A lack of interest over FY2020? Finance deal revealed!. (Part 3)
Quote:
Originally Posted by
Somebody Else
Where to start? Note 5 on page 49 of the annual report seems a good place. In calculating your $671k you have included the interest income that PGW gets from charging overdue account fees to their customers. I'm not sure why you would bother calculating that number given they tell you they paid line fees of $683k and interest of $923k for a borrowing cost of $1.6m.
Ah thanks for this. I had no idea that interest charged to customers for overdue bills would likely end up as interest income in the 'net interest and finance costs' note. I had imagined, obviously wrongly, that any 'penalty interest recovered' would go straight towards offsetting bad debts and not appear on the books as interest at all. I also imagined that this interest received as declared was from the banks on short term funds at PGW waiting to be redeployed. So I am grateful to be educated out of my wrong assumptions.
Quote:
Originally Posted by
Somebody Else
Applying $1.6m to your borrowing figure of $39.145m gives an interest rate of 4.1%. That seems a bit much, so there is likely a problem with the debt number. The first thing that stands out is that you included the $16.868m cash balance in your average debt calculation for the length of your P3 period. That seems like a big concession and likely makes your debt number $8.5m or so low ($16.868m x 6 months).
You are quite right. In reality, as it was announced at the AGM, that cash balance totalling $16.868m only materialised in the last week of the financial year as a series of due accounts were paid up. That means the debt level over that last P3 period (see my post 5044) will be significantly higher than the figure I calculated. And for a given interest payment that means that the actual interest rate being paid is lower than the interest rate I calculate.
However, if one investor had not posed an AGM question to the directors regarding their large cash balance at EOFY2020, we shareholders would be none the wiser that it had all come onto the books within days of those books being drawn up. It would certainly be unusual for any company to disclose cashflow movement week by week. There would be no way to know, from just looking at the end of year accounts of another company, that a last minute cash injection had not happened. So I would go with your indicative interest rate figure of:
($683k + $923k) / $39.145m = 4.1%
This is for consistency of calculation over different periods, even though we know from extra information in this particular case, that this interest rate result will be too high. Perhaps we have different expectations. But I think a 4.1% interest rate charge for a cyclical rural company with not insignificant debt is actually a good figure.
Quote:
Originally Posted by
Somebody Else
You could always try and reverse engineer the number by breaking it into components though this can be muddied up if PGW use interest rate swaps or other hedging tools. The facility looks to have a line fee component and an interest component, which will be a base rate + a margin. The line fee should be easy as it applies to the whole facility, so $683k / ($50m + $70m) = 0.57%.
Yes that makes sense. Whether the money is drawn on or not at any particular moment, PGW can expect to pay for having that facility available, $50m for short term and $70m for long term (AR2020 p54).
Quote:
Originally Posted by
Somebody Else
The interest rate will be harder as it only applies to drawn funds, which is why you need the average funds drawn number you tried to calculate. $923k of interest over say $45m of average borrowings = 2.2%. Might be a little high but the base rate will be one of the BKBM numbers (grab whichever one you like from the Reserve Bank, but for the PGW financial year will likely average 1%) meaning the margin is maybe 1.2%. That is probably reasonable so maybe $45m is the right number.
If I stick to my figure of $39.145m of average borrowings (which we have already discussed is very likely too low) I get a borrowing rate of:
$923k / $39.145m = 2.36%
Add that to the 0.57% 'facility fee' calculated above and I get an overall interest rate of:
2.36% + 0.57% = 2.93%
BKBM stands for 'Bank Bill Benchmark Rate' as set by the Reserve bank. It is probably different for 'on call' or 'three monthly', but we can choose 1% if you like as a good guess.
So my margin calculation is:
2.36% - 1% = 1.36%
You say 1.2% as a margin sounds reasonable. I say 1.36% as a margin sounds reasonable (even if I have doubtful ability to make such a judgement). Actually I would consider the interest margin to be the difference between a bank reference rate and the sum of the interest rate charged and the facility fee rate:
(2.36%+0.57%) - 1% = 1.93%
(Mind you I am thinking from a customer perspective not a banking perspective, so I may not know what I am talking about here.)
Quote:
Originally Posted by
Somebody Else
$1.6m of borrowing cost over $45m = 3.6%. That's higher than your residential mortgage rate, but they have line fees on undrawn facility headroom that a residential mortgage holder doesn't have.
2.2% - 0.57% = 1.6% ?
Sorry getting a bit confused on your last line. The 0.57% is calculated from the $683k facility fees is it not? Why are you subtracting that from the 2.2% derived from the $923k interest charge? Or have a got that wrong? Lost in the home stretch!
SNOOPY