The Big Crown Fibre Holdings Debt Repayment
Quote:
Originally Posted by
Aaron
Don't Crown Fibre Holdings (CFH) start getting repaid after 2025 and also that may take the form of shares so dividends would be expected to be diluted a lot in 4-5 years time.
Probably a steady infrastructure company but could someone tell me if I am right about dilution once CFH starts being repaid?
Quote:
Originally Posted by
Aaron
Guess I'll have to do the work myself. I found a summary, so my understanding is that the $929mill funding from CFI is split 50/50 with debt and equity securities.
The debt half is interest free but gets repaid.
Repayment Year |
2025 |
2030 |
2033 |
2036 |
Total |
Percentage to Repay |
18.5% |
18.5% |
27.7% |
35.4% |
100% |
The equity securities aren't the great dilution] I had surmised, they are preference shares with no voting rights so more like a debt security, but the dividend rate on the CFH1 Equity Securities (when payable) is equal to a reference rate (based on the 180 day bank bill rate in New Zealand) plus a margin of 6% per annum. So probably 6% or less depending on interest rates going negative or not. Dividends are payable six-monthly in advance, and the dividend payment dates will be aligned with the dividend payment dates for Chorus Shares.
The number of CFH1 Equity Securities on which the dividend is payable at any date will be reduced by the number of CFH1 Equity Securities which have been redeemed by Chorus up to that date (the redemption terms are described below).
The table below shows the number of CFH1 Equity Securities that will attract dividends (unless redeemed earlier):
Repayment Year |
2025 |
2030 |
2033 |
2036 |
Cumulative CFH Equity on which dividends become payable |
$86m |
$172m |
$300m |
$465m |
|
Cumulative CFH Equity %ge on which dividends become payable |
18.5% |
36.9% |
64.6% |
100% |
It is a matter of going back and seeing whether the interest on the preference shares will significantly impact cashflow or not. 2036 is a long way away.
I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.
I am surprised you are the only one who has brought up the issue of Crown Fibre Holdings debt repayment. You say 2036 is a long way away. But 2025 isn't so far into the future. And the reduced discount rates that lower interest rates bring means that the shadow of those future repayments looms ever larger. I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented. However, I shall assume your figures are correct and carry on. I am particularly interested in those debt repayments because they cannot be deferred. Reading between the lines, I think that if the debt is not repaid then CFH has the right to convert that debt into Chorus shares. So this future debt repayment schedule should be something that demands serious attention from Chorus shareholders.
For Chorus, I would judge a 5.5% discount rate on future cashflows to be about right. The debt and equity components of the Crown Fibre Holdings funding is equally split, so $465m of CFH debt must be repaid.
Repayment Year |
2025 |
2030 |
2033 |
2036 |
Total |
Percentage to Repay |
18.5% |
18.5% |
27.7% |
35.4% |
100% |
Dollars to Repay |
$86m |
$86m |
$129m |
$165m |
$465m |
Discount Rate Divisor: 5.5% discount rate (FY2020 perspective) |
1.239 |
1.619 |
1.901 |
2.232 |
|
PV Dollars to Repay (FY2020 perspective) |
$69m |
$53m |
$68m |
$74m |
$264m |
At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:
$264m / 444.492m = 59cps
Is that the quantifiable result of what you are saying Aaron?
SNOOPY
The Big Crown Fibre Holdings Debt Repayment: Take 2
Quote:
Originally Posted by
Snoopy
I have taken the liberty of reformatting your tabulated information Aaron, so hopefully you will tell me if I haven't done it correctly.
I am surprised you are the only one who has brought up the issue of Crown Fibre Holdings debt repayment. You say 2036 is a long way away. But 2025 isn't so far into the future. And the reduced discount rates that lower interest rates bring means that the shadow of those future repayments looms ever larger. I would be interested where you pulled your numbers from. I have had a cursory look and can't find the figures you have documented. However, I shall assume your figures are correct and carry on. I am particularly interested in those debt repayments because they cannot be deferred. Reading between the lines, I think that if the debt is not repaid then CFH has the right to convert that debt into Chorus shares. So this future debt repayment schedule should be something that demands serious attention from Chorus shareholders.
