The problem with estimating an 'interest rate equivalent paid' for the PGW debt is that company debt is quite seasonal. Shareholders were presented with a picture of this in Figure 6.1 on page 34 of the "PGG Wrightson Independent Report, (outlining the case for divesting the seed division, and dated October 2018). Disclosure to this level of detail is not available in the annual report. But we can make a 'triangulated approximation' to the variability of the debt via three data points that are in the annual and half year reports:
1/&2/ End of year net debt position of the current year and the previous year AND
3/ The half year net debt position in between.
From AR2019 p8
"PGW negotiated and entered into new bank facilities in July 2019.....It is pleasing to note that
very competitive terms have been struck for these banking arrangements"
This interest rate renegotiation makes all of my indicative interest rate calculations up to now, including calculations based around AR2019, historical. However, exactly what 'very competitive terms' means has not been revealed. One thing we can assume is that PGW is now paying a lower interest rate compared to what they have done in the recent past. So let's dive back into last years PGW history and try to figure out what is the figure they were paying that, by way of comparison, makes the new terms so good.
Distorting the end of FY2019 capital picture is the gain on the sale of the seeds business on 1st May 2019 of $134.281m. If this gain had not happened, the debt position of the company at EOFY balance date would be very different. We don't know exactly the position of the company just before the seed sales proceeds came through. But I am guessing it was something like I have outlined in the table below:
|
30th April FY2019 |
EOHY2019 |
EOFY2018 |
EOHY2018 |
EOFY2017 |
Cash |
$0m |
$3.884m |
$10.926m |
$24.247m |
$9.403m |
less Short Term Debt |
$2.680m (*) |
$79.635m |
$30.806m |
$91.215m |
$26.719m |
less Long Term Debt |
$134.281m |
$130.000m |
$149.205m |
$130.634m |
$110.925m |
equals Total |
$136.961m |
$205.751m |
$169.085m |
$197.602m |
$128.241m |
Half Year Increment |
|
+$36.666m |
|
+$69.361m |
|
(*) This figure from EOFY is used as an estimate of the short term loan balance two months earlier.
For the purposes of calculating an 'average loan balance', I feel it is best to consider the financial year split into three time periods:
P1/ An intiial six months, WITH
P2/ an ensuing four months FOLLOWED BY
P3/ a final two months.
The calculation of the average loan balance over these three time periods, using a linear interpolation model, is as follows:
P1/ ($169.085m + $205.751m)/2 = $187.418m
P2/ ($205.751m + $136.961m)/2 = $171.856m
P3/ $0m (debt repaid)
The time proportional average debt of these three periods added together is as follows:
( 6 x P1 + 4 x P2 + 2 xP3 ) / 12 = ( 6x$187.419m + 4x$171.856m) / 12 = $150.994m
The Annual Report declared net interest bill for the year has been split into interest expense allocated to 'Seed and Grain' ($4.481m) and PGWRR ($6.067m), for a total of ($10.548m). This equates to an implied net interest rate for PGW over FY2019 of:
$10.548m / $150.994m = 7.0%
CEO Stephen Guerin has negotiated the new banking facilities so that there is an incremental seasonal funding amounts to $70m. Considering the business has now been roughly 'half sized', this seems a lot, although I guess it is prudent to allow for less than ideal weather circumstances. The reduction in interest rate paid also announced must be meaningful for Stephen Guerin to crow about it. A 10% reduction might be more in line with what is happening in the markets as a matter of course. I am picking Stephen has got a 20% reduction. That would take PGW net interest rates down to: 0.8 x 7% = 5.6% for FY2020.