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  1. #16
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    Default TRAHB Bond Covenant 1: Interest Cover

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 09-09-2017 at 11:16 AM.
    To be free or not to be free. That is the cash-flow question....

  2. #17
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    Default TRAHB Bond Covenant 2: Leverage Ratio

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 09-09-2017 at 11:17 AM.
    To be free or not to be free. That is the cash-flow question....

  3. #18
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    Default TRAHB Bond Covenant 3: Equity Ratio

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 09-09-2017 at 11:17 AM.
    To be free or not to be free. That is the cash-flow question....

  4. #19
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    Default TRAHB Bond Covenant 4: Actual Capital Expenditure vs Base Case

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 09-09-2017 at 11:32 AM.
    To be free or not to be free. That is the cash-flow question....

  5. #20
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    Default TRAHB Bond Covenant 2: Leverage Ratio (further discussion)

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 09-09-2017 at 12:32 PM.
    To be free or not to be free. That is the cash-flow question....

  6. #21
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    With respect to the share placement that Turners have now completed in the last few days I have checked the PDS of the bond issue and it says

    "the terms of Conversion will be adjusted to ensure Bondholders arenot adversely impacted by any dilution."
    For clarity, nothing I say is advice....

  7. #22
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    Quote Originally Posted by peat View Post
    With respect to the share placement that Turners have now completed in the last few days I have checked the PDS of the bond issue and it says

    "the terms of Conversion will be adjusted to ensure Bondholders arenot adversely impacted by any dilution."
    Thanks Peat ...so the $3.75/$3.95 should be less .....if it comes into play as the minimum
    “In a roaring bull market, knowledge is superfluous and experience is a handicap.”

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  8. #23
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    Quote Originally Posted by winner69 View Post
    Thanks Peat ...so the $3.75/$3.95 should be less .....if it comes into play as the minimum
    IIRC the bond conversion terms are 'market price less 5%'. Issuing more shares theoretically lowers the market price per share. But the discount remains at 5% from the new market price. So I don't believe the bondholders will be disadvantaged by the latest placement and SPP. Consequently I don't expect any change to the conversion terms of the bonds.

    SNOOPY
    To be free or not to be free. That is the cash-flow question....

  9. #24
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    Quote Originally Posted by Snoopy View Post
    IIRC the bond conversion terms are 'market price less 5%'. Issuing more shares theoretically lowers the market price per share. But the discount remains at 5% from the new market price. So I don't believe the bondholders will be disadvantaged by the latest placement and SPP. Consequently I don't expect any change to the conversion terms of the bonds.

    SNOOPY
    At anything above $3.95 bondholders stand to have their shares issued at a bigger than 5% discount, i.e. the lower of $3.75 or a 5% discount to VWAP.
    The chances of the shares being higher than $3.95 at the time of conversion have been diluted by this issue so bondholders have indeed been disadvantaged BUT I do not expect the company directors to see it that way. They really are not interested in looking after the interests of small bondholders and shareholders. Anything that funds their growth ambitions and favor larger shareholders in friendly rights issues, no problem for them though. It's looking likely I will simply ask for my cash back at the conclusion of the bond as its quite clear that a $25m capital raise, (which is what a bond conversion ostensibly is) affects the SP going by the SP performance this week. What I am suggesting to be clear is a 5% share conversion discount is insufficient on an illiquid thinly traded share, (market evidence this week shows that a 10% discount is required to raise new capital) with a short track record of profitability. I regret investing in the bonds but will hold to maturity rather than taking a loss now...unless someone wants to offer me $1.05 per bond including accrued interest for the Sept quarter, please PM me.
    Last edited by Beagle; 16-09-2017 at 10:56 AM.

  10. #25
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    Quote Originally Posted by Beagle View Post
    At anything above $3.95 bondholders stand to have their shares issued at a bigger than 5% discount, i.e. the lower of $3.75 or a 5% discount to VWAP.
    The chances of the shares being higher than $3.95 at the time of conversion have been diluted by this issue so bondholders have indeed been disadvantaged BUT I do not expect the company directors to see it that way.
    I managed to digest my Share Purchase Plan prospectus yesterday. The entitlement for bondholders is determined by taking the dollar value of the bonds and dividing that by $3.75, thus generating an 'equivalent shareholding' for SPP purchase purposes. As you suspected Beagle, this $3.75 price is unchanged from the bond prospectus dated 22nd August 2016. Except in the bond prospectus, the conversion terms for next year stipulate a $3.75 maximum conversion price, and a lesser price should the TRA share price be below $3.90 at conversion date. Clearly issuing a whole lot more shares at $3.02 today means it is less likely that the share price will be above $3.90 in a year's time. So I think bondholders have lost out here, despite this 'out' below, quoted from p17 of the Bond Prospectus.

    "Turners may issue further Shares from time to time before the Maturity Date of the Bonds, which may negatively affect the Share price. This may reduce the value Bondholders receive on Conversion (but subject to the minimum provided by the discounted approach)."

