Capex: Total vs Sustaining (FY2022 Perspective)
Quote:
Originally Posted by
Snoopy
The difference between 'total capital expenditure' and 'sustaining capital expenditure' is set to become critical in determining the future dividend returns from Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:
"From FY22 we will transition to a dividend policy based on a pay-out range of free cash flow
▪ free cash flow will be defined as
net cash flows from operating activities minus
sustaining capex."
The following table is compiled from information in:
a/ Slide 43 of the 23rd August 2021 presentation.
b/ AR2021 p21
Capex over 2021 |
Sustaining |
Development |
Sub Total |
Fibre Layer 2 Sustaining |
$31m |
|
|
Fibre Products & Systems Sustaining |
$11m |
|
|
Fibre 'Other Fibre Connections' Sustaining |
$22m |
|
|
Fibre Customer Retention Sustaining |
$11m |
|
|
Fibre UFB Communal Development |
|
$147m |
|
Fibre Connections & Layer 2 Development |
|
$244m |
|
Other Fibre Connections & Growth Development |
|
$83m |
|
Fibre Customer Retention Development |
|
$18m |
|
Fibre Total |
|
|
$567m |
Copper Network Sustaining |
$29m |
|
|
Copper Layer 2 Sustaining |
$4m |
|
|
Copper Customer Retention Sustaining |
$11m |
|
|
Copper Connections Sustaining |
$1m |
|
|
Copper Development |
|
$0m |
|
Copper Total |
|
|
$45m |
Common IT Sustaining |
$46m |
|
|
Common Building & Engineering Services Sustaining |
$14m |
|
|
Common Development |
|
$0m |
|
Common Total |
|
|
$60m |
Sustaining Total |
$180m |
|
|
Development Total |
|
$492m |
|
Overall Total |
|
|
$672m |
The year to year comparison with the quoted post above shows a $6m reduction is 'sustaining capital expenditure'. But that includes $10m in sustaining costs less spent on the copper network. So sustaining capex for the fibre network has gone up over the year, although that is in the face of a fibre network that is still growing. Nevertheless as long as the overall sustaining capex comes down,
free cash flow = net cash flows from operating activities - sustaining capex
then free cashflow goes up. Since dividends going forwards will be based on 'free cashflow', this is a good thing for shareholders.
The difference between 'total capital expenditure' and 'sustaining capital expenditure' is now critical in determining the future dividend returns for Chorus shareholders. From the 17th November 2020 Presentation, Slide 33:
"From FY22 we will transition to a dividend policy based on a pay-out range of free cash flow
▪ free cash flow will be defined as net cash flows from operating activities minus sustaining capex."
The following table is compiled from information in:
a/ Slide 40 of the 22nd August 2022 presentation.
b/ AR2022 p21
Capex over 2022 |
Sustaining |
Development |
Sub Total |
Fibre Layer 2 Sustaining |
$29m |
|
|
Fibre Products & Systems Sustaining |
$7m |
|
|
Fibre Network & 'Other Fibre Connections' Sustaining |
$23m |
|
|
Fibre Customer Retention Sustaining |
$13m |
|
|
Fibre UFB Communal Development |
|
$77m |
|
Fibre Connections & Layer 2 Development |
|
$166m |
|
Other Fibre Connections & Growth Development |
|
$74m |
|
Fibre Customer Retention Development |
|
$14m |
|
Fibre Total |
|
|
$403m |
Copper Network Sustaining |
$27m |
|
|
Copper Layer 2 Sustaining |
$3m |
|
|
Copper Customer Retention Sustaining |
$7m |
|
|
Copper Connections Sustaining |
$1m |
|
|
Copper Development |
|
$0m |
|
Copper Total |
|
|
$38m |
Common IT Sustaining |
$32m |
|
|
Common Building & Engineering Services Sustaining |
$19m |
|
|
Common Development |
|
$0m |
|
Common Total |
|
|
$51m |
Sustaining Total |
$161m |
|
|
Development Total |
|
$331m |
|
Overall Total |
|
|
$492m |
The year to year comparison with the quoted post above shows a $19m reduction is 'sustaining capital expenditure'. That includes $7m in sustaining costs less spent on the copper network. So sustaining capex for the fibre network has gone down over the year by $12m. This is an indicator as to why management has decided they can increase their dividend for FY2022. The reason being that -at last- the broadband network is generating more cash than it consumes
Dividends going forwards are based on 'free cashflow'. Note that 'based on free cashflow' does not mean paying out 100% of free cashflow as dividends!
