BC3: Tier 1 and Tier 2 Lending Covenants HY2016
Quote:
Originally Posted by
Snoopy
I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (AR2015, p32).
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:
Tier 1 capital > 20% of the loan book.
(Dorchester has only Tier 1 capital for these calculation purposes.)
Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $121.002m - $103.595m - $8.532m
= $8.875m
The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:
1/ 'Financial Assets at fair value through profit or loss': $17.350m
2/ 'Finance Receivables': $142.827m
3/ 'Receivables and deferred expenses': $5.946m
4/ 'Reverse annuity mortgages': $13.253m
For the FY15 year these come to $179.376m
$8.875m / $179.376m = 4.9% < 20%
=> Fail test
Care needs to be taken in interpreting a result like this. A big increase in Intangible Assets over the year have done the damage to this statistic.
From note 22 in the annual report, $45.6m of intangibles was brought onto the books with the acquisition of TUA. $30.454m was brought onto the books with the acquisition of Oxford Finance. These companies were bought outright to become profitable acquisitions. A good margin over asset backing was paid because these assets were highly profitable, demanding any buyer to pay a premium. The downside is that should either of these assets suddenly become less profitable than expected an urgent capital raising from TNR shareholders could be required!
I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (HYAR2016, p14).
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:
Tier 1 capital > 20% of the loan book.
(Turners has only Tier 1 capital for these calculation purposes.)
Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $125.810m - $105.145m - $5.310m
= $15.355m
The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:
1/ 'Financial Assets at fair value through profit or loss': $15.910m
2/ 'Finance Receivables': $164.436m
3/ 'Receivables and deferred expenses': $4.553m
4/ 'Reverse annuity mortgages': $11.878m
For the HY2016 year balance date these come to $196.771m
$15.355m / $196.771m = 7.8% < 20%
=> Fail test
Care needs to be taken in interpreting a result like this. The increase in Intangible Assets over the last six months (representing a business acquired over the period) needs to be considered. Southern Finance Limited was brought onto the books on 31st July 2015, just two months before the reporting period ended on 30th September 2015. .
From note 6 in the half year report, $1.677m of intangibles was brought onto the books with the acquisition of Southern Finance. The $1.677m is a measure of what Turners were prepared to pay over and above asset backing, because of the prospective profitability of the acquisition. Nevertheless $1.677m represents a minimal overall asset distortion to a company with over $100m of intangible assets on the books already. So I am judging the acquisition of Southern Finance, with a loan book of $9.5m, (under 6% of the total finance receivables loan book for TNR) , as not distortionary and hence not material for Tier 1 lending covenant purposes.
Put bluntly, while an improvement from the FY2015 position, I consider the capital behind this company is (still) insufficient for the size of the loan book.
SNOOPY
discl: shareholder and bondholder
BC4: Gearing Ratio HY2016
Quote:
Originally Posted by
Snoopy
The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from AR2015 Balance Sheet p32) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities
$207.970m -($9.260m + $16.378m + $7.476m) = $174.850m
Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.
$328.972m - $142.827mm = $186.145m
Gearing Ratio = Underlying Liabilities/Underlying Assets = $174.850m/$186.145m = 94% > 90%
=> Fail Test
The big spending Turner's acquisition of Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) have greatly increased the gearing ratio of the formerly conservatively geared company!
The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from HYAR2016 Balance Sheet p14) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities
$224.099m (declared total liabilities ofthe company)
less $10.517m (life insurance contract liabilities)
less $15.498m (life investment contract liabilities)
less $7.587m (deferred revenue)
= $190.497m (effective snapshot of net debt)
Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.
$348.909m (total assets)
less $142.827mm (finance receivables)
= $184.473m (effective snapshot of unerlying company assets)
Gearing Ratio = Underlying Liabilities/Underlying Assets = $190.497m/$184.473m = 103% > 90%
=> Fail Test
Things look to be going in the wrong direction.
Six months on from the period in which Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) were acquired, the greatly increased the gearing ratio of the formerly conservatively geared company has increased even further.
Borrowing money to significantly increase the size of the loan book while the asset base remains steady is a risk factor that should not be underestimated by shareholders!
