and why.
SNOOPY
Is the sale price reasonable?
There is a despondent picture painted around the price at which ‘finance debt’ has been exchanged from one financial institution to another since October 2008 (page 79). Since the global financial crisis there is real doubt over whether non-bank deposit takers in New Zealand have a future at all. NTA is now the benchmark for price setting. Buying a debt at NTA is a suitable measuring stick, because it provides an estimate of the money that can be recovered assuming the underlying business cannot continue as a going concern. Selling debt at NTA is effectively an admission that that the brand value of PWF is almost nothing. This is a sad admission by PGW management.
NthPs conclude that selling debt at NTA in the current environment is reasonable, and because these are the terms agreed between PGW and HBS the deal is fair. However the deal terms at NTA do not tell the full story. Adjusted NTA at $102.5m will be accepted only on the understanding that up to $30m of that debt will be refunded by PGW if collection proves not possible. And secondly an additional $95m of toxic PWF debt remains with PGW, because the buyer (HBS) does not want to take it on at any price.
This means the real recovery rate on the purchase of all PWF debt, from the point of view of PGW is down to:
($102.5m - $30m)/($102.5m+$95m)= 36.7%
Some may argue that this ‘worst case’ scenario overstates how bad this deal is for PGW. I would argue that HBS sees no possibility of recovering any of the toxic $95m loans, hence the reason they are not prepared to acquire it at any price. I would argue further that once the deal is done there will be little incentive for HBS to collect the doubtful $30m. That’s because if HBS do nothing and the debt goes bad they already have an agreement to be reimbursed by PGW!
Even with a more optimistic debt collection scenario it is hard to see the total recovery by PGW from all loans PWF currently has to be above 60%. Even in this scenario, if HBS purchases the debt under the terms of the proposed agreement then they are purchasing the debt discounted by around 40%. That is nowhere near the ‘sell the debt for NTA scenario’ that PGW management are spinning shareholders. In summary IMO the price of this deal makes it a very good deal for HBS and a very bad deal (way below comparable transaction rates) for PGW shareholders.
SNOOPY
What if the sale of PWF to HBS fails through?
What if the deal fails?
Buried in the small print of the PWFEM on page 41 is what happens if the deal falls through. HBS will purchase PWF loans with a face value of $50m. Perhaps I am just not getting it. But this seems a far better option for PGW shareholders. I believe this fall back deal is superior because:
1/ The loan portfolio is derisked by getting rid of $50m of loans to HBS, aligning the loan portfolio better with a projected reduced inflow of depositor funds.
2/ The ASB bank risk-sharing arrangement with PWF is maintained.
3/ PGW gets a cash injection of up to $50m, instead of a $2.5m cash drain under the proposed headline deal
IMO this ‘fall back option’ is clearly a vastly superior option to the proposed headline deal. Firstly cash is coming in rather than going out and secondly the banking arrangements look superior. IMO there is no contest between the two options. But if this alternative deal is to happen, shareholders have to vote ‘no’ to the proposed outlined buyout of PWF finance. Tragically this alternative deal is only mentioned once in the whole PWFEM, so many PGW shareholders may not even be aware it exists!
SNOOPY
PS In case I haven't been clear, I will be voting 'no' as the way to go.
Selling Seeds in China not all Bad News!
From p18 of the Agria report:
"The PRC government has in recent years reduced taxes and increased subsidies and other support across the agricultural industry. For instance, the government subsidizes farmers for their seed purchases, and has increased spending on rural infrastructure. Sales of agricultural products from producers to intermediaries or to farmers are exempt from PRC value-added tax, or VAT."
SNOOPY