Free cash flow = net cash flows from operating activities - sustaining capex = $570m-$161m = $405m
On a per share basis: $405m/446.512m = 92cps.
This more than covers the 14cps (or 14cps/0.72 = 19.4cps before tax) and 21cps unimputed dividend based on FY2022 free cashflows: 92cps - (19.4cps + 21cps) = 51.6cps 'cashflow left over'.
That cashflow also makes the 40cps dividend forecast for FY2023 and the 45cps dividend forecast for FY2024 look do-able (even if probably without imputation credits). Although I do note that projected increase in dividend over the year from 35c to 40c for 2023 will be entirely negated by the loss of imputation credits! At today's $7.83 closing share price, that means we are looking at a forecast gross yield of 5.1% for FY2023, rising to 5.7% for FY2024.
SNOOPY
CIP Debt/Equity Partial Maturity 2025
Quote:
Originally Posted by
Snoopy
All of this 'CIP debt security' 'discounted debt' will eventually have to be repaid at face value. As for the 'CIP equity' (preference shares) these will either:
1/ Have to be repaid at face value OR
2/ Be settled by converting the preference shares to ordinary shares, and that process will diluting existing shareholders' interests.
I don't sleep easy with either prospect. This debt does not come into any banking covenant calculations, because the bank as they are entitled to do, regards the CIP Preference Shares as equity. I don't like it.
I had a brief chat with senior management about the upcoming $170m of CIP debt and CIP preference share maturity coming in 2025. The thinking at this stage is that both the CIP debt and the CIP preference shares will be refinanced with other debt, with no net company debt reduction. There is no hurry to do this as no commercial deal can match 'interest free' government funding. But the CIP debt coupon rate, when it comes into force in 2025, is the 180 day bank bill rate plus 6% (a condition set eleven years ago). I can no longer find any reference to a 180 day bank bill rate in NZ (anyone know what happened to this metric?). But taking the 90 day bank bill rate as a proxy, (4.17% as I write this), that equates to a coupon rate of over 10% - positively usurious, even in these days of higher interest rates.
Chorus seemed pretty pleased with their most recent EURO note financing deal, taken out over FY2020: EURO 300m in notes at 0.88%, with repayments fully hedged back to the NZD (from FY2021 at least). The implication being that -come 2025, and the first CIP coupon activation date-, Chorus will be able to strike a similarly good refinancing deal. I sure hope that is true. And hope is a legitimate investment strategy - I learned that from this forum!
International agencies seem keen to give Chorus more and more debt rope. This was the last remark in the 'capital management' section of HYR2022 p3
"In early 2022 Moody's Investors Service and S&P increased their debt/EBITDA credit rating downgrade thresholds to 5.25 times and 5.0 times respectively.for Chorus. Following this increase, it is Chorus's intention that in normal circumstances the ratio of net debt to EBITDA will not materially exceed 4.75 times."
This remark comes after Chorus and their bankers had previously 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."
It looks like those bankers and their credit rating sidekicks have raised their 'borrowgestioning' strategy as regards Chorus to new heights: "Borrow, borrow, borrow!" "There is no risk for we bankers here." (as long as you pay us your interest payments on time, of course).
SNOOPY
EBITDA, IFRS 16 and Leases [FY2022 perspective]
Quote:
Originally Posted by
Snoopy
AR2021 p20 tells us that :
1/ 'Other interest expense' includes $20m of 'lease interest', from a total of $30m.
Our objective: To ensure that the effect of 'lease interest' is not 'double counted' when calculating banking covenants. 'Lease interest' is part of what used to be considered 'rent' in the pre-IFRS16 days. So when we use EBITDA as part of a banking covenant calculation, we should calculate this for Chorus as : 'Declared EBITDA' - 'Lease Interest'.
