Taking Stock 30 March 2023

THE collapse of Credit Suisse will be significant for New Zealand companies, if not for investors.

It might be highly relevant to the Tauranga sharebroker Craig & Co, which has benefitted greatly from Credit Suisse in the past two years.

Credit Suisse's recent history uncovers many interesting stories. In the global financial crisis in 2008, Credit Suisse, like Rabobank, did not need a bailout from its home base Switzerland, just as the Netherlands-based Rabobank retained self-sufficiency.

In contrast UBS received a multi-billion dollar bailout.

The Swiss government has just facilitated a takeover of Credit Suisse by UBS Warburg, 15 years later.

Both companies have been present in New Zealand, Credit Suisse a huge participant in our equity and debt markets as an underwriter, along with its then NZ partner Jarden, arranging such critically important and difficult issues as the Covid-era billion dollar cash issue that rescued Auckland International Airport.

Credit Suisse had once owned Jarden, indeed twice it paid an impressively high premium to buy into New Zealand's premier broking firm and twice sold back, at a discount, making a number of New Zealand brokers at Jarden very wealthy people. Banks are rarely canny sellers of assets.

Until two years ago Jarden had a formal agreement with Credit Suisse, assisting Jarden to take on major tasks that needed a very deep-pocketed partner.

Jarden also transacted for Credit Suisse all of the NZX deals that Credit Suisse originated from Australia, enabling Jarden to dominate the NZ market, with close to a half share of all NZX transactions. For many years Jarden have ruled, forearmed with the bulk of buy and sell orders.

In 2021 Jarden began an ambitious plan to export its culture and intellectual skills to Australia, competing head-on with Credit Suisse in transactional work, wealth management and, most crucially, in capital market corporate advice. In effect Jarden cut its link with Credit Suisse.

Unhappy about this, Credit Suisse transferred its Australian business to Craigs, enabling the smaller NZX business to virtually double its NZX market share.

Jarden never said so but its leadership would have been watching the stress building in Credit Suisse, its governors in Switzerland making strategic errors, losing key people, and lacerating its Swiss reputation through involvement in some stupid associations with higher-risk fund managers, and through barely legal behaviour.

Credit Suisse were racking up some heavy fines around the world, not to the extent of Goldman Sachs and Deutschebank, but still measurable in billions. Respect was being lost.

Whether that decay was a factor in Jarden's decision to end the association with Credit Suisse is something only the key people of Jarden would know.

The departure of Credit Suisse, once the globe's sixth largest bank, will deny New Zealand access to what has been a source of billions of capital. In its better days Credit Suisse was a valuable friend to NZ, a country in deep need of access to international funding.

Credit Suisse will not be the first huge investment bank to depart New Zealand.

Goldman Sachs effectively stopped investing capital in NZ many years ago and now has staff at a level where it would need ring-ins for a social game of soccer.

Deutschebank bought and sold Craigs in an era where it was disgracing itself with corrupt behaviour, as outlined in the excellent recent book, Dark Towers. Craigs will be glad to be de-linked.

The Halifax Bank of Scotland came and went in the early 2000s, partly responsible for the growth and then the demise of Strategic Finance.

Lloyds Bank bought and later sold The National Bank of New Zealand, later disgracing itself, watching its share price fall by more than 90% during the 2008 crisis.

Now Credit Suisse has gone.

UBS Warburg has a minor corporate presence in New Zealand, as does Goldman Sachs.

New Zealand needs to borrow tens of billions to build or rebuild infrastructure, much of this problem exacerbated by the recent cyclone Gabrielle.

NZ also is still paying for the cost of the Christchurch earthquake and for the errors of Robertson's Covid-coping plan, the most egregious of those errors being the $8 billion thrown away after the purchase of $50 billion of government bonds at a high premium in 2019-2020. Those bonds are now being sold at a cash loss to taxpayers of at least $8 billion.

Our country would prefer to have the likes of Credit Suisse to be part of the capital-raising exercise that we are facing.

It is doubtful that its new owner UBS Warburg will be a full replacement.

My guess is that we will be turning to Asian banks to play a busy role in our corporate and government quest for funding.

One issue that the demise of Credit Suisse has left dangling is the rights of investors in subordinated bank securities when a bank collapses.

These Tier One and Tier Two securities have played a crucial role in recapitalising banks and funding those banks through hazardous years.

In essence banks have been allowed to sell interest-bearing securities that for a few years can be part of the money defined as capital. This enables banks to meet minimum capital requirements, patching up balance sheets that had been damaged by bad loans and losses in areas like derivatives, and building up reserves to cope with a troubled world.

If the securities have a long enough repayment commitment (say 10, 20, or 30 years) then the central banks or the credit rating agencies would allow this long-dated debt to masquerade for a few years as ''capital''.

Our banks have raised billions through this vehicle since 2008.

As we have recovered, the banks have thrived and easily have been able to repay the hybrid-capital securities, retained profits helping to meet capital ratios, replacing the hybrids.

