Taking Stock 23 February 2023

Fraser Hunter writes:

While only recently leaving our shores, it's already clear that Cyclone Gabrielle will go down as one of the biggest storms in New Zealand's history. At one stage, the storm covered all the North Island and caused unprecedented damage. It also came weeks after the heavy rainfall and floods of the upper North Island, postponing that recovery and causing more damage.

New Zealand remains in a state of emergency, as the devastating impact continues to be evaluated.

The scale of the tragedy is immense, with thousands of people affected by the devastating impact of the cyclone. The road to recovery will be long and arduous, but New Zealanders are coming together to support one another during this difficult time.

Our thoughts and prayers go out to the families of all those who have lost loved ones due to this tragic event, and to those who have had their homes and businesses destroyed.

Both government parties were quick to put their differences and the upcoming election aside to prioritise and support those in need. Already this week the government announced a $50m relief package for the affected regions and $250m for roading rebuilds. Both parties have also supported increased debt levels to fund the recovery. 

As these types of events seem to do, it has bought out the best in many people, with amazing stories of resilience, heroics, kindness and charity emerging.

Over the weekend in Wellington, there were requests across social media platforms to donate supplies to volunteers so they could drive them up the country. The Wellington College ''fill the bus'' drive concluded by filling two buses and an Airforce cargo flight.

Unfortunately, there have also been incidents of looting and theft, with 59 arrests in flood-affected regions. The response to this has seen 140 extra police deployed to the Hawke's Bay region. It is saddening that the desperation is that high, but there are thousands of things for the police to be doing.

Cost estimates are difficult this early, but could be in the tens of billions.

Estimating the cost of events like this is tough and requires a lot of resources, expertise, and guesswork. The accuracy of these estimates is also hard to maintain because information changes constantly. 

Despite this, it is clear that the cost will be significant, with Grant Robertson indicating it could match the $13bn cost to government of the Christchurch Earthquake. The country is in the fortunate position to have a balance sheet capable of funding such a cost and will be aided by insurers who will cover a significant proportion of the cost.

A secondary question is how the recovery will change an economy, which has been heading towards a recession. The Christchurch rebuild provided many years of economic growth at a time we and the rest of the world were recovering from the Global Financial Crisis.

This time, however, we find ourselves in a complex and inflationary environment. China is yet to re-open post-covid, there is still a war in Eastern Europe and global supply chains are still incredibly messy. Globally, there has been some reversion back to more reliable local supply chains, resulting in greater supply security but at a higher cost.

New Zealand is no different and there are valid questions about the resilience of our key infrastructure (roads, water, power, communications, food), and how we can future-proof them. There is also an economic trade-off between trying to prepare for every scenario, or whether it is better off to pay the bill if and when each event comes.

The most informed insight we are likely to see about the cost and impact will be in Treasury's upcoming budget which is currently being re-written for release in May.

Horticulture and agriculture industries highly important to these regions and the country

 The Bay of Plenty, Hawke's Bay and Gisborne account for 10% of the country's GDP, with agriculture (including horticulture) representative of 7% to 10% of that. Any prolonged slowdown will have significant implications for these regions and the country as a whole.

Hawke's Bay is a major supplier of domestic fruit and vegetables, including the largest grower of apples (63%), peaches (55%) and nectarines (60%), while the Bay of Plenty is the largest producer of avocados (45%). Food price inflation was already above 10% for the last 12 months and this will cause further upwards pressure on the country's already eye watering grocery bills.

An event of this nature can also be a catalyst for changes in industry and land usage. Taranaki, for example, underwent a major shift from horticulture production to dairy following Cyclone Bola in the late 1980's.

An industry already under fire is the $8bn commercial forestry industry due to the large damage caused by the scrap wood, debris and loose soil left on harvested forestry land.

Ironically, these forests were initially sold as a solution to erosion-prone hillsides, only to present a bigger risk to communities, waterways and infrastructure.

While the environmental court has had some prior involvement in the way of fines, the government is being urged by communities and iwis to step in.

Impact on the listed market

In terms of publicly-listed companies impacted by the cyclone, it will be widespread. An event of this size will likely have direct and indirect impacts on businesses with a national presence, as well as those with significant exposure to regions most harmed.

New Zealand is already experiencing a labour shortage, so major demand for key skills like plumbers, electricians, and builders will absorb resource from all regions.

Then there are regulatory changes. The Christchurch earthquakes brought significant regulatory change and costs to the building industry; it is likely water flow will now come under scrutiny (despite its relegation in the Three Waters saga).

Industries and market participants most impacted include insurers (Tower, IAG - ASX), Suncorp - ASX), infrastructure (Chorus, Vector, Spark, Infratil/Vodafone, Napier Port and Port of Tauranga) agriculture (Scales, Delegats, Comvita, Turners and Growers, and Seeka) and the building sector (Fletcher Building, Steel and Tube, Metro Glass and Vulcan Steel).

Insurance – Will likely foot the bill, but will want returns over time.

Starting with the insurance industry, while assessing the costs is incredibly complex, it is expected to face unprecedented levels of claims from businesses and homeowners damaged by the cyclone and pay for the bulk of the rebuild costs.

