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

[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?

As you surmise blackcap, there have been no public mutterings from DPC's bankers. The figures I am talking about are six months old now, so there has been plenty of time for mutterings to emerge. Furthermore the debt funded expansion binge of TNR has continued further, with the acquisitions of Greenwich Insurance and Southern Finance. So we can safely assume I must be wrong about those banking covenants being broken :-).

The question is, where am I wrong? There is wriggle room in some of the assumptions I have made. But I still maintain that my analysis is conceptually correct. My feeling is that if TNR have not broken their banking covenants, they must be sailing close to the wind.

( 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)

There are two 'solutions' if/when TNR's Gross Debt / EBITDA ratio becomes too high:

1/ Reduce debt
2/ Increase EBITDA

1/ means raise more equity from shareholders. So IMO what we have here is a situation that is potentially rather more risky for shareholders than bondholders.

SNOOPY

[black knat]

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

Glib answer as seems to be customary from you PT ... but not helpful. if you have something useful to contribute why not say it? I note Percy has reiterated my point above.

[Snoopy]

My feeling is that if TNR have not broken their banking covenants, they must be sailing close to the wind.

There are two 'solutions' if/when TNR's Gross Debt / EBITDA ratio becomes too high:

1/ Reduce debt
2/ Increase EBITDA

1/ means raise more equity from shareholders. So IMO what we have here is a situation that is potentially rather more risky for shareholders than bondholders.

I want to put a couple of stakes in the ground here so everyone knows where I am coming from.

I am 'mainly' a bondholder, although also a very small shareholder. I wanted to get a few shares so that I was on the mailing list for the annual report and in a position to participate in any shareholder capital raising if any. I also think that Paul Byrnes and his managment team have done an excellent job in reconstituting what was DPC from a difficult post GFC position. I am not agitating for any change to management, nor a change in the company direction.

However, I think the rhetoric from management has become such that some shareholders do not understand the risk inherent in their TNR investment. For example the AGM speeches are on the lines of TNR being 'well capitalised'. But what does this mean? I guess it means that they are trading within their banking covenants. But I also notice that mention was made of possibility of raising more equity shoudl a suitable acquisition appear on the horizon. Then we hear that Paul Byrnes is spending 50% of his time evaluating new acquisitions. What I am suggesting to shareholders is that there are some dots to join up here. IMO

1/ Another substantial acquisition is almost certain at some point.
2/ That acquisition will require either a substantial cash issue from existing shareholders or a significant placement to new investors. Either will significantly dilute any current shareholding.

TNR are IMO, despite what managment are telling shareholders to their faces, short of capital.

SNOOPY

[Snoopy]

Glib answer as seems to be customary from you PT ... but not helpful. if you have something useful to contribute why not say it? I note Percy has reiterated my point above.

A Tiger is a highly secretive creature from the Sumatran Jungle. Don't expect too much in your face stuff from such a beast. This is not how they work. When you hunt Tiger you have to work on evidence of a sign and a sniff. If you can't follow the scent, try a bigger nose.

SNOOPY

[Snoopy]

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

2/ Leverage Ratio:

Gross Debt / EBITDA < (Requirement). Requirement varies as below

Period	100% Turners (TUA) Takeover	< 80% Turners (TUA) Holding
Issue date to 31/12/2014	3.75	2.00
01/01/2015 to 31/03/2015	3.50	2.00
01/04/2015 to 30/06/2015	3.00	2.00
01/07/2015 to 30/09/2015	2.75	2.00
01/10/2015 to 30/03/2016	2.50	2.00
01/04/2016 to 30/06/2016	2.25	2.00
01/07/2016 to Maturity	2.00	2.00

The first column is the prevailing bank requirement. The second column is included as a comparison out of interest. At the time of the bond prospectus it was uncertain what holding percentage the then 'Dorchester Pacific' (now TNR) would secure of TUA, with their Turner's Auctions takeover. Thus alternative scenarios, based on the percentage of TUA shares that might be acquired were created in the prospectus. It is clear from the table that if TUA acceptances had been less than 80%, then the subsequent borrowing capacity of the then DPC would have been much more constrained. The fact that 100% of TUA shares were ultimately secured has opened the way for a debt fuelled expansion binge by TNR.

