TRAHB Bond Covenant 1: Interest Cover
Quote:
Originally Posted by
Snoopy
So let's get going.
The standard we are looking for here ( p13 bond prospectus ) is:
1/ EBITDA/I > 1.25 ( Bank Borrower Finance Companies: Dorchester Finance Limited and Oxford Finance)
2/ EBITDA/I > 3.00 ( Non-finance Covenant Group )
FY2016 |
EBIT |
DA |
EBITDA |
I |
EBITDA/I |
Pass Test? |
Finance Segment |
$14.619m |
$0.173m |
$14.792m |
$4.770m |
3.1 |
>1.25, pass |
All Other Segments |
$18.368m |
$1.971m |
$20.339m |
$6.666m |
2.8 |
<3.00, fail |
Total |
$32.987m |
$2.144m |
$35.131m |
$11.436m |
|
|
FY2017 |
EBIT |
DA |
EBITDA |
I |
EBITDA/I |
Pass Test? |
Finance Segment |
$13.744m |
$0.329m |
$14.073m |
$3.719m |
3.8 |
>1.25, pass |
All Other Segments |
$22.237m |
$2.534m |
$24.771m |
$7.361m |
3.3 |
>3.00, pass |
Total |
$35.981m |
$2.863m |
$38.844m |
$11.350m |
|
|
Eagle eyed bond holders will see that the bonds were issued in August 2016, while FY2016 finished in March 2016. Technically you can't fail a test before the bond is issued. But these TNRHB bonds effectively replaced the TNRHA bonds which had similar covenants. So I think the FY2016 figures are useful for comparative purposes. The 'close fail' of the 'All Other Segments' statistic over FY2016 could have been fixed by allocating more head office costs to the finance division, as an example. Alternatively, because these covenants are subject to renegotiation, TNR could have gained a temporary exemption from their banking syndicate. In any event, nothing was publicised on the subject of TNR/TRA breaking their interest cover covenant at the time. So it must have all worked out
SNOOPY
TRAHB Bond Covenant 2: Leverage Ratio
Quote:
Originally Posted by
Snoopy
So let's get going.
p13 of the bond prospectus lists the 'leverage ratio' as being the ratio of:
Gross Debt / EBITDA < 2.5
but only in relation to the 'Non Finance Covenant Group'. There appears to be no leverage ratio requirement on the 'Finance' group side of the business. This strikes me as being very odd. I would have thought that the leverage ratio of the finance side of the business would be far more important than the non-finance side. But I will go with it.
Please note that the segmented Gross Debt and EBITDA figures have been adjusted to allow for an appropriate proportion of head office costs.
FY2016 |
Gross Debt {A} |
EBITDA {B} |
'Gross Debt'/EBITDA {A}/{B} |
Pass Test? |
Finance Segment |
$119.107m |
$14.792m |
8.05 |
Test not required |
All Other Segments |
$232.491m-$119.107m=$113.384m |
$20.339m |
5.57 |
>2.50, fail |
Total |
$232.491m |
$35.131m |
|
|
|
FY2017 |
Gross Debt {A} |
EBITDA {B} |
'Gross Debt'/EBITDA {A}/{B} |
Pass Test? |
Finance Segment |
$158.647m |
$14.073m |
11.3 |
Test not required |
All Other Segments |
$384.917m-$158.647m=$226.270m |
$24.771m |
9.13 |
>2.50, fail |
Total |
$384.917m |
$35.131m |
|
|
|
Generally test results as far out as these two, would suggest I have made a mistake. However, as yet I can't find it. The only thing that is indisputable is that comparing 'like with like' statistics, TRA had a lot more leverage on the balance sheet at EOFY2017 when compared to a year earlier.
SNOOPY
TRAHB Bond Covenant 3: Equity Ratio
Quote:
Originally Posted by
Snoopy
So let's get going.
The 'equity ratio' is defined as: (Net worth) / (Total assets)
I am going to assume that 'Net Worth' is equivalent to 'Divisional Shareholder Funds' in this instance.
Once again this statistic is to be applied to the 'Non-Finance Covenant Group'. One again I find this very odd. I would have thought the equity ratio was far more important to the finance side of the business. Further muddying the water is that the standard listed is a minimum of 20% that should be applied to 'Dorchester Finance' and 'Oxford Finance', both of which definitely are finance arms! I don't think this bit of the bond prospectus, as written, even makes sense as it is obviously contradictory. But I shall 'battle on' and see what numbers come out.
Please note that the 'Shareholders Funds' figures have been adjusted to allow for an appropriate proportion of head office costs.
FY2016 |
Net Worth (Shareholders Funds) {A} |
Total Assets {B} |
'Net Worth'/'Total Assets' {A}/{B} |
Pass Test? |
Finance Segment |
$63.869m |
$182.975m |
34.9% |
>20%, Pass |
All Other Segments |
$129.612m-$63.869m=$65.943m |
$362.303m-$182.975m=$179.328m |
36.8% |
>20%, Pass |
Total |
$129.612m |
$362.303m |
|
|
|
FY2017 |
Net Worth (Shareholders Funds) {A} |
Total Assets {B} |
'Net Worth'/'Total Assets' {A}/{B} |
Pass Test? |
Finance Segment |
$54.431m |
$213.078m |
25.5% |
>20%, Pass |
All Other Segments |
$171.716m-$54.431m=$117.285m |
$556.633m-$213.078m=$343.555m |
34.1% |
>20%, Pass |
Total |
$171.716m |
$556.633m |
|
|
|
Conclusion? The finance arm is a lot more leveraged than last year. But it is still well within the bounds determined by the banks. So there is nothing for bondholders to worry about here.
