TRA - Turners Automotive Group [previously TNR - Turners Limited]

[Snoopy]

From p34 of the bond prospectus, the TNR banking covenants:

1/ Interest Cover Ratio:

EBITDA/ Total Interest > 3.5

2/ Leverage Ratio:

Gross Debt / EBITDA < 3.5 (31st March 2015).

Time to put the position of TNR under scrutiny at balance date.

EBITDA/ Total Interest = [$18.264m+$1.504m+$7.381m] / $7.381m = 3.68 > 3.5 (=> O.K.)

Gross Debt / EBITDA = $156.995m / $27.149m = 5.78 > 3.5 ( => fail test )

Granted all of this is historical. But it does appear that on balance date (31-03-2015), TNR was in breach of its banking covenants (the Gross Debt/ EBITDA figure)! Furthermore the first covenant was only rescued because of a write up in the share value of TUA shares because of the takeover offer! This is desperate stuff. Those directors at the AGM deserve a grilling!

SNOOPY

[Snoopy]

Gross Debt / EBITDA = $156.995m / $27.149m = 5.78 > 3.5 ( => fail test )

I have been thinking about this 'failed test'. The old Turners Auctions was brought fully in house at the end of November 2014. That means there were only four months of operating performance in the TNR results. Yet the debt on the books refers would be the same if TNR had bought TUA right at the start of the year. So I should probably add in an allowance of an estimate of EBITDA over the period that TNR was not the 100% owner.

Likewise I should add in an estimate of EBITDA for the three months of 'Oxford Finance' earnings before that company joined the TNR fold. This is harder because separate finance company earnings are not broken down amongst the different finance subsidiaries in the accounts. However, we do know that the Levin Head Office of 'Oxford Finance' has 27 Employees and the book size at EOFY20165 was $55m up 15% on FY14 (AGM presentation slide 17). This compares with 24 employees in the division named 'Dorchester Finance' (Auckland head office).

SNOOPY

[black knat]

I have been thinking about this 'failed test'. The old Turners Auctions was brought fully in house at the end of November 2014. That means there were only four months of operating performance in the TNR results. Yet the debt on the books refers would be the same if TNR had bought TUA right at the start of the year. So I should probably add in an allowance of an estimate of EBITDA over the period that TNR was not the 100% owner.

Gee... that is a rather large error Snoop.

I must confess i can never understand the point to your detailed comparisons of TNR to a bank. It is not a bank and those that choose to invest do so, i suggest, with that understanding.

[Snow Leopard]

Gee... that is a rather large error Snoop.

I must confess i can never understand the point to your detailed comparisons of TNR to a bank. It is not a bank and those that choose to invest do so, i suggest, with that understanding.

The business of a bank is what?
The business of Turners is what?

When you work out the similarity then you will realise the usefulness of such comparisons.

Best Wishes
Paper Tiger

[Snoopy]

I must confess i can never understand the point to your detailed comparisons of TNR to a bank. It is not a bank and those that choose to invest do so, i suggest, with that understanding.

As PT has suggested, both TNR and banks are in the primary business of lending money.

Granted since November 2004, TNR now own outright the former TUA business. In an ironic twist, TUA themselves had an 'add on' finance division to add value to the primary activity of auctioning/selling cars. Now TNR has an 'add on' business of selling cars to support their primary business of lending money! I may have to extract the car selling part of TNR to get a fair 'finance company' comparison in the future. But for FY2015, TNR only had four months of owning TUA outright. So it was very much 'mainly' a finance company for FY2015 (Ended 31st March 2015).

You are correct in that I am interested in comparing TNR as a finance company to the likes of say Heartland (the bank that contracts out all its conventional banking activity to other banks) because they both operate in the NZ market and focus on consumer and small business lending. However, there is a second exercise going on here that has nothing to do with any inter company comparison.

Turners (TNR) have their own banking syndicate that supports their activities. TNR have their own covenants to keep their own bankers happy. These were listed in the TNR (formerly Dorchester) bond prosoectus at the time of the TUA takeover. They are not listed in the TNR annual report for the scrutiny of shareholders. However, I do believe it is of interest to TNR shareholders to see how well TNR are tracking with their own banking arrangments.

Those reading this thread casually may not have made this distinction. And this may be my fault for taking one perspective, then swinging immediately to another. So I thank you Black Knat for bringing attention to this matter.