You can see from the table that the debt filled expansion party has to be brought under control such that by bond maturity date we are back to the same covenant level as before the full TUA acquisition.

IMO

1/ Another substantial acquisition is almost certain at some point.
2/ That acquisition will require either a substantial cash issue from existing shareholders or a significant placement to new investors. Either will significantly dilute any current shareholding.

TNR are IMO, despite what managment are telling shareholders to their faces, short of capital.

Drawing some more dots across two of my posts

The tightening bank requirements laid out in the quoted table, shows the growth required by the banks for TNR to retain the banks confidence. One way of interpreting that table is that the return on invested capital must increase by:

3.75/2.00 = 87.5% over just two years!

This is a big ask. If anyone is up to that task it is Paul Byrnes and his team. However if they fall short of this lofty target, they cannot sit back basking in partial success. They will have to raise more capital from shareholders.

It is really good to hear about all these new acquistions being EPS positive. But are they EPS positive enough? EPS increasing is not just desirable for TNR's future, it is critical!

This is quite an unusual position for the banks to adopt from my POV. Rather than being conservative, the banks are driving growth hard. The revised EBITDA to Gross Debt targets mean that growth is now essential for TNR to survive. There is no turning back. There is serious risk for shareholders with such a strategy though. This is why I am happy to be 'mainly' a bondholder at this point in TNR's development. If growth looks like stumbling from the required 40% per annum goal, I'll be cashing out my bonds in a year's time.

SNOOPY

[Snoopy]

The tightening bank requirements laid out in the quoted table, shows the growth required by the banks for TNR to retain the banks confidence. One way of interpreting that table is that the return on invested capital must increase by:

3.75/2.00 = 87.5% over just two years!

This is a big ask. If anyone is up to that task it is Paul Byrnes and his team. However if they fall short of this lofty target, they cannot sit back basking in partial success. They will have to raise more capital from shareholders.

It is really good to hear about all these new acquistions being EPS positive. But are they EPS positive enough? EPS increasing is not just desirable for TNR's future, it is critical!

I seem to have done quite a bit of waffling on this thread over the last few days. So time to nail down some targets for future reference.

Required increase in EBITDA, as dictated by the banking syndicate supporting TNR, is 87.5% over two years. If we express the annual growth rate required as 'g', then:

g^2= 1.87 => g=1.37

So an annual EBITDA growth rate of 37.5% is required. This equates to $49.7m for FY2016 and $68.1m for FY2017. Expect the TNR share price to be punished if these growth expectations are not met!

Principal assumptions are as follows:

1/ Current EBITDA earnings are just holding at a level the banks are happy with, but on the cusp of breaching bank covenants.
2/ The one off increase in TUA shares that TNR booked to profit in FY2015 of $7.058m is part of 'normal' profit for bank covenant purposes (increases in asset values on the balance sheet are real gains,no matter the source). If this one off profit figure is taken out, then the EBITDA increase from FY2015 to FY2016 is 71%
3/ The earnings performance of TUA during the period 01-01-2014 to 31-12-2014 was in line with management forecasts made in August 2014.
4/ Any new acquisitions must earn a profit 37.5% higher than overall group EBITDA margin from the previous year.

Paul Byrnes has a great management team together. But this required 37.5% annual growth rate will test even the best management teams. Are they up to the challenge? If not there should be plenty of opportunity to buy more DPC shares at around 25c from a future capital raising, that would be required to 'fix the books'.

SNOOPY

[Snoopy]

Why is the liquidity buffer ratio important? It doesn't matter how profitable a finance company is. If there is a need for cash in the current year, and the company cannot call on enough current assets to pay up, then the company will likely go out of business. This is effectively what happened when almost the whole finance sector in New Zealand collapsed a few years ago. So with that still fresh in the memory of high interest hunting debenture investors (and finance company shareholders) , this is probably the most important financial statistic of all. It is very frustrating when a company's annual report does not detail the headroom in their banking facilities. However, with a little sleuthing I know have it (a minimum of $22m with the banks). So, at last, we can see where DPC stood at the end of their financial year.

