Net Senior Debt [FY2020 Perspective]
Quote:
Originally Posted by
Snoopy
What is of particular interest to me is the effect of IFRS 16 on EBITDA, because that impacts banking covenants.
I know that IFRS 16 introduces new interest costs to the business in the form of a 'lease interest' expense. This will boost EBITDA for a given NPAT as the interest total 'I' to be added back in increases. In the case of Chorus, lease interest over FY2018 totalled $18m (AR2018 p45).
Chorus have declared that EBITDA from FY2017 to FY2018 rose from $652m to $653m, (AR2018 p18) a rise of $1m. However if we adjust for IFRS 16 then EBITDA drops from $652m to $635m, a sizeable drop of $17m.
Slide 32 of the 17th November 2020 presentation shows the 'Net Senior Debt' / EBITDA ratio should be less than 4.75 times.
Yet, before the early adoption of IFRS 16 was announced on 1st July 2017, Chorus and their bankers had already announced revised banking syndicate arrangements on 25th May 2017.
"The facility has also been repriced to reflect current market rates and the covenants have been revised from 4.0 to 4.75 times debt to EBITDA and 3.0 to 2.75 times interest coverage, to better align with Chorus’ rating thresholds."
Moving on to the numerator of banking covenant, I imagined it would be a straightforward process to simply pluck the relevant figures out of the balance sheet. However, after I had done this, I noticed Chorus themselves had done the calculation on the same 30th June 2020 balance date, and come up with a significantly different answer (Slide 41, November 17th 2020 Presentation).
|
Net Debt Nov 2020 Presentation (Chorus) |
Net Debt FY2020 Balance Sheet (Snoopy) |
Borrowings |
$2,234m |
$2,327m |
add PV of CIP debt securities (senior) |
$183m |
$461m |
add Net Leases Payable |
$263m |
$263m |
less Cash |
$0m |
$0m |
equals Total Net Debt |
$2,680m |
$3,051m |
The differences in the two calculations are outlined below:
Borrowings
Chorus Interpretation: (Refer Slide 42, November 2020 Presentation):
$30m (Long term bank facilities) + $5m (Overdraft) + $400m (NZ Bond) + $500m (NZ Bond) + $1,299m (European Medium Term Notes) = $2,234m (Total)
Snoopy Interpretation: (Refer Note 4 AR2020 and Balance Sheet for Overdraft):
$30m (Syndicated banking facilities) + $5m (Current Liability Overdraft)+ $400m (NZ Bond) + $500m (NZ Bond) +$1,410m (EMTN) -$18m (facility fees) = $2,327m (Total)
The EMTN Total by Chorus of $1,299m is described as "$NZ equivalent at hedged rates". Why would the figures in the balance sheet not be at $NZ equivalent hedged rates"?
Why do Chorus not count the 'facility fee', (an annual payment on account of their banking facilities) as part of their banking liabilities?
You can take it from those questions that I am backing my own interpretation of debt from the balance sheet, over that espoused by Chorus.
CIP Debt Facilities
Chorus have used the face value of the debt facilities issued (Slide 42, November 2020 Presentation) and used an 8.5% annual discount factor (AR2020 p50) to get their 'present value' of CIP debt:
$85m / 1.085^5 + $86m / 1.085^10 + $128m / 1.085^13 + $163m / 1.085^16 = $183m
The undiscounted value of that CIP debt is: $85m+$86m+$128m+$163m = $462m, equal to .the total value of the UFB1 debt. (Slide 42, November 2020 presentation), However, this may be a co-incidence, as why would the UFB2/UFB2+ funding be left out of the Chorus debt picture?
The total of $461m on the balance sheet represents both 'CIP equity' and 'CIP debt'. The 'CIP equity' is actually preference shares, which in my view are more closely classed as a form of debt (it is listed as a liability in the balance sheet after all). Nevertheless, this is a grey area and Chorus is not wrong to leave out 'CIP equity' as part of their debt load. But I would class the Chorus view as a favourable interpretation of the company's debt situation.
SNOOPY
'Net Senior Debt' / EBITDA ratio [FY2020 Perspective]
Quote:
Originally Posted by
Snoopy
Moving on to the numerator of banking covenant,
|
Net Debt Nov 2020 Presentation (Chorus) |
Net Debt FY2020 Balance Sheet (Snoopy) |
Borrowings |
$2,234m |
$2,327m |
add PV of CIP debt securities (senior) |
$183m |
$461m |
add Net Leases Payable |
$263m |
$263m |
less Cash |
$0m |
$0m |
equals Total Net Debt |
$2,680m |
$3,051m |
|
Chorus View |
Snoopy View |
Total Net Debt |
$2,680m |
$3,051m |
divided by EBITDA |
$648m |
$648m |
equals 'Net Selected Debt' / EBITDA |
4.14 |
4.71 |
The number the banks are on the lookout for is anything over 4.75. Chorus would have you believe that they are doing really well. Anything under 4.2 ( Moody's ) and 4.25 ( S&P ) are the trigger ratings for a credit upgrade. I, however, consider that Chorus are within a whisker of breaking this banking covenant. Chorus won't go broke though. But it is very possible that in the future at least some preference shares could be converted to Chorus ordinary shares. That would be eps dilutive for existing shareholders, and not welcome!
SNOOPY
EBIT / Net Interest [FY2020 Perspective]
Quote:
Originally Posted by
Snoopy
"The facility has also been repriced to reflect current market rates and the covenants have been revised from 3.0 to 2.75 times interest coverage, to better align with Chorus’ rating thresholds."
|
Snoopy View |
EBIT |
$246m |
divided by Net Interest Expense |
$114m |
equals 'Interest Coverage' |
2.2 |
Notes
1/ For the interest bill I am using in this calculation (Ref AR2020 p47):
($185m -$12m) - $29m - $27m - $3m = $114m
I have removed from the net interest bill:
(i) $29m of CIP securities 'notional interest'
(ii) $21m of 'lease expense' interest and $5m amortisation from a swaps reset and $1m to restructure interest rate swaps.
(iii) $3m from the ineffective portion of a cashflow hedge.
This calc is telling me the 'Interest Coverage Ratio' is not greater than 2.75 and so is broken. Not good news!
SNOOPY