SNOOPY

[Snoopy]

Gee... that is a rather large error Snoop.

The problem with both of TNR's own banking covenants is that the EBITDA figure should be higher. So I am going to tabulate my calculation for TNRs EBITDA again in detail, but this time also adding some more bits and pieces (Workings A and B), so that you can see if I have missed anything.

	Amount	Reference
Net Operating Profit (EBT)	$18.264m	AR2015 p30
add Depn & Amtn Expense	$1.504m	AR2015 p30
add Interest Expense	$7.381m	AR2015 p30
add TUA pre takeover adjustment	$8.336m	(Working A, below)
add Oxford Finance pre takeover adjustment	$0.786m	(Working B, below)
Total TNR EBITDA	$36.271m

Leverage ratio (being the ratio of Gross Debt of $156.995m (p64 AR2015) to EBITDA (calculated above) is:

$156.995m / $36.271m = 4.32 > 3.5 times allowed (p34 Simplified disclosure prospectus for Dorchester Bonds).

Try as I might, I can't get TNR's EBITDA high enough to satisfy Turner's own bankers!

SNOOPY

[Snoopy]

add Oxford Finance pre takeover adjustment

$0.786m

(Working B, below)

The following is an estimate due to there being no specific breakdown of the profits of the legacy 'Dorchester Finance' and 'Oxford Finance' purcahsed during the year FY2015.

Finance business consists of Dorchester Finance based in Auckland (24 employees) and Oxford Finance based in Levin (27 employees). Assume all employeess are equally productive. Segment result (AR2015 p46) shows total operating profit for the Finance division in FY2015 of: $5.156m

This represents teh total profit from 'Dorchester Finance' and nine out of twelve months of 'Oxford Finance'. So we can work out the monthly contribution 'a' of each employee using the following equation:

( 9/12) 27 x a + 24 x a = $5.156m => a = $0.1165m /month

Total operating profit if Oxford finance had been owned for the entire year would therefore be:

27 x $0.1165m + 24 x $0.1165m = $5.942m

This is an increase of: $5.942m - $5.156m = $0.786m

Over the result declared in TNR's annual report.

SNOOPY

[Snoopy]

add TUA pre takeover adjustment

$8.336m

(Working A, below)

The TUA year ended on 31st December 2014, where as the TNR year ends of 31st March 2015. The Grant Samuel report on the takeover offer for TUA had projections for the full year earnings of TUA as an independent entity (p9 Grant Samuel Report). From this I have been able to estimate the EBITDA for TUA over the year ended 31st December 2014 as follows:

EBITDA = Net Operating Profit + Interest paid + Depreciation and Amortization
= $8.8m + $2.0m (*) +$1.7m = $12.5m

(*) The $2.0m I have estimated here is slighly higher than the $1.928m paid in the previous year because of the borrowing needed to pay the special dividend to TUA shareholders.

Assuming earnings are constant per month over the year

Monthly EBITDA = $12.5m /12 = $1.042m /month

8 months x $1.042m /month = $8.336m

SNOOPY

[percy]

The business of a bank is what?
The business of Turners is what?

When you work out the similarity then you will realise the usefulness of such comparisons.

Best Wishes
Paper Tiger

The main difference between a bank [HNZ] and a finance company [TNR] is that a bank is more regulated than a finance company.
Banks in NZ must report quarterly to The Reserve Bank of NZ,and be registered.This adds a level of greater security to depositors.Therefore,banks can source their funds cheaper than a finance company.
So this must/should be taken into account when comparing a bank to a finance company.
It is up to each of us to decide for our selves what allowance we make.Risk verses reward.
Both TNR and HNZ appear to me to be very well managed businesses.

[blackcap]

Granted all of this is historical. But it does appear that on balance date (31-03-2015), TNR was in breach of its banking covenants (the Gross Debt/ EBITDA figure)!
SNOOPY

What are the implications for TNR shareholders or TNR itself if it is in breach of its banking covenants? Does the/a lender have to lay a complaint and if upheld what are the penalties to TNR?
Are TNR really in breach because if they were their bankers would surely be making some mutterings?
Interested in your thoughts?
( I do realise that being in breach is more scary for bond/debt holders than shareholders and there is the constant "tension" between debt and equity)