What is unknown is the level of uninsured or underinsured and the long-term impact these events will have on insurance premiums across the country. Longer-term, these businesses need to be profitable and this will likely result in higher premiums across the country and/or changes to the coverage of high-risk properties (if coverage is available at all). Parts of Japan, and flood-prone areas in Australia, are examples of regions that no longer get insurance coverage for certain events. While NZ has so far navigated some of these issues through the EQC, there are questions about fairness in the way it is currently done, with a cliff top, coastline Auckland mansion having the same coverage and cost as an inner city bungalow.

Tower confirmed that the two events both triggered the major event threshold triggering its reinsurance policy (it has an excess of $12m per major event). In the three weeks following the Auckland floods, Tower had received 4,850 insurance claims and estimated the flood cost to its customers to be between $95-$125m. Towers' market share in the personal insurance market is somewhere around 10%.

Infrastructure Sector

Infrastructure companies affected includes Chorus, Vector, Spark, Infratil/Vodafone, Napier Port (directly) and Port of Tauranga (indirectly).

The most impacted is Napier Port (NPH.NZX: down -11.5% last week) which announced this week it has partially re-opened its operation following minor damage to the port assets. Damage to regional transport infrastructure is limiting access to the port and the primary industries of the region, horticulture, agriculture and forestry have suffered considerable damage.

The port holds business interruption insurance that will provide some mitigation against the adverse trade effects of the cyclone. 

Port of Tauranga was not materially impacted but could be a beneficiary of increased volume should Napier Port and the surrounding infrastructure stay out of action for extended periods of time.

The other major infrastructure exposures (Spark, Chorus, Vector, Infratil/Vodafone) operate national networks. Short term, resource will likely be diverted to repairs, taking it from other parts of the country. In the longer term, costs may need to be recouped in terms of higher insurance costs or building more resilience in the networks. The likes of Chorus and Vector are regulated in their returns on assets, so we expect them to push for a higher allowable return.

Agriculture Sector

The agriculture sector is well represented on the NZX, including some large companies such as Fonterra and a2 Milk. While dairy is likely to have some exposure to producers in the region, the most impacted are food producers such as Seeka, Scales, Delegats, T&G Global and Comvita.

Investors were early sellers of Scales, which fell -19.2% last week, due to uncertainty around its Mr Apples Business. Scales updated the market on Monday, reporting damage to 4 of its 15 apple orchards and withdrawing profit guidance for the financial year.

The orchards were in the very early stages of harvest when the cyclone hit and will still look to export what it can over the next few months. The share price bounced 3% on Monday following the announcement, reflective of the risk priced into the company.

Seeka (down -7.1% last week) has approximately 5% of its Kiwifruit supply grown in the Hawke's Bay region, with the bulk of the supply coming from the Bay of Plenty area. The initial damage assessment of its major assets showed no significant damage, however the company expects 2023 kiwifruit volumes to be down on the previous year's harvest due to an early-season frost, variable bud break, and Cyclone Gabrielle.

Delegats (down -5% last week) confirmed it has not had significant damage to its Hawke's Bay Winery and Vineyards.

Comvita (no significant change to share price) announced that it expects its Hawke's Bay site will be written-off but is not expected to have material impact on its financial results due to insurance cover in place.

Some of these companies put out NZX statements, with others remain in the process of identifying the impacts to its business.

Building Sector – a big uptick in demand, but when and how

Using Christchurch as an example, the new houses and repairs following the cyclone will take time to begin but will provide a pipeline of activity spanning the best part of a decade. Tradesmen will need to be brought in from outside the region (and outside New Zealand) and this will likely drive-up both the demand and price of these services across the country. Companies will need to be set up, workers will need to be hired and relocated, and accommodation will need to be identified.

Ryman Healthcare

Finally, it is hard not to mention Ryman Healthcare this week. Holders will have received multiple emails about the $900m capital raise.

While the capital raise will improve the company's balance sheet, Ryman and its leadership have come under justified criticism about the early payment of its USPP debt, which resulted in a $134m penalty fee paid from the raised capital.

Ryman entered into a US$500m debt facility during the covid pandemic and was the most expensive of Ryman's debt facilities. However, the company had given little information about the debt, the covenant risks or the penalties in disclosure to date. Given the astronomical cost to exit the debt, it's thought they absolutely had to repay it to avoid a bigger penalty cost should they have breached the covenants.

The regulator has announced it is looking into Ryman's disclosure obligations, after the company revealed the raise was required to prevent a potential breach of debt covenants. ASX-listed companies have found themselves in trouble with class-action lawyers for breaches to disclosure requirements in recent times.

Questions around Ryman's debt levels have been weighing over the share price for a while and further worsened by a slowing housing market impacting the timing of sale settlements and cash flows. Prior to the capital raise, the only attempt to address it was a DRP which had minimal effect, so the question that must be asked is - why did they wait so long to raise capital?

Conveniently for the directors and leadership team, the people who entered and signed off on the original USPP deal are no longer with the company.  

Ryman had been a market darling since listing in 1999, climbing from $1.50 to more than $17 in 2019. Factoring in the 5:1 stock split in 2007, original investors have done extremely well. Over the majority of the last decade, the company targeted and delivered earnings growth in excess of 15% per annum, boosted by surging house prices and the opening of new villages across the country. During its rise, a badge of honour for the company was never having to raise money from shareholders.

Waiting the extra 12 months cost it $134m in penalties and a large destruction of shareholder wealth over that time.