For Chorus over FY2021, this means, for banking covenant purposes: EBITDA = $649m - $20m = $629m
AR2022 p20 tells us that :
1/ 'Other interest expense' includes $15m of 'lease interest', from a total of $23m.
Our objective: To ensure that the effect of 'lease interest' is not 'double counted' when calculating banking covenants. 'Lease interest' is part of what used to be considered 'rent' in the pre-IFRS16 days. So when we use EBITDA as part of a banking covenant calculation, we should calculate this for Chorus as : 'Declared EBITDA' - 'Lease Interest'.
For Chorus over FY2022, this means, for banking covenant purposes: EBITDA = $675m - $15m = $660m
SNOOPY
CIP Debt Facilities Update [FY2022 perspective]
Quote:
Originally Posted by
Snoopy
This has become a bit of an 'old chestnut' of mine: The representation of the 'Crown Infrastructure Partner Securities', incorporating both 'CIP Debt' and 'CIP Equity' (actually preference shares) on the Chorus balance sheet. First of all, hats off for Chorus listing the 'preference share equity' as debt. But as for the way the balance is discounted back to present day values using an ultra high (IMO) 8.5% discount rate....
CIP Debt Facilities
Chorus have used the face value of the debt facilities issued (Slide 21, August 2021 Presentation) and used an 8.5% annual discount factor (AR2021 p43) to get their 'present value' of CIP debt:
$85m / 1.085^4 + $86m / 1.085^9 + $128m / 1.085^12 + $163m / 1.085^15 = $198.6m
The undiscounted value of that CIP debt is: $85m+$86m+$128m+$163m = $462m, equal to the total value of the UFB1 debt - exactly the same situation as last year (Slide 21, August 2021 presentation). The UFB1 construction project is now complete, as it was last year (which no doubt explains why the ultimate repayment value of UFB1 debt has not changed). I noted this, but wondered why the still under construction related UFB2 funding was left out of the 'Chorus Debt Facilities' picture?
-On a separate note, I see the UFB2 equity drawn by Chorus has increased from $143m to $265m over FY2021, an increase of $122m as the UFB2 roll out passed another 70,000 premises during the financial year (PR2021 slide 6)-.
Back to my question, the UFB2 roll out during the year was all funded by 'UFB2 equity' (sic), not 'UFB2 debt'. This answers my question regarding why the UFB2 debt funding has been left out of the debt picture (Slide 21, August 2021 presentation - there isn't any UFB2 debt funding as yet the UFB2 $105m debt facility remains untouched).
CIP Equity Facilities
The total of $545m on the balance sheet listed as "Crown Infrastructure Partners (CIP) securities" represents both 'CIP equity' ($306m) and 'CIP debt' ($209m) (See AR2021 p44). 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, the listed total "Crown Infrastructure Partners (CIP) securities" liability of $545m is discounted from the ultimate repayment amount, as accounting standards allow. Nonertheless all of this 'CIP debt security' 'discounted debt' will eventually have to be repaid at face value. As for the 'CIP equity' (preference shares) these will either:
1/ Have to be repaid at face value OR
2/ Be settled by converting the preference shares to ordinary shares, and that process will diluting existing shareholders' interests.
I don't sleep easy with either prospect. This debt does not come into any banking covenant calculations, because the bank as they are entitled to do, regards the CIP Preference Shares as equity. I don't like it.
This has become a bit of an 'old chestnut' of mine: The representation of the 'Crown Infrastructure Partner Securities', incorporating both 'CIP Debt' and 'CIP Equity' (actually preference shares) on the Chorus balance sheet. First of all, hats off for Chorus listing the 'preference share equity' as debt. But as for the way the balance is discounted back to present day values using an ultra high (IMO) 8.5% discount rate....
