PGW - PGG Wrightson

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Originally Posted by Ferg

Snoopy

You should have stopped here:
Snoopy wrote: "I think my problem is that I am thinking of this "Guarantee, letters of credit and trade finance facilities" as a loan, when it is not really a loan at all.

What you posted after that about an undrawn facility being fully drawn is, with all due respect, garbage. Your assumptions are wrong, namely:

• suggests to me it is based around a specific transaction - WRONG (with the identical value from 6 months ago??)

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Yes, an identical value as six months ago, because exactly the same letter of credit was in force six months ago as now. It is the same thing being reported at two different snapshots in time.

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Originally Posted by Ferg

• In all probability the facility will remain undrawn - WRONG (these are used all the time and balances actually committed vary monthly, higher probability this facility is committed to a value >$0 and <$3.77m)
• Since the banks have no control over this $3.77m facility - WRONG (they set the limit)
• it would be prudent for them to consider it drawn, even though it is not - WRONG (not 'drawn' instead an 'exposure')

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If we:
a/ Accept your point that a 'Letter of Credit' is not for a fixed amount of $3.77m, but is instead for some varying amount between $0 and $3.77m at any particular time AND
b/ Accept your point that the $3.77m is an 'exposure' rather than being 'drawn'. (I think this is playing with words a bit. 'Exposure' has a context of something that might happen given certain circumstances and in those circumstances a payout might be required. 'Drawn' OTOH would suggest an event has happened and the money has actually been drawn out. But whether that $3.77m is a 'drawn risk' or an 'exposure risk' the amount of money 'at risk' is still $3.77m either way.)

BUT We know for a fact that this $3.77m is outside of the banking syndicate facilities.
YET we also know that the banks know the $3.77m is outside of the arrangements of the banking syndicate facilities.

Given the banks know this, they could therefore have set up their banking facilities to take account of the fact that this $3.77m facility exists outside of the banking facility arrangement they are about to set up. So although the banking syndicate does not control the $3.77m external facility directly, they do control it indirectly , in effect, because the banking facility they are about to set up will be on less generous terms compared to a hypothetical 'parallel universe facility' they would have set up if the $3.77m external facility did not exist.

So Ferg, I put it to you that although we are approaching this question from different directions, when each of us puts the building blocks in place, along our divergent expressive paths, what we end up with is the same thing. IOW in results terms, we agree. That $3.77m can be drawn down at any time and the banks know it.

SNOOPY

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Originally Posted by Ferg

What is your point? Given I know accounting like the back of my hand, I can't forecast? Absolute twaddle. I made a living making forecasts hence the reason I think statements such as "people can't forecast the future" are 100% nonsense.

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That post was meant to be a joke Ferg, to lighten up what was turning into a deadly serious thread. You think I could come onto a finance forum, diss all accountants and economists and get away with it? It was a play on stereotypes and not meant to be personal or taken too seriously. I have added smilies to the original post to make this clear! I very much appreciate and respect your contributions on accounting matters. No hard feelings I hope.

SNOOPY

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Originally Posted by Ferg

"Since the banks have no control over this $3.77m facility" - WRONG (they set the limit)

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Originally Posted by Snoopy

BUT We know for a fact that this $3.77m is outside of the banking syndicate facilities.
YET we also know that the banks know the $3.77m is outside of the arrangements of the banking syndicate facilities.

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You may not be aware of the full history of this Ferg. So this is a further explanation is just to show you I am not making this stuff up....

On 1st May 2019 PGW sold their seed division. Under Note 9 "Cash and Finance facilities" in AR2019 we are told:

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"The company fully repaid the and cancelled the syndicated banking facilities during the year, using proceeds form the sale of the Seed & Grain segment."
"As at 30 June 2019, the group had the following finance facilities, which amount to $9.58m, comprise:
- Guarantee and trade finance facilities of $6.08m
- Overdraft facilities of $3.50m"

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Go forward one year under the same Note 9 and we get this:

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"On 2 July 2019, the Company entered into a new syndicated bank facility which provides the following:
– Term debt facility of $50.00 million maturing on 1 August 2021
– Working capital facilities of up to $70.00 million maturing on 1 August 2021 (subject to an annual Clean Down)
The syndicated facilities fund the general corporate activities of the Group, the seasonal fluctuations in working capital, and the Go livestock
receivables."

"The syndicated facility agreement allows the Group, subject to certain conditions, to enter into additional facilities outside of the Company’s syndicated facility. The additional facilities are guaranteed by the security trust. These facilities amounted to $6.58 million as at 30 June 2020 (2019: $9.58 million).
–Overdraft facilities of $3.00 million
–Guarantee, letters of credit and trade finance facility of $3.58 million."

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The point of this post being to show you that the 'additional borrowing facilities' we are talking about were in place before the current banking syndicate was signed up. Not the other way around.

SNOOPY

So what we are saying is that syndicated debt = the term debt + working capital facility. That is not in dispute. Typically 'syndicated debt' is debt provided by >1 banks (hence it is called a syndicate of banks) and usually includes at least 1 local bank and can include 1 or more overseas banks. Syndicated debt is therefore provided by a bank syndicate. The overdraft and trade finance/LOC facilities are typically (probability >99%) provided by a single local bank which is normal practice. That single local bank may or may not be a member of the bank syndicate. My prediction is that the single local bank is a member of the syndicate (Why? In my experience I have not yet seen a bank syndicate where one of the local bank syndicate members does not provide the day to day banking services). Whilst it could be a local bank that is not a member of the bank syndicate, I would be surprised if that were the case. Whilst the single local banker is not the same entity as the bank syndicate in toto, the banking syndicate would certainly have half an eye and some say on the size of the non-syndicated debt facilities - hence the 'banks' setting facility limits refers to the single local bank working in conjunction with bank syndicate as evidenced by your quote ("The syndicated facility agreement allows the Group, subject to certain conditions, to enter into additional facilities outside of the Company’s syndicated facility"). But all said and done, this changes nothing for the numbers...

