Rural Portfolio Capital Limited (RPC010) - Preference Shares

[Alan3285]

Hi All,

Being a little presumptive, I am lifting a (likely tongue-in-cheek) comment by GTM in the Allied Finance thread:

For real thrills and excitement, I don't think you can go past RPC010 -

Buy 110%
Sell 90%
Last 100%

Does anyone know anything about RPC and the situation with respect to the prefs?

Thanks,

Alan.

[Enumerate]

Does anyone know anything about RPC and the situation with respect to the prefs?

I took a look at them a little while ago.

Effectively the fund is secured by a portfolio of NZ Farming Systems and PGG Wrightson. RPI, the owner of these assets and the borrower of funds from RFC, is responsible for making the interest payments.

RPI is, therefore, highly leveraged. Given both assets PGW and NZ Farming Systems have not done particularly well ... investors could have some concern as to the security of the loans.

The structure of the investment is like what the Americans call a "covenant light senior loan". RPC loans RPI capital, this is senior debt on RPI and has covenants over specific assets. The big problem is that the assets are impaired. Further, from my quick inspection of the trust deed, there are no clear loan covenants on the assets ... like, for example, the value of the security will at all times cover the value of the loan.

This was a brief and partial analysis. I suggest you follow through with a more detailed review.

If you are bullish on PGW and NZFS ... this may provide a cheap entry.

Please do not act on this overview ... I am just recounting my partial understanding.

[Enumerate]

It would appear that the "charged assets", in the RPI portfolio in favour of the RPC010 prefs are as follows:

46,764,868 PGW shares

10,000,000 New Zealand Farming Systems Uruguay Limited shares

$2,129,400 deposited in the Dividend Escrow Account.

Given that there is $60million, face, in pref shares due next year - it would appear that the current buy offer of about 44 cents per $1 face is priced at about the current asset securitisation of the loan.

There are actually better deals around - unless, for some reason, you fancy PGW and NZS.

[Alan3285]

Hi Enumerate,

It would appear that the "charged assets", in the RPI portfolio in favour of the RPC010 prefs are as follows:

46,764,868 PGW shares

10,000,000 New Zealand Farming Systems Uruguay Limited shares

$2,129,400 deposited in the Dividend Escrow Account.

Given that there is $60million, face, in pref shares due next year - it would appear that the current buy offer of about 44 cents per $1 face is priced at about the current asset securitisation of the loan.

There are actually better deals around - unless, for some reason, you fancy PGW and NZS.

So, the prefs have a current market value of about 44% x $60m (face value) = $26.4m?

If we then deduct the $2m in cash that leaves $24.4m.

So, if I understand correctly, the market is saying that the PGW shares plus the NZFSU shares together are worth about $24.4m today?

PGW are trading today at about 62c, so those 47m shares are worth about $29m?

Even if the NZFSU shares are totally worthless, it appears that the prefs are under-valued?


Did I miss something obvious again?

Thanks,

Alan.

[Alan3285]

So, if I understand correctly, the market is saying that the PGW shares plus the NZFSU shares together are worth about $24.4m today?

PGW are trading today at about 62c, so those 47m shares are worth about $29m?

Even if the NZFSU shares are totally worthless, it appears that the prefs are under-valued?

Sorry for posting in two parts - I ran out of time before so I truncated the post.

I was going to check the NZFSU share price too.

NZS is currently on the board at about $0.44, so the 10m shares are worth about $4.4m.

Add that to the $29m PGW and $2m cash, we get approximately:

$4.4m + $29m + $2m = $35m +

Compare that to the 60m prefs at $0.44 = $26.4m

Therefore, it *appears* that there is approximately 130% asset cover for the prefs (implying that the ords have a value too).


I'm guessing I am still missing the obvious though.....?

Thanks,

Alan.

[Silverlight]

RPC010 also need to pay their coupon payments for the next 15 months @ 10.14% of face value.

So three payments to come of 60m * 5.07% (not accurate) is around 9.1m.

[Alan3285]

Hi Silverlight,

RPC010 also need to pay their coupon payments for the next 15 months @ 10.14% of face value.

So three payments to come of 60m * 5.07% (not accurate) is around 9.1m.

So, are you saying that the asset backing is actually more like:

$35m - $9m = $26m

Which is much more closely aligned with the $60m @ $0.44 = $26.4m


However, would I be correct in thinking that we should then add back on any dividends reasonably likely to be received?

It looks like NZS doesn't (or hasn't recently) paid a dividend.

However, PGW paid 16c per share in the last 12 month period (no guarantee they will pay the same ongoing of course, but let's assume they will for the purposes of discussion).

Therefore, we add back on 46m x $0.16 = $7m.

That gives:

$35m - $9m + $7m = $33m (compared to 60m @ $0.44 = $26.4m)


Is that correct?

Thanks,

Alan.

[Silverlight]

PGW just did a large capital raising for an influx of cash so I doubt they will be paying a dividend in the near term.

Also for the past 12 months they only paid 5c of divs, PGW skipped out on paying their traditional full year dividend, and may do so for the future.

Interim 5.00000¢ 1 Apr 09
Final 11.00000¢ 30 Sep 08
Interim 5.00000¢ 1 Apr 08
Final 8.00000¢ 5 Oct 07
Interim 4.00000¢ 2 Apr 07
Final 6.00000¢ 2.95520¢ 2 Oct 06
Interim 4.00000¢ 31 Mar 06


The current yield reflects net present value of all future cash flows, so the 9m in interest payable is fixed, and the capital repayment at the end should 100 but the market is pricing in the current assets net value 35m minus the 9m, to get 26m.


By buying these you are speculating that NZS or PGW or both will appreciate in value, but if you believed this it would be more prudent to buy the stocks directly, as come April 2011 you will be forced to liquidate your holding in PGW/ NZS, through the redemption of RPC010, whether you are in profit or loss.

I guess at that stage with the redeption money you could then buy then directly yourself, but if that is the plan you could just do that now.

One thing to note is the best sell order to buy in is $50.78 per 100, which means current holders value RPC assets at 30.4m, buyers at 26.6m

[Alan3285]

Thanks Silverlight.

[GTM 3442]

RPI/RPC was set up as a vehicle to own a controlling interest in PGW.

Some of the owners capital, more borrowed in the RPI bonds. Interest to be paid out of PGW dividends.

This works out nicely. Bonds taken up.

PGW share price trades $1.50 +/- $0.20. PGW dividends pay RPI issue interest. All happyhappy joyjoy.

SFF merger proposed.

PGW share price hits $2.20

PGW/SFF merger falls over. World financial crisis begins. Merriment and jollification all round.

RPI bond issue matures. RPC bond issue made. At higher interest rate.

PGW makes dividend shares in lieu unless shareholder opts out. Oh dear ! Problem for RPC.

PGW suspends dividend. Oh dear ! Problem for RPC.

Agria buy-in, RPC no longer has controlling interest, no control over dividend policy.

2011. RPC bonds due. How to raise the money in the new RP? bond series ?

Given the reason for RPC's existence, sale of PGW shareholding seems to be least preferred option. So expect a new issue of RP? bonds ?