CIP Debt Facilities
Chorus have used the face value of the debt facilities issued (Slide 27, August 2022 Presentation) and I have used an 8.5% annual discount factor (AR2021 p43, discount rate not disclosed in AR2022) to get their 'present value' of CIP debt:
$85m / 1.085^3 + $90m / 1.085^8 + $137m / 1.085^11 + $174m / 1.085^14 = $224.7m
The undiscounted value of that CIP debt is: $85m+$90m+$137m+$174m = $486m, more than the total value of the UFB1 debt. The UFB1 construction project is now complete, with $462m of CIP debt incurred. Therefore, I presume any additional debt is because some UFB2 debt has been brought under the 'Chorus Debt Facilities' umbrella?
On a separate note, I see the UFB2 equity drawn by Chorus has increased from $265m at EOFY2021 (PR2021 s21) to $306 + $24m = $330m as at EOFY2022 (PR2022 s17), an increase of $65m. At the same time the UFB2 roll out passed another 1,324,000 - 1,282,000 = 42,000 premises during the financial year (PR2022 slide 5).
CIP Equity Facilities
The total of $613m on the balance sheet listed as "Crown Infrastructure Partners (CIP) securities" represents both 'CIP equity' ($346m) and 'CIP debt' ($267m) (See AR2022 p44). 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, the listed total "Crown Infrastructure Partners (CIP) securities" liability of $613m is discounted from the ultimate repayment amount, as accounting standards allow. Nonetheless all of this 'CIP debt security' 'discounted debt' will eventually have to be repaid at face value. As for the 'CIP equity' (preference shares) these will either:
1/ Have to be repaid at face value OR
2/ Be settled by converting the preference shares to ordinary shares, and that process will diluting existing shareholders' interests. OR
3/ Be refinanced as additional debt on commercial terms.
This debt does not come into any banking covenant calculations, because the bank as they are entitled to do, regards the CIP Preference Shares as 'equity'.
I am a little nervous of companies with large amounts of debt in general on their balance sheet in a rising interest rate environment. Management's preferred formula for ultimately exiting CIP funding is 'option 3', to refinance it all as 'additional debt'. Furthermore the banks seem prepared to play along with this strategy, at least for now (see my post 2836). Whether 'global financiers' feel the same, we shareholders get to find out before October 2023. That date is when a 500 million euro note funding arrangement, with a coupon rate of 1.13%, comes to an end. I wonder what coupon rate that 500m euro quantum of debt will be able to be refinanced at?
SNOOPY
'Net Senior Debt' / EBITDA ratio [FY2022 Perspective]
Quote:
Originally Posted by
Snoopy
I am using the calculation method shown on Slide 22 from PR2021 (August)
FY2021 |
Chorus View (Pre IFRS16) |
Chorus View (Post IFRS16) |
Reference |
Snoopy View |
Bank and Note Debt (1) |
$2,339m |
$2,339m |
(Slide 21 PR2021) |
$2,339m |
add PV of CIP Debt Securities (Senior) |
$198m |
$198m |
(my post 2799) |
$462m (2) |
(Slide 21, PR2021) |
add Net Leases Payable |
|
$264m |
(Note 5 AR2021) |
equals Total Selected Debt |
$2,537m |
$2,801m |
|
$2,801m |
less cash |
$53m |
$53m |
|
$53m |
equals Total Net Selected Debt |
$2,484m |
$2,748m |
|
$2,748m |
divided by EBITDA |
$629m |
$649m |
|
$629m |
equals 'Net Selected Debt' / EBITDA |
3.95 |
4.23 |
|
4.37 |
Notes
1/ Total net bank and other senior debt = $140m+($858m+$511m-$70m)+($200m+$500m+$182m)+$18m = $2,339m.
The $70m decrease in balance sheet value of the Euro bonds is because of a change in end of year value of an associated hedging instrument, the cross currency interest rate swaps used to hedge the Euro bonds (AR2021 p54). Likewise the $18m adjustment upwards in the value of the NZ bonds is because of the offsetting $18m decrease in value of interest rate swaps that are used to ensure hedge effectiveness (AR2021 p54).
2/ I don't like the accounting standard that lets a company discount debt that ultimately has to be repaid. So I am assuming a PV discount rate of 0%.