From note 26b in AR2014, we can see that the company's Financial Assets that are due to mature in the next twelve months are:

$26.463m + $8.229m = $34.692m

On the same page we see that borrowings that must be repaid or refinanced with Dorchester's banking syndicate amount to:

$0.723m + $7.648m = $8.371m

Under note 24 secured bank borrowings are $17.565m. That still leaves borrowing headroom of:

$22m - $17.565m = $4.435m

This is the extra amount of capital that DPC could borrow at 31-03-2014 -should they need to- without any renegotiations with their bankers.

However, in this case the $34.692m in maturing business more than covers the $8.371m of capital due. So there is no need to resort to borrowing headroom. DPC's liquidity is just fine.

All the above information was taken from note 26b-Liquidity Risk in the FY2014 annual report. The equivalent information is not so neatly tabled in the FY2015 annual report. When presentation of results changes from year to year, I immediately become suspicious: What has the company got to hide by changing their result presentation format? 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 Receivables Contractural Maturity	$74.174m	AR2015 p53
Reverse Annuity Mortgages	$1.603m	AR2015 Note 16
Total Current Resources	$88.116m	(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 - $88.116m = $29.052m

Of course there are ways to make up this shortfall.

1/Some of those account receivables could be rolled over into new business, thus making the 'theoretical' shortfall disappear.
2/There is $8.984m of stock on the books at the 'Fleet & Auction' division, that could be sold for cash.
3/ Retaining half (company policy is to pay out half of earnings as dividends) of the profit of $10.050m budgeted for the ensuing year.
4/ 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.

The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other Cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($88.116m+$8.984m+0.5x$18.050m) > 1.1 x $119.459m
=> $106.125m > $131.405m (this is false)

The theoretical shortfall of $27.278m represents:

$27.278m/$142.827m = 17.7% of the end of year loan book balance

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 $18.05m!

SNOOPY

[Snoopy]

Required increase in EBITDA, as dictated by the banking syndicate supporting TNR, is 87.5% over two years. If we express the annual growth rate required as 'g', then:

g^2= 1.87 => g=1.37

So an annual EBITDA growth rate of 37.5% is required. This equates to EBITDA of $49.7m for FY2016 and EBITDA of $68.1m for FY2017. Expect the TNR share price to be punished if these growth expectations are not met!

Principal assumptions are as follows:

1/ Current EBITDA earnings are just holding at a level the banks are happy with, but on the cusp of breaching bank covenants.
2/ The one off increase in TUA shares that TNR booked to profit in FY2015 of $7.058m is part of 'normal' profit for bank covenant purposes (increases in asset values on the balance sheet are real gains,no matter the source). If this one off profit figure is taken out, then the EBITDA increase from FY2015 to FY2016 is 71%
3/ The earnings performance of TUA during the period 01-01-2014 to 31-12-2014 was in line with management forecasts made in August 2014.
4/ Any new acquisitions must earn a profit 37.5% higher than overall group EBITDA margin from the previous year.

Forecast figures from the AGM presentation:

-----

Full Year Profit
–
12 Months to 31 March 2016
•Guidance $20.0 million profit before tax
•Up 43% on $14.0 million trading profit to 31 March 2015

-----

I will have to figure out how EBITDA profit growth compares to NPAT profit growth. But superficially it looks like the 43% forecast profit improvement falls well short of the 71% improvement required. Nothing that can't be fixed by yet another cash issue of course. But this isn't good news for existing shareholders.

SNOOPY

[Snoopy]

What we have here is an on paper 'theoretical' current shortfall of:

Current Financial Assets-Current Financial Liailities
=$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.

I don't think what I said above was correct. The 'financial receivables', from Turner's perspective, is principally the car loans it writes to customers. These loans could be effectively extended, by the customer buying a new car for example. But this is a negative cashflow event for TNR in the current year. Turners would initially have less money to repay the banks that had been supporting them, and the cash shortfall would not improve, but get worse, at least in the current year.

If any of the shortfall remained, the difference could be borrowed under the company's banking facilities.

The above bit is correct though. It may be that when the BNZ sees the juicy cashflow from new customers signed up for the future, they won't have any trouble rolling over the current loans due into future years. IOW, they will be prepared to match TNR's cashflows with the interest payments they in turn ask for from TNR.

SNOOPY

[Not too Flash]

Will be interesting to see what the bonds trade at when they are listed Friday. At 9% for about a year to go assume will be 1.04 or thereabouts.

Will be interesting if the conversion factor at max of 30c will have any effect.