Summerset Bond Issue

Summerset has announced that it is proposing to raise $175m via a senior bond issue. It is likely being raised to refinance its existing $100m of maturing bonds. Summerset's existing bonds are trading on a yield above 6.00% with maturities spread over 4.5 years, reflective of a premium of between 1.1% to 1.75% above underlying swap rates.

We are of the view that it is likely that this new bond from Summerset will offer a rate exceeding 6.00%, although rates remain volatile.

Anyone interested in this bond is welcome to contact us to be pencilled in our list pending further details, due to be released next week.


Edward will be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

He will also visit Blenheim on 17 March, Taupo on both 20 & 21 March, and Wellington on 24 March.

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Edward will be in Napier on 31 March (Mission Estate) and in the Wairarapa on 3 April.

Clients are welcome to contact us to arrange an appointment.

Taking Stock 16 February 2023

THE ANZ’s recent bond offer was hugely oversubscribed, resulting in 50% scaling for investors.

This suggests either that it was mis-priced (the 5.22% rate too generous), or it suggests there is a huge amount of investor money looking for long, strong bonds, urgency created by a fear that interest rates have peaked.

I have no such fear.

Until inflation shrinks to whatever the new, acceptable level might be, short-term rates will rise.

Long bonds already enjoy a ‘’negative yield curve’’, meaning long-term rates are lower than short-term rates.

It is hard to see how that yield curve can become even steeper. A much steeper negative yield curve would signal a grim year or two ahead.

I suspect the ANZ has been smart in scooping up $500 million. The 5.22% rate might soon look cheap.

This week Wellington International Airport is issuing a 5 ½ year bond with a minimum rate of 5.6%.

I expect many more issues from the private sector, especially from corporates which prefer to step away from the strictest covenants demanded by banks when they grant long-term loans. I suspect the Ryman rights issue of discounted shares has its origin in the high cost of debt.

These interest rate increases cannot be good for those home owners who must renegotiate their mortgage rates in coming weeks.

It would be a brave optimist that assumed that NZ had already discovered how great the fall might be in household discretionary spending.

Credit card borrowing is still increasing.

How much of that increase in expensive debt is simply a reaction to the greater cost of mortgage debt servicing, and to the reality of inflation of essential goods?

(If you want to attract a laughing response, then pretend that inflation for households is only 6%!)

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THE rapid rise in the cost of money (capital) is no doubt linked to the new attitude of wholesale investors towards new disrupting companies that grow in size by underpricing the service they offer.

In the USA hundreds of thousands of workers, collectively, have been discarded this year as a result of investors’ refusal to provide capital to be burned in pursuit of (loss-incurring) growth.

The result for unlisted angel companies is that they must cut costs and accept that their alleged value will be removed from the stratosphere to which the value had been cast by those who believed money would be free for all time.

As discussed in previous weeks, fund managers will not like writing off the money they have destroyed by pursuing these gains based on high valuations.

New Zealand now is watching this reality apply to Sharesies, a broking platform that lost tens of millions, funded by fund managers like Pathway, by Trade Me, and by the American loss-making broker, Robinhood.

Sharesies needs cash. It went to Cameron & Co, usually more accomplished at corporate restructuring than selling angel companies. Cameron & Co sought to raise approximately $35 million, valuing Sharesies at $335 million. I know no market leader who believed this value.

Earlier, I had opined that a value of $50 million seemed more credible. Trade Me’s bookkeeper displayed $50 million, implicitly.

The Cameron & Co cash raise failed and now has been deferred, a better explanation than re-priced.

Genuine market leaders, familiar with all current market transactions, believe a cash raise might be possible at less than a third of the valuation that failed.

Sharesies’ founders clearly are creative and have long-term plans for the business but sadly, the days of free money are gone. Perhaps they should sell at a price that finds a buyer.

To me, a trade sale could be a solution.

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RECENT discussion on the failure of our government to exploit very low funding costs centred on the relative skill and agility of the private sector.

In 2020-21 dozens of private companies were locking in long-term funding at rates of around two percent, while our government, advised by Treasury and the Reserve Bank, missed that obvious opportunity.

The local government funding agency grabbed money at the time, as did the likes of the Auckland City Council, as well as many listed companies.

The discussion of the issue attracted responses, including one that argued that Treasury indeed had raised a huge sum with a variety of short, medium, and long-term bonds in 2020 and 2021, the amount with one issue exceeding $50 billion, a massive introduction of funds.

The problem was, as will soon be highlighted, that the issue was priced at a level that drew little outside investor interest. So Treasury ended up buying the lion’s share of the issue, effectively meaning New Zealand printed funny money.

The debt, issued at around 1%, was subject to a government underwrite for Treasury, meaning that the government – taxpayers – would pay for the cost of on-selling the bonds to the investment sector, when that became possible.

Well, that is what is happening now.

Treasury is selling its share of the $50 billion at market value to Australian banks, institutions, and a small number of foreign wealth funds, at a yield far exceeding four percent.

I have not seen the exact number being sold but the sale figure will be tens of billions.

If you own a 1%, 10-year bond, and need to sell it when the market rates are 4%, the price at which you would sell would be discounted by the difference between your rate (1%) and the sale rate (4%), multiplied by the number of years until maturity.

A holding of $10 billion of 10-year 1% bonds would thus lose you 3% x 10 years, meaning what you paid $10 billion to buy, will be sold for $7 billion.

Treasury’s loss was underwritten by the current Minister of Finance’s agreement to switch this cost on to the taxpayer.