In recent times Credit Suisse issued US$17 billion of such a security, ATIB (Alternative Tier One Bonds).

Hybrid capital is always sold as ranking behind bank deposits but ahead of ordinary shareholders. This batting order is logical. Shareholders benefit from share price growth. Bondholders usually do not.

Yet when Credit Suisse collapsed the shareholders were given a tiny return, by way of UBS Warburg shares, while the hybrid security-holders were completely written off, the institutional holders of these securities getting nothing back.

How could this change in the batting order occur? Part of the answer lies in the poor disclosure in the documentation of the ATIB.

I expect the ATIB holders to challenge this decision in court and I expect them to argue convincingly.

If their argument fails, then who in future would buy hybrid capital? Nobody would, if the batting order was not documented.

The European behaviour is already impacting on New Zealand.

Next month Heartland Bank was intending to raise its capital levels by $125 million with an issue of hybrid capital, probably at a coupon rate of 7%.

I doubt that it will proceed given the Credit Suisse/UBS Warburg behaviour.

Heartland may have to revert to a more costly rights issue, looking to raise the capital that it needs to fund its Australian purchase and growth plans.

Clearly the NZ market shares my expectation.

Unaccountably Heartland's share price has fallen by more than 10 percent, in recent days.

I infer from this that the institutions expect Heartland to announce soon a discounted rights issue. It is always an institutional response to sell off before any announcement, forcing the issuer to accept an even lower share price as a result of the sell-off. Having sold off early, the institutions then buy back more cheaply into the rights issues, pocketing a tidy gain. There is nothing illegal about this game unless knowledge is held by a participant in the game.

This institutional response suggests that no more issues of hybrid securities will occur before a Swiss court rules on the Credit Suisse ATIB write-off, after the arbitrary change in the batting order.

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THE bungling of our economic management, our failure to address our low productivity, our failure to control inflation, and our constantly growing balance of payments deficit would logically combine to have one obvious consequence.

The NZ dollar seems certain to lose value, because of these failures.

This exchange rate loss would be exaggerated if global banking tremors led to a flight to the illusory haven of the US dollar or, more logically, to the currency of a well-managed country like Singapore.

Many will recall how the NZD fell below 40c US in 1985 after the Labour government then floated our currency and moved from a grossly over-regulated financial market to a new status of having virtually no regulations at all.

Many will remember this as the mad scientist project overseen by Roger Douglas, from over-regulation to abandonment of financial supervision.

Economist Gareth Morgan, who I greatly admire, toured the country in that period, seeking to persuade our banks and companies to prepare for an exchange rate of less than US30cents.

An extraordinary surge in interest rates tripped up his prediction.

Our short-term lending rates hit 1000% per annum in March 1985. Long-term mortgage rates hit 24%. Our Minister of Finance earlier had announced a 5-year government stock issue paying 17.5%, with an investor option to recall the money after 30 days, at any time of the stock duration.

All of this led to a surge in the value of the NZD, from US 40cents to US 55cents, in a very short period, causing amongst other things, huge distortion and grief to the rural sector and the corporate death of Broadbank, which lost a currency bet. Ironically the 1990s Reserve Bank governor Don Brash had been a CEO of Broadbank.

Having been a market participant during this period, I have ever since had no wish to forecast currency rates and have struggled to differentiate foreign exchange dealers from the status of those working at Steptoe and Sons, or with bookmakers at the races.

Today the NZ dollar again looks vulnerable.

International punters play with NZ dollars at levels not at all linked to New Zealand's share of international trade.

My memory recalls that the NZD is amongst the ten most traded currencies in the world, liked by FX traders because its daily value is not often affected by central bank buying or selling, i.e. artificial intervention.

In recent days relatively reputable organisations, like JP Morgan, have speculated that within months the NZD will trade at around US55cents.

If that happens, watch the price of petrol, gold, and imports, as well as the grocer shop prices of a leg of lamb.

Inflation would become further embedded.

Oh, for more competent economic management!

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New bond Issues

Contact Energy has set the interest rate for its 6-year senior green bond at 5.62%.

Christchurch City Holdings has set the interest rate for its 5-year senior bonds at 5.043%.

If you have not already done so, please contact us if you would like an allocation.

Contract notes for both bonds will be issued on Saturday 1 April.

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Edward will be in the Wairarapa on 3 April, in Nelson 21 April, and in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Chris will be in Christchurch on April 18 and 19 (FULL).

David will be in Palmerston North on Wednesday 19 April and in Lower Hutt on Thursday 20 April.

Fraser will be in Dunedin on Thursday 27 April.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Taking Stock 23 March, 2023

Fraser Hunter writes:

THE New Zealand-developed transport software company Eroad has achieved quiet success in NZ, its software used by around 70% of New Zealand’s 30,000 trucks, but the company's share price has tanked. It has failed to achieve scale in the USA and continues to burn cash there.