My 'Snoopy' view of this calculation removes the 'lease interest expense' (a part of rent) from EBITDA (so EBITDA is lowered). But I have also removed the 'Net Leases Payable' (a construct of IFRS16) as a liability, as I don't consider that a debt in a pre-IFRS16 sense. I don't consider my approach better than the approach Chorus has used. But my approach aligns better with the old way of assessing this banking covenant.
The other controversial thing that I have done is to disallow any discounting of CIP debt, in addition to removing the 'Net Leases payable' debt. By pure chance the effect of doing each of those two things separately has exactly cancelled out any overall debt change. Nothing should be read into this, as it is just a case of two unrelated changes unexpectedly neutralizing each other.
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. Personally I don't believe Chorus do deserve a credit upgrade, based on my retro calculation that shows the company is a slightly less favourable debt position.
Quote:
Originally Posted by
Snoopy
I am a little nervous of companies with large amounts of debt in general on their balance sheet in a rising interest rate environment.
It is important to respond to my quote immediately above, because even an established utility provider can come unstuck if the debt position gets out of hand. To check this out, I will use the same yardstick that the banks use. That consists of figuring out how well the total bank debt taken on by the business covers (or smothers?) its gross earning capacity (EBITDA). The lower the (Net Debt)/EBITDA ratio the better.
I am using the calculation method shown on Slide 18 from PR2022 (August 2022)
FY2022 |
Chorus View (Pre IFRS16) |
Chorus View (Post IFRS16) |
Reference |
Snoopy View |
Bank and Note Debt (1) |
$2,389m |
$2,389m |
(Slide 18 PR2022) |
$2,389m |
add PV of CIP Debt Securities (Senior) |
$225m |
$225m |
(Slide 18, PR2022) |
$486m (2) |
(my post 2838) |
add Net Leases Payable |
|
$187m |
(Note 5 AR2022) |
equals Total Selected Debt |
$2,614m |
$2,801m |
|
$2,875m |
less cash |
$88m |
$88m |
|
$88m |
equals Total Net Selected Debt |
$2,526m |
$2,713m |
|
$2,787m |
divided by EBITDA |
$660m |
$675m |
|
$660m |
equals 'Net Selected Debt' / EBITDA |
3.83 |
4.02 |
|
4.22 |
Notes
1/ Total net bank and other senior debt = $190m+($828m+$464m-$42m)+($200m+$500m+$154m+$45)m = $2,339m.
The $42m decrease in balance sheet value of the Euro bonds is because of a change in end of year value of an associated hedging instrument, the cross currency interest rate swaps used to hedge the Euro bonds (AR2022 p55). Likewise the $45m adjustment upwards in the value of the NZ bonds is because of the offsetting $45m decrease in value of interest rate swaps that are used to ensure hedge effectiveness (AR2022 p55).
2/ I don't like the accounting standard that lets a company discount debt that ultimately has to be repaid. So I am assuming a PV discount rate of 0%.
My third column 'Snoopy' view of this calculation removes the 'lease interest expense' (a part of rent, now reclassified as an interest payment under IFRS16) from EBITDA (so EBITDA is lowered). But I have also removed the 'Net Leases Payable' (a construct of IFRS16, representing rent contracts committed to over several periods) as a 'finance liability', as it wasn't a finance debt in a pre-IFRS16 sense. I don't consider my approach better than the approach Chorus has used. But my approach aligns better with the old way of assessing this banking covenant.
The other controversial thing that I have done is to disallow any discounting of CIP debt.
The covenant number that Chorus are targeting is anything under 4.75.. Anything over 5.25 ( Moody's ) and 5.00 ( S&P ) - see my post 2836 - are the trigger ratings for a credit downgrade. To avoid such a thing, Chorus would have to take some remedial action, like raise some more capital. My Snoopy retro calculation shows that - even if the company replaced their CIP debt with an equivalent quantum of commercial debt-, they would still be noticeably below this specific debt covenant ceiling. That's good. But it is all on the precept that net revenue remains at current levels. Is this likely?
SNOOPY