If Treasury bought perhaps $30 billion of 10-year 1% bonds, its sales loss would now be at least 3%, multiplied perhaps by 8 years, a total of $7.2 billion.

Ouch, what a disgraceful outcome; chicanery.

The loss is real, paid in cash.

It will not surface until Treasury sells. It will presumably sell off its holding in tranches, at a loss that the guarantor, the taxpayers, can absorb at the time.

The decision of the Crown to undertake the transaction will substantially add to our country’s deficit in the future, probably being calculated and reimbursed by the next government, not the current one.

Nobody can say now, with utter certainty, what price would have been required to avoid Treasury and Robertson’s catastrophic error.

Had the Crown run a book-build, as the private sector does, it would have achieved price discovery before it issued the $50 billion of government bonds.

To capture $50 billion of real investment from the market it might have had to increase the 1% offering to 1.5%, or even 1.75%.

At that time, similarly strong, reliable, sovereign debt was low, and heading for zero, or even into negative rates, according to Robertson and our Reserve Bank.

Perhaps the government was seduced by the thought of the zero-cost debt that its advisers could see on the horizon.

Whatever, in trying to save a penny, it has wasted a pound.

My point remains; our public sector decisions are routinely made without enough input from experienced private sector people. We accept incompetence, mediocrity and even catastrophes because, usually, we are not made aware of them.

We do not have a Minister of Finance with any financial market private sector experience.

The cost of the $50 billion government stock bungle will be known one day. It will be in many billions.

It cannot be hidden, perhaps beyond one political cycle.

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RELATED discussion of the low-quality decisions regularly made by councils pointed the finger at the type of people who seek these roles.

It is rare for a skilled, experienced, retired private sector person to stand for office, whether at council or central government level.

I ponder whether the Higher Salaries Commission has created the problem by nominating pay scales that attract the mediocre who see the pay as their ‘’main chance’’ to get ahead. The public service ethic might have been surpassed.

There are a handful of exceptions, some of whom I have met, usually in rural areas, where the motivation is to reverse poor quality decisions, the remuneration factor not relevant.

The discussion in Taking Stock led to some off-the-record responses from councillors, one genuinely smart operator pointing to the impenetrable processes and legal constraints that prevent any agility, and most commercial decision making, at council level.

I am told there must always be trade-offs between poor decisions and smart decisions to attract the necessary support levels.

There is no scope for shareholders to ‘’sack the board’’ or to decline to provide capital for unaffordable projects.

The result is massive rate increases, or failing infrastructure, while some council faction gets its version of an underground airport or a harbour bridge made of soap bubbles.

Has anyone contemplated a solution to this?

Can democracy recalibrate to be the pathway to excellence?

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A PRIVILEGE of working in capital markets is the context it brings with a wide variety of people.

As a generation, science, engineering, and agriculture provide the most impressive people – creative, skilful, hardworking, and ambitious.

I met recently in the South Island with a few farmers, who at their most polite scratch their head when they receive advice or instructions from ‘’Wellington’’, politely pondering the thought process of a desk-bound public servant or politician who thinks the farmer requires guidance on how best to achieve long-term farming success. The less polite are more colourful.

A regular subject was the amount of wool stored in farm sheds, available at extraordinarily low cost, so suited to carpets, insulation, and tasks like cleaning up oil spills.

Who in Wellington chooses to fill government offices with oil-based synthetic carpets, they pondered, and who is it that cannot see the versality of pure wool? Pink wool, anyone? Or Pink Batts?

Who in Wellington does not understand the toxicity of pine needles, and who does not understand the exponentially growing need for food? These questions occur in many conversations.

One does wonder how often policy-writers make meaningful visits to our agricultural leaders, and how well they absorb information.

Our horticultural sector has been battered, and continues to be battered, by weather events.

Hawkes Bay has had its stone fruit production all but wiped out; its pip fruit will be sodden; its grapes affected by the dreadful season, which began with poor bee pollination. Much of its productive land has been ruined and will take years to recover.

Northland’s dairy farmers have been battered.

Bay of Plenty’s kiwifruit production has been badly affected.

Is it time for a new, grateful public attitude to be developed, and much longer time frames for any rare, sensible changes conjured up by policy-writers?

You cannot thrive unless you survive.

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Ryman Healthcare has announced its intention to raise $902 million through a rights issue, priced at not below $5 a share. At time of writing, the stock is in trading halt and cannot be purchased or sold. We will participate in a book build that will determine the price for any unclaimed shares.

All shareholders will be invited to participate. The retail offer closes at 5pm NZT on 6 March.

Those who do not wish to participate will have the option to sell their entitlements on market. Those who do nothing will receive whatever premium exists following a bookbuild sale of rights.

Advised clients are invited to contact us should they wish to discuss this issue.

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In February and March our advisors will be visiting Hamilton, Christchurch, Wellington, Taupo, Kerikeri, Whangarei, Nelson, Napier, Blenheim, Auckland and Northland and are available on the following dates:

Edward will be in in Napier 22 February (Mission Estate) and 23 February (Crown Hotel).

Edward will also be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

He will also visit Blenheim on 17 March, Taupo on both 20 & 21 March, and Wellington on 24 March.

Chris will be in Hamilton on Tuesday February 21, at the Ventura Inn & Suites boardroom, 23 Clarence Street.

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 9 February 2023

AS pretty well every household will tell you, when you find a cockroach you can almost bet that others are nearby.