Over the past few weeks we have had some important updates from Eroad; firstly, a downgrade to full-year guidance in late February; secondly, its 2023 Fleet Expo held in Wellington; and this week its investor day and strategy unveiling in Sydney.

The investor day was the most crucial as it provided some insight into what Eroad was doing to reduce the cash outflows and head towards breakeven, how far through the Coretex acquisition it was and what synergies were achievable. Lastly, and perhaps most importantly, was how the company was planning to balance all the former, while still trying to gain a foothold in North America.

It was also an opportunity to introduce a refreshed management team, with the day led by Mark Heine, who is less than 12 months into his CEO role and surrounded by a number of new appointments in the executive team, some of which stayed on from Coretex.

The North American strategy was one of the main themes of the investor day. Earlier in the week, Goldman Sachs was announced as an adviser to help identify partnership options, but the investor day had few specifics with the company unsurprisingly not naming any candidates it was talking to. It did note an ideal partner would improve market access, offer compatible or complementary technology, and/or potentially contribute capital.

The company expressed that ''no options were off the table'' in regard to the review, but confirmed that divesting the US business was not one of the current considerations. Options listed included business combinations, joint venture and an alliance partnership. The next update on the partner search is expected to come at the annual result in May.

The Investor Day presentation also outlined the outcome of Eroad's recent strategic review and change of strategy. The strategy-shift was somewhat forced on Eroad following an underwhelming performance over the past 12 months. The company missed revenue targets, costs grew faster than revenues and working capital ballooned as stock grew ahead of sales. Additionally, the capital markets for tech companies changed dramatically, with a higher premium on cash generation and a lower emphasis on revenue growth, these being the result of much higher interest rates.

Eroad's business model was unsustainable in the face of changing market conditions by the end of FY22. In response to these external pressures, Eroad adjusted its strategy with the hope of reducing spending and boosting cash flow, while protecting the potential for growth in the United States.

The strategy was put together with the assistance of strategic consultant McKinsey (consultancy costs must have contributed to the recent downgrade), and while the presentation was heavy with project management jargon (Agile, Platform 2.0, Optimisation etc), overall the strategy was positive, simple and sensible, but ultimately still hinges on the execution.  

The strategy was broken down into four key areas:

1) Segmentation of customer offering

A key aspect of Eroad's customer service strategy is to segment its customers based on their size and revenue contribution. This, in theory, will allow Eroad to reduce its costs and increase its profitability by offering different levels of service and support to different customer segments.

Eroad's revenue distribution shows that the smallest 80% of its customers generate only 13% of its revenue, while the largest 20% account for the remaining 87%. Therefore, Eroad is experimenting with lower-cost self-service models for smaller SMB customers who have less complex needs and lower willingness to pay.

At the same time, Eroad is catering to larger customers who demand and value premium support and customised solutions. Eroad has already started to introduce a premium product to its NZ client base with some success, and plans to scale up this offering across its markets.

This premiumisation strategy is nothing new and was highlighted as one of the buzz words across S&P500 companies during the most recent result season, where companies of all types are targeting the high-end segment of their respective markets with differentiated products and services that command higher margins. This strategy entails challenges as Eroad likely faces competition from other major players in the market who have similar ambitions and deeper pockets.

2) Improvement in R&D spending and payback

The second area highlighted was inefficient spending on R&D. Eroad had historically developed products that were too complicated or expensive to maintain. They also had a number of different platforms that did not work well together.

The result was consolidating the platforms to one that worked for all products and customers (EROAD 2.0), and a reduction to three core products (Corehub, Clarity Dashcam and Ehubo). The platform also aims to integrate with other devices and systems to leverage third-party data.

To make these changes happen, Eroad hired a new director who would help to improve project delivery, team structure, software process and communication.

The desired outcome is to reduce the R&D spend to more manageable levels, while also enabling the rollout of faster products with better returns on investment, while meeting the current needs of customers. The forecast R&D spend falls from its current level of 28% of revenue ($38m) to a target of 12-15% of revenue.

3) North American Market fit

Eroad reiterated the size and potential of the US market. The addressable market is well over $1bn, 10 times the size of NZ and 5 times Australia. Technology, industry, and regulatory change will also help to double Eroad's addressable market by 2030. The opportunity is undoubtedly huge, but clients required more than a telematics system.

Post covid, US operators need help with labour shortages, poor road conditions, congestion, and complex regulations that affect efficiency and profitability. Eroad is shifting its focus from vehicles to operator needs. The company can already provide a decent solution, as evidenced by the Sysco signing, but it needs a partner to become a major North American player quickly and to plug the gaps in its current offering.

The US market offers the company the most upside but also the most risk and uncertainty, especially since there is no partner and few details about what capital and resources it will provide, what it will want in return, and the impact on existing shareholders.

To scale, Eroad must expand its North American enterprise sales team. Positively, it currently has 20,000 units in pilot with regional enterprise customers and expects to convert some of them into paying customers next year (60% conversion rate last year).