SNOOPY
TRAHB Bond Covenant 4: Actual Capital Expenditure vs Base Case
Quote:
Originally Posted by
Snoopy
So let's get going.
"In each year , in relation to the 'Non-Finance Covenant Group', capital expenditure is to be no more than 110% of the base case as set out in the annual budget provided to the bank."
In essence this looks like a 'no surprises' policy. This is almost impossible to verify though, as we mere shareholders/bondholders have not been briefed on the TRA annual budget. I imagine that if TRA wanted to spend more than their 110% of budgeted capex, a meeting with the bank manager outlining in detail their revised business plan could be negotiated.
On p63 of AR2016 we learn:
"The Group does not currently have any approved capital expenditure commitments at reporting date (2015: nil)."
According to my maths, 110% of 0 is 0. So it follows that Turners must have sought bank approval for the acquisition of 'Buy Right Cars' and 'Autosure' during FY2017. That is hardly surprising, and brings to an end my analysis of this covenant.
SNOOPY
TRAHB Bond Covenant 2: Leverage Ratio (further discussion)
Quote:
Originally Posted by
Snoopy
p13 of the bond prospectus lists the 'leverage ratio' as being the ratio of:
Gross Debt / EBITDA < 2.5
but only in relation to the 'Non Finance Covenant Group'. There appears to be no leverage ratio requirement on the 'Finance' group side of the business. This strikes me as being very odd. I would have thought that the leverage ratio of the finance side of the business would be far more important than the non-finance side. But I will go with it.
Please note that the segmented Gross Debt and EBITDA figures have been adjusted to allow for an appropriate proportion of head office costs.
FY2016 |
Gross Debt {A} |
EBITDA {B} |
'Gross Debt'/EBITDA {A}/{B} |
Pass Test? |
Finance Segment |
$119.107m |
$14.792m |
8.05 |
Test not required |
All Other Segments |
$232.491m-$119.107m=$113.384m |
$20.339m |
5.57 |
>2.50, fail |
Total |
$232.491m |
$35.131m |
|
|
|
FY2017 |
Gross Debt {A} |
EBITDA {B} |
'Gross Debt'/EBITDA {A}/{B} |
Pass Test? |
Finance Segment |
$158.647m |
$14.073m |
11.3 |
Test not required |
All Other Segments |
$384.917m-$158.647m=$226.270m |
$24.771m |
9.13 |
>2.50, fail |
Total |
$384.917m |
$35.131m |
|
|
|
Generally test results as far out as these two, would suggest I have made a mistake. However, as yet I can't find it. The only thing that is indisputable is that comparing 'like with like' statistics, TRA had a lot more leverage on the balance sheet at EOFY2017 when compared to a year earlier.
I guess if anyone is still reading this thread, they might think that I am travelling down a black hole of mindless detail. But actually these covenants have a bearing on whether we bondholders will get our investment capital back at all, should something go 'slightly wrong'. You can bet that if the bank doesn't get all of their capital back in times of distress, then we bondholders will get nothing. So as far as our bond investment is concerned, this discussion is a life or death exercise.
I am going to re-run some of these numbers based on the actual numbers listed in the segmented analysis, section 6, of AR2017. This removes all my 'reallocation of costs' assumptions that I have used in this analysis so far. To allow the best possible chance of 'covenant success' we want the numerator, in this case the 'Gross Debt' to be as low as possible and the denominator, in this case EBITDA, to be as high as possible. The 'Gross Debt' can be found from the divisional liabilities and can be summed up as follows:
Non Finance Group |
Liabilities FY2017 |
Liabilities FY2016 |
Automotive Retail |
$103.821m |
$62.625m |
Collection Services NZ |
$9.246m |
$13.991m |
Collection Services Aus |
$0.890m |
$1.346m |
Insurance |
$66.503m |
$27.110m |
Corporate and Other |
$79.169m |
$50.668m |
'Gross Debt' Total |
$259.629m |
$155.740m |
The average gross debt across the financial year is therefore:
$259.629m + $155.740m = $207.685m
Non Finance Group |
EBT FY2017 |
DA FY2017 |
I FY2017 |
EBITDA FY2017 |
Automotive Retail |
$15.397m |
($2.286m) |
Collection Services NZ |
$6.006m |
($0.092m) |
Collection Services Aus |
$0.239m |
$0m |
Insurance |
$0.928m |
($0.091m) |
Corporate and Other |
($8.095m) |
($0.065m) |
Total |
$14.475m |
($2.534m) |
($11.350m) |
$28.359m |
Note that i have maximised EBITDA by assuming that the whole company interest bill is paid by the 'Non Finance Group', which IMO is an assumption unlikely to be true.
Now we have the numerator and denominator, we can work out the fraction:
(Gross Debt) / EBITDA = $207.685m / $28.359m = 7.3 > 2.5 (fail)
Because Autosure was not bought until the last day of the financial year, we could assume that the gross debt increase as a result of that purchase was unrepresentative. Assuming gross debt for insurance did not change during the year gives us a lower average gross debt figure of $187.988m.
(Gross Debt) / EBITDA = $187.988m / $28.359m = 6.6 > 2.5 (fail)
Try as I might, and making all sorts of favourable assumptions, I cannot get anywhere near a pass mark on this covenant. I am forced to conclude that our bond capital is at significant risk should trading events not pan out as planned.
SNOOPY