My late Mum extended this thought process by standing on the piano stool for at least a week after finding, and fleeing from, a weta.

It is the thought of where are the other cockroaches that will be behind the collapsing confidence in India’s public company sector after the market giant, Adani Group, controlled by Indian billionaire Gautam Adani, had to cancel a $2.4 billion bond issue, and cancel Adani’s plan to reduce his shareholding.

All of this followed a rare, aggressive research piece by a small American research company, Hindenburg, which alleged Adani was understating its debt and grossly overstating the valuations of its assets.

Hindenburg is the same company that gained notoriety in 2020 after releasing a research piece on electric vehicle manufacturer Nikola. It alleged that Nikola’s public demonstration of its electric truck was in fact simply rolling downhill, rather than being powered by its own propulsion. Nikola’s Executive Chairman resigned shortly afterwards.

If Adani was irrelevant to India, its failure to dismiss the allegations might make the research meaningless.

Adani is relevant.

It is huge, it works with India’s Government, and it is leading India’s drive from a coal-based economy to develop solar and wind power, aiming to reduce India’s dependence on coal in the electricity mix to just 50% by 2030.

The Hindenburg allegations have heavily damaged Adani’s share price and has brought attention to the folly of believing that price equates with value. Price often far exceeds value. Often price is just the outcome of a herd mentality amongst fund managers, sometimes based on false values.

Companies which display the ‘’value’’ of their assets by quoting an ‘’independent’’ company engaged to assess that value have always been suspect.

This is especially so in Asia, where the level of respect for outside shareholders is often low.

Indeed any investment banker who has worked anywhere in Asia will often entertain the tables of gathered business people with horror stories of corrupt practices.

Adani’s collapsing share price will be causing tingles in every fund manager, as we discover the whereabouts of the cockroaches.

Having said that let us here in New Zealand not get too sanctimonious.

Every day we accept valuations as though they were meaningful, despite ample proof that the valuation methodology is somehow beyond inspection, and is illogical.

It is easy to recall the property companies whose assets proved to be far less impressive when, in any sort of market downturn, liquidity was challenged.

The likes of our recent property syndications will soon be tested, given falling foreign enthusiasm and rising debt cost, which combine to deny the market liquidity and, most certainly, the froth that grew on the basis of free money.

New Zealand had its own ‘’Adani’’ moment in the 1990s, as many will recall, with the meat processor and exporter Fortex lying about its sales, lying about the value of its stock, and understating its debt.

Its chief executive Graeme Thompson was jailed, and the publicly-listed company collapsed. Somehow none of the board of directors were judged to have had responsibility for the deceit.

Thompson subsequently co-wrote a book ‘’More Paddocks to Plough’’ which told his side of the story, though I thought he was gracious in side-stepping the issue of why he alone was deemed to be responsible.

Fortex was to be the new modern face of processing sheep meats, with a focus on exporting cuts of meat rather more valuable than exporting carcasses. It aspired to have a better partnership with the unions, and to have modern purpose-built meat works.

Sadly, when times were tough, and the other meat works in the South Island were aggressively bidding for stock, Fortex could not process and sell enough sheep meat to justify its state-of-the-art plants.

So it had meat cuts in freezers and pretended the meat had been pre-sold at flash prices, thus over-stating the value of stock, and the acclaimed ‘’sales’’. It raised debt in Asia but accounted for that incoming money as though the money was from proceeds of product sales, rather than from a new loan.

It fought like hell, illegally as it turned out, to try to obtain the capital increases and debt facilities that it needed to buy the time to build its volumes of processed cuts.

Thompson was the CEO. He was responsible for the accounting malfeasance.

Nobody else, it seems, was involved in the deceptions. In effect, Fortex was the cockroach. Between 1987 and 1997, 200 NZ-listed companies discovered cockroaches.

In the case of Adani, in India, the world will be wondering why the Indian regulators never examined what the Hindenburg people had found odd.

The world will wonder about Indian governance standards, audit thoroughness, accounting rules, and someone might wonder whether Adani’s political connections had been too busy counting his munificence to spare the time to examine the anomalies Hindenburg now allege.

This may leave people recalling Enron, in the USA.

Uncomfortably, many New Zealanders will recall the rotten standards of our finance companies and mortgage trusts, highlighted by the abysmal accounting, audit, governance, regulatory and political behaviour in the period between 2000 and 2008.

There is a solution to all this misery for investors and I think it would work.

If the miscreants were put in front of a competent judge, knowing that no political friends could prevent this, the incidence of such foul cheating would decrease.

If the sanctions included complete loss of all personal assets, wherever hidden (including trusts), until the victims of the fraud had been compensated, then the incidence of such cheating would be eliminated, except in the case of the insane, prepared to take the risk.

Business errors will always be judged with some tolerance. Business cheating, as opposed to errors, is by comparison murder compared to mishap.

In times of ever-greater global stress, the number of roaming cockroaches might take a while to count.

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RISING interest rates, economic slowdown, goofy property valuation standards and, possibly, a self-focus of the property managers – these may combine to offer a threat to investors, but a massive opportunity for councils.

Not all syndicated property is poorly designed, deliberately favouring the managers. Most is.

Exaggerated property prices, a myriad of claimable, often hefty fees, and an ‘’all care, no responsibility’’ attitude of managers have often been the characteristics of poor syndication.