4) Unit economics improvement

The final prong of the strategy addressed how Eroad could improve the economic return over the client life cycle. Improvement is expected to be driven by reducing costs, continuing to grow the business, and retaining customers for longer periods of time.

Crucial to this is Eroad's ability to reduce overheads and limit cost growth, while expanding its customer base (something it has historically struggled with) and also retaining customers on a lower cost basis. Eroad has aggressively targeted $20m in annualised operation cost cuts going forward, which has resulted in a meaningful reduction in headcount in its NZ business.

Eroad currently has a 90% customer retention rate and a breakeven period of 23 months. If it can improve either of these metrics, it will gain a lot of operating leverage.

Prior to the Investor Day, Eroad updated its financial guidance for FY23. The company expects to have higher revenue ($159m-164m), but also higher losses than previously forecast (negative -$3m and - $6m).

This reflected higher costs due to delays in implementing the Sysco rollout in the US, increased one-off and inflationary costs, and the refocusing of the Research and Development programme.

Alongside the strategy document, Eroad released some long-term targets, aiming for revenue growth of 11%-13% per year until FY26. Based on its most recent guidance, this would result in revenue between $217m – 237m by FY26.

At the same time, it plans to reduce its R&D spending from $38m to around $30m by FY24 and lowering its R&D costs as a percentage of revenue to 13%-15% going forward (24% this year).

As a result, Eroad expects to be free cash flow neutral by FY25 and positive by FY26.

Fleet Expo Summary


A few weeks ago, we attended Eroad's 2023 fleet expo in Wellington. While we were hoping for some insight into how the business was tracking, particularly abroad, it was not the theme of the expo, which was more targeted at adding value to its local client base.

It did this by bringing in several guest speakers and specialists covering topics relevant for key decision makers and fleet managers. The most dominant theme was how electrification was changing vehicles and fleets and how companies can best prepare themselves.

I came away from the expo with a couple of key takeaways: Firstly, the national vehicle fleet will see massive change in the next five years or so; and secondly, Eroad has a very good NZ business, built on strong relationships and is in a good position to add value to these partners as it navigates change in technology and requirements.

The national fleet is already changing, with electrification of vehicles, either full electric or partial / hybrid, making up a growing portion of new vehicle sales. For the 2022-year, new electric sales jumped +150% on 2021, Plug in Hybrids (PHEV) by +192% and Hybrids up +30%. Full electric vehicles are expected to overtake standard petrol hybrids in volume this year.

While the total number of electric vehicles is low in terms of the overall fleet size, electric vehicles represented 11% of new vehicle registrations in 2022, up from 4.7% in 2021. There are many reasons why this will continue to rise.

New Zealand and its leading companies have some lofty emissions targets, and fuel will be a big part of meeting them


One speaker noted that while New Zealand generates lots of clean, renewable energy, it imports and consumes far more in the form of petrol and diesel. More electric sources would reduce emissions, but the revenue from running and charging that fleet would mostly stay on shore (i.e. paid to electricity providers rather than oil companies).

Switching from a high-emission vehicle to an EV or partial EV will significantly reduce a company's carbon footprint. Large companies may prioritise this, but smaller ones may not. First, because large companies recycle fleets periodically to optimise asset values. They will also need to publicly report emission levels and will be under scrutiny from fund managers, who are also under pressure to deliver on their clean investment claims (i.e. green funds, Kiwisaver).

Car manufacturers are just beginning to target the mass market


To date, electric vehicles have been predominantly adopted by the wealthy, the environmentally conscious, or businesses that upgrade their vehicles periodically. While a government subsidy has helped lower this, the entry point for the most popular electric vehicles has been $80k (the threshold for the rebate).

Over the next few years, the number of brands, models, and types of vehicles will expand dramatically, as will the price point. A $30-50k price point for a fully electric vehicle with a decent range and fast charge will appeal to a mass market that has primarily been serviced to date by imported second-hand Nissan Leafs.

Car manufacturers are also accepting that EVs are more effectively built in new factories and on new platforms, rather than within existing infrastructure (i.e. alongside combustible engine vehicles). This will further increase economies of scale.  

Support networks are improving constantly


Range anxiety is still the main reason people don't use electric cars more, so infrastructure networks continue to be a key issue. Extreme events like those in the North Island, where power outages and key infrastructure were taken offline overnight, reinforce this feeling. EVs may only progress slowly until resilience is guaranteed.

New charging stations and sites are rapidly being rolled out, along with improving technology in the form of faster-charging, longer-range batteries. The EECA has driven this, but petrol, power, and newer specialist companies like ChargeNet are also now involved. Charging at home, in apartment or parking buildings, or at workplaces with fleet charging infrastructure is also a growing practice.

So where does this leave investors?


Both the investor day and the fleet expo highlighted the dramatic shift apparent in the industry, driven by technology change, industry change and regulatory change. Eroad's New Zealand business remains sound, with a dominant and profitable position, an attractive value proposition for its customers. It also has significant upside if it can further broaden its offering and deliver value across its existing loyal customer base, which is part of the broader customer segregation and enterprise offering.