SNOOPY
BC1: EBIT to Interest Expense Test, HY2016
Quote:
Originally Posted by
Snoopy
Updating for the FY2015 financial year (ended 31-03-2015)
The underlying interest expense is shown under note 7 (AR2015) to be $7.381m.
The underlying EBIT is a bit more complicated. There is a $7.058m gain recorded because of the write up in the value of the then Dorchester's existing stake in TUA to 'market bid value' level. But the market bid was made my Dorchester. So Dorchester have in effect bid up the value of their pre-owned TUA shares to a market level that they themselves have chosen. $7.058m is a one off self controlled capital gain that is not repeatable. IMO this should not be included in any underlying EBIT to Interest Expense ratio.
(EBT +Interest Expense)/(Interest Expense) = [($18.264m-$7.058m)+$7.381m]/$7.381m = 2.52 > 1.2
=> Pass Test
Updating for the HY2016 financial year (ended 30-09-2015)
The underlying interest expense is shown in the 'Condensed Consolidated Statement of Comprehensive Income' (p12 HYAR2016 to be $5.722m.
The underlying EBIT may be found in the same statement by taking the 'Profit Before Taxation' (EBT) and adding back the interest expense (I).
(EBT +Interest Expense)/(Interest Expense) = [$10.260m+$5.772m]/$5.772m = 2.78 > 1.2
=> Pass Test
'Post Calculation Thought'
It strikes me that by passing this test so easily, the profit margins at TNR must be generally higher than the finance industry norm. Given this, perhaps the 'failures' in the two previous tests are not as much of a concern as I previously considered. Others Thoughts?
SNOOPY
BC2: Liquidity Buffer ratio for HY2016
Quote:
Originally Posted by
Snoopy
The current account information that I seek is still in the FY2015 annual report, but it is scattered. Let's see what happens when I bring it all together again.
Financial Assets |
0-12 months |
Reference |
Cash & Cash Equivalents |
$12.339m |
AR2015 p32 |
Financial assets at value thru P&L |
$0.877m |
AR2015 p43 |
Financial Receivables Contractural Maturity |
$74.174m |
AR2015 p53 |
Reverse Annuity Mortgages |
$1.603m |
AR2015 Note 16 |
Other Receivables |
$4.616m |
AR2015 Note 17 |
Total Current Resources |
$93.609m |
(addition) |
Financial Liabilities |
0-12 months |
Reference |
Current Liabilities |
$79.629m+$37.539m |
AR2015 p44 |
Total Current Liabilities |
$117.168m |
(addition) |
What we have here is an on paper 'theoretical' current shortfall of:
$117.168m - $93.609m = $23.559m
Of course there are ways to make up this shortfall. Some of those account receivables could be rolled over into new business, thus making the 'theoretical' shortfall disappear.
If any of the shortfall remained, the difference could be borrowed under the company's banking facilities. However, information on the capacity of spare banking facilities available is not listed in the annual report. In summary, not a good result compared to the strong cash positive position of last year. The contractual cash deficit position of TNR is substantial, greater than the (record) full year profit in FY2015 of $18.5m!
Financial Assets |
0-12 months |
Reference |
Cash & Cash Equivalents |
$13.019m |
HYAR2016 p14 |
Financial assets at value thru P&L |
$0.365m |
HYAR2016 p23 |
Financial Receivables Contractural Maturity |
$?m |
n/a |
Reverse Annuity Mortgages |
$?m |
n/a |
Other Receivables |
$?m |
n/a |
Total Current Resources |
$?m |
(insufficient information) |
Financial Liabilities |
0-12 months |
Reference |
Current Liabilities |
$?m |
n/a |
Total Current Liabilities |
$?m |
(insufficient information) |
I am putting up the above table to show shareholders how much information is missing to allow any conclusions to be reached. IMO this is very poor disclosure, only a few years on from when the finance sector in NZ collapsed. Granted this company is not funded by public deposits. But in my mind, not providing enough information in the accounts to allow even a 'quick ratio' (current assets to current liabilities) to be calculated is disgraceful in 2016. I guess shareholders need to 'believe the story'?
SNOOPY
PS nothing published on the structure of company bank loans either!