We saw all of these flaws at a time when money was cheap, bank deposit rates low, and the property market was infested with greedy brokers, valuers, and entrepreneurs, fed by bankers chasing loan growth, the determinant of their bonuses.

During these times it is often true that rapidly-rising valuations appear to drown out the effect of manager greed.

When the cost of debt rises, nothing can cloak naked greed.

In tough times tenants can fail, they can reject their rights of renewal, reject rent rises, and demand concessions.

Particularly in flood damaged Auckland there will be pressure to find a survival formula.

These syndicates based on high debt levels will face banker fear. When benign conditions reverse, bankers can become risk-averse overnight.

If this inauspicious trend is now being seen, there may still be an outcome that pleases someone.

The unsaleable property may find a new owner, who buys at a lower price.

I discussed this recently with one of our best syndicators, who notes that for many buildings currently there are very few, if any, natural buyers.

If there is no market, the existing investor yields would fall, as the cost of debt rises to six, seven or (hopefully not) eight percent.

Most syndications work on the basis that the building was bought at a yield (say 6%) and funded 50% by the ASB or its like at 4%, the bank holding a first mortgage and having all the rights.

Investors were promised, say 7%, with potential rises if rents rise, or if debt cost falls, always dependent on 100% tenancy rates, and minimal maintenance cost.

Now if debt costs go to 8%, and tenancy rates fall, investors face a reduction in returns - maybe the elimination of returns if the bank also demands that surpluses be applied to reduce bank debt.

This all sounds ugly. It is.

The key to a solution is the cost of money.

Councils can raise term debt today at say, 5%, maybe a fraction less.

Might there be an opportunity should there be in NZ any council with good, experienced, commercial governance?

An example of good use of debt is when it is used to fund an income-bearing asset, such as happened in the 1950s with the Auckland Harbour Bridge. The toll income made the bridge a commercial success.

Should councils now be in the market of providing the only bid for syndicated property at a yield that well exceeds the cost of money for the council?

If the property was, say, an apartment building, might the council be able to increase social housing capacity, reduce rents, and use debt to make a margin for councils (ratepayers)? Win, win, win.

Councils so often use debt unwisely, borrowing to spend, borrowing to avoid charging appropriate rates, borrowing for nice-to-have assets that generate cost, not income, borrowing to win votes.

We all could tolerate this if there were a plan, a strategy, a credible outcome, that did not mean that tomorrow’s ratepayers will pay for yesterday’s subsidised rates.

We could all have some hope if we saw governors with a history not in policy-writing but in finance, marketing, developing the business and executing sane policy.

Wellington City Council at its last elections introduced Tim Brown, long-time executive and director of Infratil, one of New Zealand’s most admired companies, lauded for its vision and its execution of mostly successful strategies. Tim worked alongside some pretty impressive people. He is now a councillor, having retired from Infratil. He is a skilled communicator.

Brown is in his mid-60s. He will have had a career quite different from any other councillor. He is socially skilled and ought to be skilled at explaining logical arguments.

Will Wellington display the use of good debt that is so rare at local or central government levels?

No pressure, Tim!

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HOLDERS of shares in ERoad will have had a forgettable year with this company, its share price collapsing after an oversubscribed rights issue at around $5.50, to enable a merger with a like company.

As the American economy faced threats of rising debt costs, Covid, recession, a diminishing work force, and all the wastage that comes with its global policeman’s role, the hedge funds of the world reached the views that ERoad’s technology would take even more years to produce the required levels of sales, nett revenue and ultimately dividends.

So short-selling began, the hedge funds spotting some wounded prey.

The more the short-selling pressure rose, the more inevitable it became that ERoad would drop out of the indexes that are followed by index-hugging funds and pension funds, a New Zealand example being Simplicity, a small KiwiSaver player that predominantly allocates to other index-based funds.

The momentum of ERoad’s price fall eventually spooked the index funds and at around 90 cents per ERoad share millions were sold, not because the value of the company was matched by the share price, but because the covenants in trust deeds stipulated the need for a sale.

All of this might cast light on why many loathe the concept of short-selling and query the value of any fees paid to a marketer of index funds.

I note that all around the world index fund fees are transitioning to zero. May the transition period be brief.

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New Bond Issues

Wellington International Airport

WIAL has announced that it is considering issuing a 5.5-year senior bond. More details will be released next week, however we are expecting the bonds to have an interest rate of around 5.50%.

We have started a list pending further details. If you would like to be pencilled on our list please contact us.

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In February and March our advisors will be visiting Hamilton, Christchurch, Wellington, Taupo, Kerikeri, Whangarei, Nelson, Napier, Blenheim, Auckland and Northland and are available on the following dates:

Edward will be in Wellington this Friday 10 February and has two spare appointments left. He will be in Nelson (Beachcomber) on Friday 17 February, and in Napier 22 (Mission Estate) and 23 February (Crown Hotel).

Edward will also be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

He will also visit Blenheim on 17 March, Taupo on both 20 & 21 March, and Wellington on 24 March.

Chris will be in Hamilton on Tuesday February 21, at the Ventura Inn & Suites boardroom, 23 Clarence Street, and in Christchurch on February 14 and 15, at the Airport Gateway Motel.

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 2 February 2023

IF New Zealand is to halt the falling standards that have blighted the most recent decades, change should begin in 2023.