The Australian business is solid and growing, but not with the same take-up as locally, but will eventually face the same hurdles and require similar solutions to other markets. For Eroad this remains an opportunity.

The US opportunity is huge, but will take time, require a lot of capital and will involve significant risk as there are a number of questions to be answered.

Eroad is not an investment opportunity for the faint hearted. What was formerly a tech darling, with high upside, now resembles more a small, high quality Australasian business, with a growth option in the US. Any success will also likely be shared with a yet to be named partner. During this time, investors should be prepared for little in the way of dividends, and potentially a future capital raise.

Eroad offers a unique growth opportunity in a sector with long-term tail winds and has some value underpinned by a high-quality local business. It is also not beyond the realm of possibilities that should it identify some large well-funded partner, it may find it easier to just take over or break up what is currently a tiny New Zealand-based business, with a market capitalisation of just $85m.

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New Issues


Contact Energy Green Bonds

Contact (CEN) has announced that it is considering an offer of 6-year fixed rate, senior green bonds. It is likely that these bonds will have an interest rate above 5.70% per annum.

Contact has an investment grade credit rating of BBB (stable outlook).

Contact will use the proceeds to finance and refinance renewable generation and other eligible green assets in line with Contact's Sustainable Finance Framework.

The offer is expected to open on Monday, 27 March, when more details will be released.

Christchurch City Holdings (CCHL)

CCHL is offering 5-year unsecured, unsubordinated, fixed rate bonds to both retail investors and institutional investors. The bonds mature in April 2028 and will be quoted on the NZX Debt Market alongside existing debt securities (CCH020). CCHL has a Standard and Poor's credit rating of AA and a stable outlook.

Full details of the upcoming bond issue will be released at the time of offer opening which is expected to be on or around 27th March 2023.

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Edward will be in Napier on 30 March (Crown Hotel) and 31 March (Mission Estate) and will be in the Wairarapa on 3 April. He will be in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Chris will be in Ellerslie on March 27 (pm) and 28 (am), on the North Shore on March 28 (pm) and in Ellerslie again on March 29 (am). He will be in Christchurch on April 18 and 19.

David will be in Palmerston North on Wednesday 19 April and in Lower Hutt on Thursday 20 April.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Taking Stock 16 March 2023

WHEN the Bendigo gold mining project owners last week revealed to Australian investors the details of their ambition, the South Island town of Cromwell should have sat up to attention.

So should town planners, home builders, various government departments, property developers, and if there were any people in Treasury who plan to stay there for five years, so should those people have given thought to the consequences of the Bendigo project.

Santana's presentation in Australia last week said ''Our vision is to develop the Bendigo-Ophir project into a world class long life, environmentally sustainable mining project that will bring generational employment and prosperity to the Bendigo region.''

The gold mining project is currently owned by Santana Minerals (SMI), a relatively small Australian stock exchange listed company.

Australians currently own around 55% of SMI. New Zealanders own the rest, have two key directors on its board, and for the moment have the opportunity to creep up the shareholder registry.

The plan revealed by SMI in Australia has been kick-started by unexpectedly high-yielding gold discoveries that imply a mine that might have a life of 50 years or more.

SMI presented a plan that might be producing 200,000 ounces of gold per year ($600m per annum, at current prices), as early as 2028.

It disclosed that the company is beginning the significant process of preparing for a resource consent, the crucial steps that enable any mining company to switch from an aspiration into an approved plan to produce gold.

The resource consent is never a formality. SMI has prepared by assembling a group of leaders, each with decades of experience of addressing the issues that the consenting authorities would examine. This would include plans that address waterways and air pollution, visual pollution, the safety of birds, insects and animals, the treatment of mining by-products, roading, safety and many other issues.

Various technically competent relevant external consultants would need to help prepare and validate SMI's plan. It will likely take at least two years to prepare such a plan and have it processed and approved.

It seems certain that to match its stated objective to be a world class sustainable and environmentally friendly mine, SMI must use new technology that primarily uses equipment powered by electricity. The latest vehicles and plant used in mines are adopting this very recent technology.

Were there any lingering minor concerns, these would need to be at least partially addressed and offset by the enormous economic benefit to Cromwell and New Zealand that would follow the annual export sales of 200,000 ounces of gold.

In most simple terms the economic benefits might be:-

- $600 million (at current prices) of annual exports (largely to Australia, which buys virtually all of our gold exports).

- Around $10-20 million of royalties paid to the Crown from each year's production. A 50- year project at $20 million per year is $1 billion.

- Highly paid employment for perhaps 300 people (average wage likely to exceed $150,000).

- PAYE tax of perhaps $10 million per year.

- Corporate tax revenue of perhaps $40-60 million per annum.

Over the life of the mine, the revenue for the Crown would be many billions.

For Cromwell, the project as planned would be transformational.