    "The minimum provided by the discounted approach" refers to the minimum 5% discount on new shares issue at maturity that will increase if the share price goes above $3.95 by conversion date. But bondholders would get this discount whether the SPP and placement happened or not. So I think it would be clear to an independent observer that bondholders will be disadvantaged at conversion time, even if they (apparently) have an offsetting opportunity to buy some new shares at $3.02 today, as 'compensation'. I say 'apparently' because my offer to take part in the SPP came because I am also a shareholder. No mention was made of the fact that I am a bondholder as well.

    Did any bondholder who is not a shareholder get the SPP offer document?

    For what it is worth I have applied for my maximum allowance. I am not sure how many I will get and I am not sure if $3.02 is really a bargain. It will only be a bargain if growth goes according to plan, and that is the risk that all shareholders take.

    SNOOPY
    Last edited by Snoopy; 23-09-2017 at 11:28 AM.
    To be free or not to be free. That is the cash-flow question....

  11. #26
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    Quote Originally Posted by Snoopy View Post
    I

    Did any bondholder who is not a shareholder get the SPP offer document?

    e.

    SNOOPY
    Yes, my partner who is only a bondholder got a SPP offer document. She has applied for shares at $3.02.

  12. #27
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    I've made an official inquiry on whether there will be an adjustment to the 'strike price'
    For clarity, nothing I say is advice....

  13. #28
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    Thanks Snoopy and peat. Yes I got an offer to apply for shares even though I am just a dissatisfied bondholder. The companies veracious appetite for new capital concerns me as does the depth of the discount required to get it. The 5% discount bondholders will "enjoy" if they choose to convert to shares next year does not appear to be sufficient if they're having to resort to issuing new capital at a 10% discount now. Those who do convert their bonds to shares next September are playing Russian roulette if their goal is to sell these very illiquid shares and try and work the 5% discount to their advantage.
    I feel the same way about the present apparent 5% discount ($3.20 current SP compared to $3.02 SPP) especially while we play flip the coin with which way Winston Peter's will jump. I think a left wing coalition with him the Greens and Labour could seriously undermine business confidence going forward. My sense is TRA have enough of my capital already and I am underwhelmed with how I am being treated as a bondholder in regard to conversion terms, the EPS growth and the discount on possible conversion of bonds is with hindsight, materially insufficient. I will decide at the time but its looking almost certain I will simply ask for my money back at the end of the convertible note term. No interest from me in the SPP for the shares at $3.02. I see far better value elsewhere.

    Colonial Motors are trading at a material PE discount and have an outstanding history of providing solid returns to shareholders over their 99 year history. I guess I just prefer strong stable companies that have been around for a really long time and weathered all sorts of financial conditions including the GFC. There's something about that sort of long history and solidity that really appeals to me.
    Last edited by Beagle; 27-09-2017 at 10:24 AM.

  14. #29
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    The official answer is that there is no adjustment to the $3.75 figure.
    Colleagues consider this immaterial, I am not sure.

    But a strict reading of the PDS allows for it

    I had read this :
    Turners may issue further Shares from time to time before the Maturity Date of the Bonds, which may negatively affect the Share price. This may reduce the value Bondholders receive on Conversion (but subject to the minimum provided by the discounted approach). As described below, in the case of an issue of Shares to Shareholders, the terms of Conversion will be adjusted to ensure Bondholders are not adversely impacted by any dilution.


    But, there is also this

    If, prior to the Maturity Date, Turners issues any Shares or other instruments to its Shareholders byway of capitalisation of profits, reserves or otherwise (other than pursuant to a dividend reinvestmentplan or share purchase plan) the terms of Conversion will be adjusted to ensure Bondholders are notadversely impacted by any dilution. Turners and the Supervisor shall agree on the adjustment and ifthey are unable to agree, the Supervisor will appoint an independent adviser, approved by Turners, tomake the determination.
    For clarity, nothing I say is advice....

  15. #30
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    Quote Originally Posted by peat View Post
    The official answer is that there is no adjustment to the $3.75 figure.
    Colleagues consider this immaterial, I am not sure.

    But a strict reading of the PDS allows for it

    I had read this :
    Turners may issue further Shares from time to time before the Maturity Date of the Bonds, which may negatively affect the Share price. This may reduce the value Bondholders receive on Conversion (but subject to the minimum provided by the discounted approach). As described below, in the case of an issue of Shares to Shareholders, the terms of Conversion will be adjusted to ensure Bondholders are not adversely impacted by any dilution.


    But, there is also this

    If, prior to the Maturity Date, Turners issues any Shares or other instruments to its Shareholders byway of capitalisation of profits, reserves or otherwise (other than pursuant to a dividend reinvestmentplan or share purchase plan) the terms of Conversion will be adjusted to ensure Bondholders are notadversely impacted by any dilution. Turners and the Supervisor shall agree on the adjustment and ifthey are unable to agree, the Supervisor will appoint an independent adviser, approved by Turners, tomake the determination.

    Thanks Peat

    First paragraph says maybe ....but second says NO (as a SPP)

    Immaterial - dilution was about 10 million shares on top of 74 million shares - quite a lot I reckon. The $3.75 would be reduced to about $3.26 (my calc) in theory to keep things fair (?)

    If second paragraph is the gospel according to Turners then have we been 'screwed'?
    “In a roaring bull market, knowledge is superfluous and experience is a handicap.”

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