For Chorus, I would judge a 5.5% discount rate on future cashflows to be about right. The debt and equity components of the Crown Fibre Holdings funding is equally split, so $465m of CFH debt must be repaid.
Repayment Year |
2025 |
2030 |
2033 |
2036 |
Total |
Percentage to Repay |
18.5% |
18.5% |
27.7% |
35.4% |
100% |
Dollars to Repay |
$86m |
$86m |
$129m |
$165m |
$465m |
Discount Rate Divisor: 5.5% discount rate (FY2020 perspective) |
1.239 |
1.619 |
1.901 |
2.232 |
|
PV Dollars to Repay (FY2020 perspective) |
$69m |
$53m |
$68m |
$74m |
$264m |
At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:
$264m / 444.492m = 59cps
Is that the quantifiable result of what you are saying Aaron?
I notice in the 'UBS Australia virtual conference' on 17th November 2020, the Chorus CIF debt repayment schedule has been updated to include repayments from the UFB2 roll out (slide 43). I have revised my table accordingly
Repayment Year |
2025 |
2030 |
2033 |
2036 |
Total |
Percentage to Repay |
15% |
18.5% |
29.4% |
37.1% |
100% |
Dollars to Repay |
$85.3m |
$104.7m |
$166.7m |
$210.2m |
$566.9m |
Discount Rate Divisor: 5.5% discount rate (FY2020 perspective) |
1.293 |
1.619 |
1.901 |
2.232 |
|
PV Dollars to Repay (FY2020 perspective) |
$69m |
$65m |
$88m |
$94m |
$316m |
Discount Rate Divisor (corrected): 5.5% discount rate (FY2020 perspective) |
1.307 |
1.708 |
2.006 |
2.355 |
|
PV Dollars to Repay (FY2020 perspective, corrected) |
$65m |
$61m |
$83m |
$89m |
$298m |
Note
I have preserved my uncorrected calculations because other posts further down in this thread now reference those (wrong) figures. It would be confusing if those sent back to look at this post could not find the wrong figures the subsequent posts have referenced.
At EOFY2020 there were 444.492m Chorus shares in issue. So to work the future CFH capital repayments into today's Present value of Chorus shares, you have to reduce the value of Chorus shares by:
$316m / 444.492m = 71cps
Corrected Calculation: $298m / 444.492m = 67cps
This is the amount that must be taken off the value of CNU based on earnings potential to adjust for the debt repayment schedule.
SNOOPY
BT1/ STRONG MARKET POSITION (Top 3 in chosen market sector) [perspective FY2020]
Quote:
Originally Posted by
Snoopy
Potentially we have a a very significant drop in CAPEX coming through, notwithstanding the fact that UFB2 and UFB2+ and the Rural Broadband Initiative (in partnership with Vodaphone) are still rolling out. FY2023 and FY2024 look like they will become comparatively sweet years for Chorus, before a very heavy debt repayment schedule disrupts things. It strikes me that with such a systematic change coming onto the horizon, a Buffett type analysis of Chorus today will be more an historical curiosity, rather than a forecasting tool for the future. But let's do it anyway :-)
Chorus is the largest builder and operator of the fibre broadband telecommunications network in New Zealand. Of the 33 identified 'build regions', Chorus has the contract to build 24 of them. Fibre broadband networks not being built by Chorus include:
1/ Greater Christchurch being built by 'Enable' (a wholly owned subsidiary of the Christchurch City Council)
2/ Whangarei and Kaipara being built by 'Northpower' (Northpower is owned by consumers connected to Northpower's Electricity network).
3/ Hamilton, Cambridge, Te Awamutu, Tauranga, Tokoroa, Hawera, New Plymouth and Whanganui already built by 'Ultra Fast Fibre' (owned by Australian firm 'First Sentier Investments')
All of the above are part of a 'Regulatory Asset Base' (RAB) for NZs partially government funded Fixed Fibre Local Access Service (FFLAS).
Chorus is also the owner operator of the legacy copper telecommunications network which is present over the whole country. Chorus is a regulated wholesaler of telecommunications services for many retail partners including Vodaphone, Spark, 2degrees, Vocus, Trustpower and Sky.