If most of the mining workers were recruited to Cromwell, there would be an obvious impact on housing, schooling, roading, and other infrastructure. Already housing and local school/college rolls are stretched. The local college currently has 400 students in its lower year groups, implying an enormous expansion of the roll in the next two or three years.

An influx of 300 workers might imply, with partners, several hundred more shoppers, with well-fed purses and wallets.

The picturesque, modern, but somewhat empty town centre would be celebrating.

A town that survives on horticulture, viticulture, tourism, and a motor-racing attraction would transform, with the Bendigo project being by far the biggest wealth-generator in the area.

Anyone who had visited the project, studied the results of the two years of drilling results and read the presentation made by SMI in Australia last week, would understand not just the dimensions of the project, but would be thinking of the transformation this would bring to an area of New Zealand that garners little political or public sector attention.

At very least the local politicians should bone up on the Bendigo project and disclose their attitude towards it.

Of course, Cromwell has not always been away from the minds of politicians.

In the late 1970s when politicians and the public sector were making huge decisions about national development, the plan was hatched to build the Clyde dam, just down the road from Cromwell.

At that time the Clyde River and Kawarau River joined at Cromwell, then a tiny town created to accommodate the gold rush era in the late 19th century. The large gold dredge, the Lady Ranfurly, in that era produced 1,200 ounces of alluvial gold in just one day, from the junction of the Clyde and Kawarau rivers.

Built on the river banks, the old Cromwell town was dominated then by wooden churches, grocer shops, hardware shops, and public bars, and was largely unchanged until the 1980s.

When the politicians decided to build the dam and create Lake Dunstan, the project needed to submerge the old town.

The town and many houses were shifted at the Crown's cost a couple of kilometres up the road.

Farms that would be inundated were bought by the Crown. The new town is thus modern, attractive, surrounded by mostly recently built houses, and relies heavily on the growing horticultural developments, cherries, stone fruit and grapes now a cornerstone of its economy.

Tourism has grown, with bicycle trails abounding, and the town benefits from its close proximity to Queenstown, barely an hour down the road beside the Kawarau River that flows towards the Shotover River and Lake Wakatipu, at Frankton.

A 30-year, world-class gold mine would turbocharge Cromwell's economy.

SMI would be highly aware that it would need to address every environmental concern if its mine were to be consented.

Comfortingly, it will know that Central Otago's local government specifically names gold mining as an approved activity in the area.

None will have ever been built with such environmental care.

None will ever have targeted many millions of ounces of gold.

None will ever have sold its gold at NZ$3,000 an ounce (NZ $3,100, today).

SMI will also know that the area has many consented gold mines and has no history of impeding any well-planned consent applications.

The proposed mine, on private land, would be developed on land with very little agricultural and horticultural value. Rabbits, heather, and the odd rebellious sheep, like Shrek, barely eke out survival in barren, stony land, which is well out of the public view.

SMI will know that environmentalists would want a plan to re-home the geckos that abound in the scrub around the ranges.

The plan would need to be more successful than one West Coast environmental plan to re-home snails, initially by spending huge sums gathering them up and giving the snails bed and breakfast in air-cooled premises until they could be allocated more pristine permanent premises.

The air cooler malfunctioned. The snails died.

The plan to mine Bendigo is now underway.

The SMI presentation in Australia outlined the plan and recorded that the first steps towards a consent application are occurring while the infill drilling proceeds to reduce the risk that assaying results might be misleading.

To date, independent analysis records SMI has around 2.7 million inferred ounces, and around 0.3m of indicated gold. Virtually all of this gold is in one tiny sliver of rock under the Rise and Shine Valley.

To move from inferred results (from drilling every, say, 120 metres) to indicated results, infill drilling occurs at every, say, 40 metres, thus obtaining much greater mathematical certainty that the drilling has neither been randomly lucky, nor randomly unlucky.

Infill drilling is now proceeding, with four drilling rigs working virtually every hour of the week, when the contractors can provide staff.

Within another three months more independent assessment will declare a new inferred figure and, hopefully, a much higher indicated figure.

When the indicated figure hits millions of ounces, the SMI project will move towards top gear, as it seeks to become New Zealand's biggest and richest ever find of gold, comparing favourably on a global scale.

Cromwell would stand to be transformed.

This might all happen in five years. That is the SMI plan.

I hope the politicians, the public service, the local town council, property developers, and many others will now be alert.

The project is no longer a dream. This year, it might convert to a very credible, important project, an essential part of New Zealand's plan to grow wealth to help restore the living standards and the facilities, infrastructure etc, that have been eroded by Covid and by weather bombs.

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SANTANA Minerals is not permitted to speculate on drilling results, nor is it allowed to disclose what it deduces from drilling samples, nor may it extrapolate from these results, guess future gold sale prices, nor guess the costs of mining gold. The ASX has strict rules.

I am subject to no such rules.

If any gold mine produces 200,000 ounces from high-grade ore (nearly three grams per tonne), then it would be highly enriching for the Crown, the township, the workers and would reward shareholders who took the risk of funding the project.

