Global paper company PaperlinX Ltd says it is considering an equity issue if assets sales can’t deliver enough cash to help meet the terms of a just renegotiated debt facility.
In a veiled way that news is also a sort of admission that it is expecting a tougher earnings outlook in the coming year because of the worsening local and global economic outlook.
It’s something that wasn’t stated directly, but the statement to the ASX yesterday reveals the reasons for the suggested equity issue and/or asset sales.
The Melbourne based company revealed that it had extended the maturity date of a one-year tranche of the $US589 million ($A698.78 million) debt facility it established in February this year.
The $US251 million one year tranche’s maturity now is December 2009, while the second and third tranche review dates remain unchanged.
As part of the extension, PaperlinX has committed to reduce the total facility by $A150 million by May next year, and to raise that money it has now started looking as asset sales.
That reduction was due to a covenant (condition) in the debt agreement which basically requires Paperlinx to raise extra cash
The company explained it along these lines; "The inclusion of a net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) covenant and an incremental tightening in certain covenant thresholds at June 2010. PaperlinX has assessed the impact of these changes and is confident they can be accommodated."
There is one easy way to meet these conditions and that is to maintain or drive earnings higher.
Clearly with the local and international economies turning down, that’s going to be a big ask.
So Paperlinx is looking as raising the $150 million in other ways to make sure the reduction covenant can be met in the case of an earnings downturn.
The company said in the statement: "To meet its commitment to a reduction in the total facility of A$150 million by May 2009, PaperlinX will continue to implement its current programme of asset sales and is also considering a potential equity raising.
"In relation to asset sales, as previously announced, PaperlinX is currently seeking investors for some or all of its Australian manufacturing business, Australian Paper. While this process continues to progress, no decision has been made to sell at this time.
"Any decision to sell some or all of Australian Paper will be assessed in light of the overall value of any offer, the value to PaperlinX from retaining Australian Paper and PaperlinX’s alternative uses of funds in the near and medium term if a sale proceeds.
"Accordingly, PaperlinX considers it is prudent to examine alternative strategies to meet its obligations under the refinanced debt facility, including consideration of a potential equity raising via a pro-rata entitlement offer.
"Any such equity raising would strengthen PaperlinX’s financial position, support the continuation of the merchanting strategy and provide the flexibility to ensure optimal value is realised for shareholders from the Australian Paper review."
At the moment, PaperlinX says it has assessed the impact of the changes and is confident they can be accommodated.
"We will see some increase in the margin, but this is largely offset by other internal debt management initiatives, so that net interest costs including capitalised interest in 2009 are expected to be at a similar level to 2008," CEO Tom Park said in a statement to the ASX.
The shares eased 11c to $2.23 where the company is valued at just over $1 billion.
There’s enough room there for an equity raising, but it might be needed if the credit crunch means the company gets lowball offers for its Australian paper assets, or no bids at all.