By FY2023 Chorus will have made the transition from being a 'builder of broadband' and an 'operator of telecommunications fixed networks' to a 'fully regulated operator of networks'. Despite being a legislated monopoly network provider, Chorus continues to roll out an innovation program for their customers. Over FY2020 they launched:
1/ The new 'Hyperfibre' service. This is new network technology that allows 2Gbps or 4Gbps symmetric connection speeds.
2/ A new streamlined fault restoration service, instigated for small business.
3/ A streamlined connection service to connect widely dispersed customers at a single network handover point, which will improve customer management for retailers.
4/ A WiFi service that does not require retailer supplied routers.
Looking further out, Chorus are considering the implementation of 'Wi Fi 6', which is expected to deliver a big step up in performance in speed and latency. 'Wi Fi 6' is an effective prospective rival to mobile network 5g services.
Conclusion: As a monopoly fibre broadband provider, that is expected to maintain a bandwidth and latency edge of competing fixed mobile offerings from Spark and Vodaphone (both minor players in terms of market share) , this test result is a PASS
SNOOPY
BT2/ INCREASING EARNINGS PER SHARE TREND (one setback allowed) [perspective 2020]
Earnings per share are calculated by taking the normalised net profit after tax and dividing that by the number of shares on issue at the end of the financial year.
FY2016: ($91m + 0.72( $3m+$9m )) / 400.800m = 24.9cps
FY2017: ($113m + 0.72( $6m+$3m+$11m+$6m )) / 411.002m = 32.0cps
FY2018: ($85m + 0.72( $5m+$5m+$7m)) / 429.641m = 22.6cps
FY2019: ($53m + 0.72( $1.5m+$2m+$3m+$3m+$6m+$2m )) / 439.288m = 14.9cps
FY2020: ($52m + 0.72( $2m+$6m+$5m+$2m+$1m+$5m+$2m )) / 444.492m = 15.4cps
Notes
1/ To normalise the FY2016 result, remove a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap. The interest rate exposure is only partially hedged, explaining the need for a reset. (ref AR2017 p20). A further $9m interest charge relating to the part amortisation of a now defunct (from 9th December 2013) hedge residual, was added back
2/ Normalised FY2017 result adds back $6m in incremental Consultancy fees spent on strategic review of the regulatory framework and Chorus itself. Removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). Further interest charges of $11m + $6m, based on the ineffectiveness of the EMTN cashflow hedge have been added back.
3/ Normalised FY2018 result removes a $5m labour restructuring charge, removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A further interest charge of $7m, based on the amortisation of the ineffectiveness of the EMTN cashflow hedge (closed out on 9 December 2013), has been added back.
4/ Normalised FY2019 removes $1,5m of labour restructuring costs, $2m of consultants fees investigating the forthcoming regulatory regime, and $3m from a set aside implementation charge to get the new regulatory framework in place. Removed a $3m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A further interest charge of $6m, based on the ineffectiveness of the EMTN cashflow hedge has been added back. A $2m one off expense for restructuring two forward dated interest rate swaps has also been removed.
5/ Normalised FY2020 removes a combined $2m Covid-19 relief payment for both Fibre and Copper broadband customers, a $6m increase in Covid-19 staff leave provisions and contractors to help make the transition to the new regulatory framework, a $5m payment to contracted service companies to help them through the lock-down periods, an incremental $2m increase in consultancy fees related to the regulatory transition, a $1m one off expense for restructuring forward dated interest rate swaps, Removed a $5m interest charge realised from a reset of a GBP Euro Medium Term Note (EMTN) interest rate swap (the interest rate exposure is only partially hedged, explaining the need for a reset). A final further interest charge of $2m, based on the ineffectiveness of the EMTN cashflow hedge has been added back, and at EOFY2020 and, this 9 December 2013 transaction, was finally 'closed out' of the account books.
Lots of adjustments made to gather a normalised result free from one offs and loan adjustments that have nothing to do with the underlying operational performance of the company. The result is that Chorus has performed 'better than you think'. Nevertheless there have been more downs that ups in the NPAT earnings per share trend, which, if anything is down. Warren would not be impressed!
Conclusion: FAIL TEST
SNOOPY