In basic arithmetic, it might have cost tens of millions to acquire the data that proves the presence of gold.

A consenting process could easily cost ten million.

The development of an open pit mine might cost tens of millions. The gear, vehicles and equipment required would cost many tens of millions.

The need to build a roading network in the hills and valleys might cost tens of millions, when added to the other earthworks.

Royalties would cost at least $10 million each year.

Labour costs at a working mine would cost perhaps $50 million each year.

So the arithmetic might mean that the capital costs to be written off might easily be $200 million, and the running costs might easily be $200 million each year.

In year one, if a mine produces 200,000 ounces, selling for $600 million would be sufficient income to write off capital costs, pay the royalties and running costs, finance future exploration cost (perhaps $10-20m per year), and produce a small pool for shareholders (perhaps tens of millions).

In year two, the capital costs would decrease.

Shareholders would expect a bigger dividend.

To raise all the money needed from equity might mean the issuance of another 100 million shares, meaning SMI would have 250 million ordinary shares.

A dividend pool that accommodated a 20c annual dividend would eat $50 million.

Annual sales of $600 million would soon have surpluses comfortably exceeding $50 million.

Because of the high grade of gold, mining costs would be relatively low per ounce of gold mined.

SMI cannot disclose these workings as they are filled with assumptions and therefore involve the unknown. This partly defines the word ''risk''.

Several years ago the biggest risk was that the exploration would not discover gold.

That risk has now been greatly reduced.

By 2024, more of the uncertainties should have been addressed if the company's presentation in Australia last week proves to have been under-stated.

_ _ _ _ _ _ _ _ _ _ _ _


New Issues

Kiwi Property Group Limited senior secured green bonds

Kiwi Property (KPG) has set the minimum interest rate for its 6.5 year fixed-rate senior secured green bonds at 6.00% per annum.

The offer is open and closes tomorrow at 9am (17 March).

KPG has also confirmed that it will be paying the transaction costs for this offer, so no brokerage will be charged to investors. The secured green bonds have an investment grade credit rating of BBB+. Kiwi Property is one of New Zealand's largest listed property companies with a portfolio that includes mixed-use, large format retail, and office buildings with a combined valuation of over $3billion. A product disclosure statement is available for investors to evaluate the bond offer here: 


Heartland Bank unsecured subordinated notes

Heartland Bank Limited is considering making an offer of up to $125 million of unsecured subordinated notes.

The Notes are expected to constitute Tier 2 Capital for Heartland Bank's regulatory capital requirements with a 10-year maturity date but may be redeemed after 5 years or on any quarterly Interest Payment Date after that date.

The Notes are expected to have a credit rating of BB+ from Fitch Australia Pty Limited.

It is expected that full details of the offer will be released in mid-March 2023 and an interest rate around 6.50%p.a. is possible.

Please contact us if you would like to discuss any of the above investments.

_ _ _ _ _ _ _ _ _ _ _ _


Edward will be in Taupo on 20 & 21 March, and in Wellington on 24 March. He will also be in Napier on 30 March (Crown Hotel) and 31 March (Mission Estate) and will be in the Wairarapa on 3 April.

Chris will be visiting Christchurch on March 22 (FULL), seeing clients at the Russley Golf Club. (Johnny is unable to travel for family reasons). Chris will be returning to Christchurch on April 18 and 19 (not yet full).

Chris will be in Ellerslie on March 27 (pm) and 28 (am), on the North Shore on March 28 (pm) and in Ellerslie again on March 29 (am).

David will be in Palmerston North on Wednesday 19 April and in Lower Hutt on Thursday 20 April.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Taking Stock 9 March 2023

IT is easy to imagine that very few New Zealand investors have ever heard of the Magnitsky law.

Indeed, it is to their credit that investors might calculate that it would never be of any relevance to them.

The recently-introduced law, after all, is solely relevant to cheats, to thieves and to those despicable people who contrive to rip off taxpayers.

Its history stems from a heroic Russian lawyer whose surname was Magnitsky. If he were alive today he would still be young. He was murdered by the current Russian regime because he had displayed his patriotism (to Russia) and his heroism by fighting corruption in Russia after Putin came to power.

He observed the henchmen and the politically powerful stealing unimaginable sums – multi billions – and, with the help often of greedy international banks, shifting the money through multiple banks in many countries until it was ''laundered'' and safe to spend, largely in Western countries.

The Russian lawyer Magnitsky collaborated with a smart American-born, British-domiciled, former Russian hedge fund operator to bring an end to this thieving. He traced such transactions, proved that grand scale larceny was widespread, and challenged the West to thwart the cheats, realising that there was no chance of prosecuting the Russian elite who were stealing.

The hedge fund operator escaped from Russia but Magnitsky was captured, tortured and murdered by the Russians.

His legend led to the Magnitsky law, a law first passed, almost unanimously, in the United States. The law enables a government to confiscate any assets that can be shown to have been bought with illegally-acquired money.