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Originally Posted by Ferg

So what we are saying is that syndicated debt = the term debt + working capital facility. That is not in dispute. Typically 'syndicated debt' is debt provided by >1 banks (hence it is called a syndicate of banks) and usually includes at least 1 local bank and can include 1 or more overseas banks. Syndicated debt is therefore provided by a bank syndicate. The overdraft and trade finance/LOC facilities are typically (probability >99%) provided by a single local bank which is normal practice. That single local bank may or may not be a member of the bank syndicate. My prediction is that the single local bank is a member of the syndicate (Why? In my experience I have not yet seen a bank syndicate where one of the local bank syndicate members does not provide the day to day banking services). Whilst it could be a local bank that is not a member of the bank syndicate, I would be surprised if that were the case. Whilst the single local banker is not the same entity as the bank syndicate in toto, the banking syndicate would certainly have half an eye and some say on the size of the non-syndicated debt facilities

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OK, that is basically the point I was trying to make but you have said it better. But the way you previously expressed your view that I quote below I believe gave the wrong impression.

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Originally Posted by Ferg

Snoopy "Since the banks have no control over this $3.77m facility" - WRONG (they set the limit)

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You may have had it in your mind that you were saying the same thing. But it didn't come across that way to me. The above sounds like the new banking syndicate came in and said:
"Right, that existing day to day banking facility you already have. You can't have that any more. We are ripping that agreement up and from now on we will set the overdraft limit and any letter of credit conditions. That other bank you have agreed to those old terms with - they can get stuffed."

What I was saying was, the new banking syndicate can't come in and order PGW to default on their previously agreed to 'day to day' banking arrangements. Whenever you take out a new loan agreement, it is natural for any new loan provider to be aware of any existing loan agreements that already exist with others. They want to know about your total ability to repay all outstanding loan agreements - not just the new loan application you put in front of them. And yes, whether they approve that new loan or not, will require them to know the intimate details of other loans you have. But what a potential new loan provider cannot do is approach another loan provider and demand they change the conditions of another loan you have with that different third party loan provider.

They would as you so aptly put it:
"certainly have half an eye and some say on the size of the non-syndicated debt facilities."

But they can't demand changes to a contract that was not signed by them, and in which they have no direct interest. They can of course adjust their own proposed loan arrangement to take account of this. But they can't dictate the terms of as third party contract, which I believe what your quote immediately above implied.

SNOOPY

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Originally Posted by Ferg

Only you can convince yourself that a facility that is undrawn is actually drawn!
:huh:

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....and just to explain this apparent paradox. If PGW has a syndicated bank facility, and outside of that a non-syndicated bank facility with another party over which the syndicated bank facility has no control, that means the non-syndicated facility could be drawn down from anything to $0 to a maximum of $3.77m. Since the non-syndicated bank facility could be drawn down to $3.77m at any time, that means the syndicated bank facility, if being conservative, would need to assume it is drawn down all the time. Thus you have the superficially what looks like a paradoxical situation where a loan is assumed to be drawn, when it may be completely undrawn.

SNOOPY

Soooooo, numba go up or down?

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Originally Posted by Entrep

Soooooo, numba go up or down?

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The debt will go up.....

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Originally Posted by Toddy

The debt will go up.....

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I feel the need to qualify that statement. PGW is a seasonal business. And as part of the seasonal ebbing and flowing of the business there is an agreement that at some point the working capital, drawn to $65m at the half year balance date will need to be 'washed down' or completely repaid. $65m off company debt is quite a reduction. The wash down will be possible because of the sell down of shop stock, and the sell down of PGW owned animals 'rented out' to farmers from the GoLivestock program. The question is what happens 'after that', or about now?

PGW now has to choose to what level they will stock their retail operations for the 2024-2025 season. If they think Spring will be tough, they may not buy in as much shop stock as last year. Likewise, the farmers who do have spare feed may not have to pay as much for the beasts they plan to fatten up over the winter months. So the PGW GoLivestock balance may be reduced as a result of that. Less capital borrowed means lower profits but also less money borrowed from the banks to support those lower profits. Given no dividend was paid over 2HY2024 as well, I think that come the 30th June balance date, debt will be lower than many here think. Granted that will be against a backdrop of slower and lower profits going forwards.


SNOOPY

Most of PGW's Spring stock orders were most probably placed in January/Feb/March.

"the farmers who do have spare feed may not have to pay as much for the beasts they plan to fatten up over the winter months. So the PGW GoLivestock balance may be reduced as a result of that"

No,beef prices will be higher with a shortage of stock likely.Works already indicating $6.50/kg later in winter

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Originally Posted by kiora

"the farmers who do have spare feed may not have to pay as much for the beasts they plan to fatten up over the winter months. So the PGW GoLivestock balance may be reduced as a result of that"

No,beef prices will be higher with a shortage of stock likely.Works already indicating $6.50/kg later in winter

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Good to hear.

Higher beef prices
=> Higher prices paid at auction for cattle
=> Higher commission income for PGG Wrightson Livestock
=> More capital needed to support 'GoLivestock' (the only negative)
BUT ultimately farmers are better off
=> More money spent on the retail side of the PGW business
=> EBITDA increases
=> ability to support today's higher company debt increases
=> less need to conserve capital = 'dividends restored' YAY!

The 'virtuous circle' circles back.

SNOOPY

"Higher beef prices" no one can afford to buy!

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Originally Posted by FatTed

"Higher beef prices" no one can afford to buy!

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They can in Japan.

SNOOPY