The falling standards to which I refer are not a comment on the potholes, the health facilities, educational standards, the breakdown of families, the collapse in media standards, the failure to control social media, ramraids, and the divisions created by opaque political ideologies.

Any of those should be discussed by a wide range of alert people but need not be the feature of this financial newsletter.

Likewise, we need in-depth analysis and smart solutions to address the fall in productivity levels and we need to rediscover our collective respect and gratitude for our rural communities. I applauded a recent political suggestion that we need to be as proud of our farmers as we are of our female World Cup rugby players.

My concern relates to the public sector and its inability to install programmes that create wealth and/or reduce costs. I will focus on finance, a subject on which I am entitled to write with clarity.

There is an apparent missing link in the public sector, which must be a cause of a disconnect, just as there is an obvious cause in the deteriorating standards of those who aspire to be our politicians. (Excessive reward attracts quite different people.)

The missing link might be the failure to cross-pollinate between our public and private sector. In short, New Zealand is almost an outlier in its inability to attract outstanding private sector minds into short-term leadership roles in the public sector. Likewise, there is no swap over with leading public sector figures, to introduce them to private sector disciplines.

The latest event to bring attention to this might be the Crown's borrowing programme.

We will this year raise billions of long-term debt finance at rates that well exceed 4%.

Two years ago we could have raised as many billions as we liked at rates of less than 1%. The public sector failed to exploit this opportunity. Why?

Sovereign wealth funds and global pension funds had pools of money that would have filled every pothole in the country, had we offered new 10-year bonds. It is facile to say that I am using the rearview mirror to make this case. The private sector saw the opportunity and grabbed it.

Smart private sector companies borrowed more than they needed when they could see those pools of money and did so at rates of around 2%. Private sector companies generally have to pay more than local governments or central governments.

Two years ago stable but unheroic companies like Oceania Healthcare, Arvida, Summerset, Ryman, Argosy Property Trust, and many others saw the anomaly, understood that ''free'' money would be a passing phenomenon, and reacted. Collectively, billions of long-term money was raised for private sector companies at rates that now underwrite their future profitability and corporate successes.

Low debt servicing costs underwrite even marginal new projects.

The likes of Ryman, Oceania and Arvida saw what our public sector did not – an opportunity to act quickly and get ahead of the inevitable correction in pricing money.

In making their decision these companies had to have the knowledge, experience and courage to ignore the political boffins in Wellington.

Recall that just two years ago the likes of Orr and Robertson were forecasting negative interest rates. Perhaps they deferred their borrowing programmes in expectation of this absurd concept. Orr should have known better and should have had a competent board that understood, after listening to the private sector. Robertson, I forgive. He has had none of the grounding that private sector pressures would produce. It would be unreasonable to expect him to display such commercial nous.

New Zealand was an outlier in not exploiting the opportunity.

Globally US$14 trillion of negative-coupon bonds were created to sell to the stupidly-designed pension funds and wealth funds that ''manage'' other people's money and commit to ignoring value.

Usually the buyers of these wealth-thieving bonds had no choice. The covenants in their fund management trust deeds pledged that the funds would buy such nonsense. (Swiss bonds, Norwegian bonds, Japanese bonds, German bonds etc – all paying negative interest.)

If I were in a sterner frame of mind, I would display these behaviours as a reason never to use those index funds or computer-driven funds that make open-ended pledges to hold even the most absurdly-priced instruments. Mispricing occurs every day because of such mindless contrivances.

In NZ, Orr and Robertson, and the public sector generally, seem to have lacked access to the minds of our smartest people, whose job it is to price assets properly. They do not cooperate. There can only be one winner. Taxpayers are the losers.

In listening to the public sector advisers, the decision-makers were doomed to make choices that were vulnerable to market responses.

The private sector brains trust had worked out we were already in a short-term dangerous capsule, feeding inevitable and imminent inflation by printing tens of billions of funny money as though the Social Credit leader of the 1970s, Vern Cracknell, was in charge. (We printed $50 billion!)

Now that rates are not 0.4% for 10-year bonds, but 4.0%, we are about to raise more ten-year money.

As a reference point, $10 billion borrowed at a cost of half a percent has a 10-year servicing cost of $500 million, paid by the taxpayers (and, sadly, by even more borrowings).

At 4%, that 10-year cost is $4 billion, an excess of $3.5 billion, that money disappearing to the Middle East, Asia, Europe and America, countries which will take up the new bond offers.

The USA, despite Trumps and its gun laws, has something to teach us in this area.

Its private sector leaders regularly are seconded to public duties, and the public sector leaders often are transferred for short-term roles to work amongst ''the opposition''. Not always, but often, this benefits both sectors.

In NZ we have made occasional use of private sector leaders, the likes of the late John Anderson having offered his intellect, leadership and knowledge to governments of both hues, greatly improving leadership in areas like health, education, and financial management.

So too, did Hugh Rennie (KC), like Anderson, knighted for his contributions in many areas in Rennie's case, broadcasting being just one example.

The only reliable way forward for New Zealand to create wealth, improve productivity, manage debt, address inequality and weather changes, AND exploit our comparative advantage in areas like food production, is to introduce, no matter how temporarily, our real leaders to the public sector, and to introduce public sector leaders to private sector disciplines.

Currently many private sector leaders have given up trying to help.

Years ago, Tatum Park near Otaki used to run management courses for imminent leaders (and a few no-hopers). It attracted people from public and private sectors. Perhaps its greatest achievements were the relationships that evolved after people from both sectors were forced to live together for a prolonged period (weeks).

Treasury has had brief periods of good leadership during the past 30 years when it has welcomed the use of private sector disciplines.

But it has also destroyed multi billions of taxpayer money through operating without intelligent input. Its behaviour has often looked bovine.

Think of the billion destroyed by oafish behaviour when South Canterbury Finance was pillaged.

Think of the sale of NZ Steel for a NEGATIVE amount because Treasury resorted to illegal strategies. The High Court made the taxpayers return the sale price to Equiticorp investors, who had funded the purchase of NZ Steel.

Think of the sale of the railway assets, where lazy, careless people sold $100 notes for a few coins. Untold millions were just gifted away to random property investors.

Think of the contracts that have led to bonfires – the computer software mistakes in areas like education and the police.

My hypothesis is that we need much better attitudes towards merging public and private sector leadership, at least for secondment periods. It is a truism that once you politicise the public sector you will dumb it down.

Covid proved that without the leadership of many in the private sector there would have been worse delays in acquiring protective gear, worse delays in getting Auckland vaccinated (the ''telethon'' idea was a private sector initiative, though sold as an Ardern/Hipkins idea) and without the likes of Sir Ian Taylor, we might still be arguing about our testing procedures.

The billions of wastage must stop. We do NOT run budget surpluses.

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Many decades ago my uncle, Fred Lee, was head of what was then called the Government Stores Board, which on behalf of the public sector bought what the public sector needed – cars, pencils, desks, everything. His greatest ally was a private sector leader who joined him for drinks at the Midland Hotel after work, not every day, but often. Fred reckoned he saved millions through that connection. That was 50 or more years ago! (He paid for his own drinks.)

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STEPHEN Toplis, Head of Research at the BNZ, was convincing when he summed up the range of consequences of the miserable weather event that has damaged Auckland.

Yes, there will be more demand for cars, brown goods, whiteware, carpet, construction materials, construction labour and may other items destroyed by the water.

Yes, if supply is constrained price increases are inevitable.

Pukekohe helps feed NZ. Yes, food supplies will be reduced; demand in all areas will lead to price increases; inflation; a deferral of when inflation can be tamed; a deferral of when interest rates will ease.

Toplis' words had the effect of mocking those headline-chasers who sought to provide our media with an off-the-cuff guess as to the economic cost.

One such silly fellow guessed $346 million; not $347m? (Why does the media call on headline-chasers?)

Toplis correctly noted that nobody has even the faintest idea of the cost. It could be $500 million, it could be $1.5 billion, he said.

After the Christchurch earthquakes the media published the guesses of the repair cost at $16 billion. The current view quoted is $40 billion.

Our media will gain in sophistication and credibility when it ceases to seek such guesses and addresses the real issues rather than point fingers at people trying to do an impossible job.

The only certainty is that the destruction of assets is NEVER of benefit to the owners of those assets.

Most of the flood-destroyed assets will be owned by Auckland Council – bridges, roads, pipes, parks etc. Sooner or later, rates will reflect this cost.

The insurance money will be like a sugar rush and may briefly lift such artificial measurements of wealth as GDP.

But we will pay. Of the publicly-funded assets, many would be self-insured (by local government or government).

Given the level of financially-strapped people in Auckland, many destroyed assets will be uninsured. Poverty would result.

So I expect elections will be won by politicians who vote to borrow more money and pay out the uninsured, as happened in Christchurch. Moral hazard will be disregarded again.

None of these things seem disinflationary. The nett result of such an event must be negative.

Let us hope that in the future these atmospheric rivers of rain descend at sea, and that we rebuild wealth for a few years before such events extract that wealth from us again.

Such events underline why NZ must preserve its borrowing ability and must never borrow frivolously to fund wish-lists or dopey political ideological projects. (Broadcasting merger, anyone?)

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IN last week's Taking Stock I wrote that Oceania Gold was ASX-listed. Of course it shifted to the Toronto exchange some time ago and its shares are no longer tradeable in Australia. Mea culpa.

The Toronto exchange is not as inaccessible as it once was, but is still more of a nuisance than Australia, for traders in mining shares.

Yet Toronto's exchange is a haven for mining stocks. It attracts punters as well as real investors, and a fair share of those who pick horses by their number.

It is a long time since NZ has had its own mining platform, when the likes of L and M and later Crusader, Oilfields, NZOG, Southern Petroleum, Petro-Taranaki, and Macraes Mining were all actively traded.

Those were the days when some fairly ordinary sharebrokers ''specialised'' in mining stocks and penny dreadfuls, often sending out poorly researched sales guff to attract punters. Thankfully, that breed seems to have been sent off to distant paddocks.

Oceania Gold is real. It does mine gold and does make a profit.

But investors will have to trade through Toronto to access the shares.

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In February and March our advisors will be visiting Hamilton, Christchurch, Wellington, Nelson, Napier, and Auckland and are available on the following dates:

Chris will be in Hamilton on Tuesday February 21, at the Ventura Inn & Suites boardroom, 23 Clarence Street, and in Christchurch on February 14 and 15, at the Airport Gateway Motel.

Edward will be in Wellington on Friday 10 February, in Nelson (Beachcomber) on Friday 17 February, and in Napier 22 (Mission Estate) and 23 February (Crown Hotel).

Edward will also be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Ltd

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