Many Russian elites stole money from the Russian people, often with as simple device as a contrived tax claim, perhaps using completely falsified claims for hundreds of millions of tax ''refunds'', even if the ''refund'' was for tax that had never been paid.

Someone in Moscow would authorise and pay out the refund. The money would be smuggled out, laundered, and then used to buy real estate in New York, London, Paris or indeed in any place.

Well, it is not so easy now, thanks to the lawyer Magnitsky. The US Government has passed the law and has since used it to confiscate assets worth vast sums of money, multi-billions, from Russian cheats.

Other jurisdictions, including in Europe, have similarly adopted laws allowing confiscation.

The Russians fought and continue to fight, as only they can, to thwart the laws. People have been murdered in many countries.

Magnitsky was by no means the sole victim of the evil campaign to maintain the pillaging.

For those who might be interested, the full story of the spine-chilling saga is now available in a book, Freezing Order, by Bill Browder, the hedge fund manager who blew the whistle and escaped from Russia.

Now retired investment banker Brian Kreft, a longtime friend who wrote the foreword for my book, The Billion Dollar Bonfire, owns the Paper Plus bookshop in Wanaka. His shop has won awards. It stocks many books that might appeal in a lovely town that is now the retirement home of many previous leaders of South Island commerce.

Brian regularly, and generously, sends me obscure books, including In the Jaws of the Dragon, that documented some fairly suspect political behaviour in New Zealand, involving China’s success in gaining a stronghold here.

Freezing Order describes the vigour of the Russian effort to prevent the Magnitsky laws from spreading.

Happily, this is one war Putin has already lost.

From a distance, I salute those willing to challenge the rotten human beings who scour out the wealth of others, displaying disdain for their country, absurd personal greed, and a total lack of morality.

In the Jaws of the Dragon, once freely available, is now not stocked in most bookshops, taken off the shelves, despite no public challenge in New Zealand. One wonders why book shops have banned it.

I expect Freezing Order is not available at Moscow Airport.

_ _ _ _ _ _ _ _ _ _

THE political responses to the published views of a corporate leader Rob Campbell are a little more than just dross, at a time when New Zealand faces a great re-set.

His role as chair of our reforming health sector might have been influential, and led to the adoption of better policies, but Campbell has been judged as dispensable by the very politicians who targeted him for those governance roles.

His sin was not to criticise the government’s policies but to publish his personal dislike of the National Party’s views on co-governance.

Clearly the Government felt this was a test of the ''independence'' of such people, so he was dismissed, in breach of his employment agreement.

That in itself was not sinister. It was just another decision on an issue that might have been a distraction in election year.

Campbell, also sacked from chair of the Environmental Protection Agency, stated in public that his EPA Minister, David Parker, had instructed Campbell not to reveal to the public the EPA strategy to develop co-governance policies. Adopt the strategy, but do not tell the voters!

Such deception is the antithesis of open, transparent, consultative government, as so piously, but hypocritically, preached in parliament.

It is remarkable how inevitable such deceptions are revealed in times of stress.

I would have expected an independent, experienced, wise chairman to have resisted such chicanery.

Even more controversially, Campbell has now joined the chorus, of whom I am a member, that sings about what is now obvious to all – that the whole public sector is deeply politicised, focused on just about any minister’s whim, far removed from the standard it should pursue, EXCELLENCE.

Surely the value of an independent business leader is to challenge the boundaries of those whose lives and standards are confined to using the media and voter forums to gain votes and thus obtain the right to hide but administer ideological change.

Since when did planned change need covert strategies, rather than open discussion?

In so far as I have observed him during his long career, Campbell has been a rarity, having switched from communism and stroppy trade unionist leadership to a comfortable corporate life, culminating in chairing the most capitalistic company of all, Sky City casino.

He was the chairman of Government Print when it was sold to Graeme Hart, kickstarting his career.

Campbell has been an outlier in corporate ranks, in that he has been willing to take the risk of talking regularly to our mostly young media reporters, allowing them to interpret his conversation. Most leaders minimise their interaction with such people to avoid misrepresentation.

Campbell has seemed to be intellectually energised, willing to develop his own conclusions, yet apparently able to work effectively with a wide range of people. He is no version of a business Einstein but he has a value developed from his range of experiences in quite different sectors. He seems willing to interact with anyone.

By contrast our best private sector leaders would privately confess that if they can be persuaded to join a governance group, they would want a dominant say in selecting who would work in the team. The busiest people usually decline to engage with the under-cooked.

That philosophy perhaps explains why so many excellent leaders are not willing to be subject to the voting of the masses, or of those people for whom they have little respect.

I guess we all admire a truly wise, proven, successful person who will take on the task of convincing others around the table to pursue the strategy of the leader, rather than surrounding his table with like minds.

Of course the risk of this, highlighted by the NZX example in the first decade of the century, is that shareholders might choose someone who declares he is the smartest person in the room and is not required to consider the views of people he holds in disdain.

The line between a great leader and a psychopath can be narrow.

I continue to recall the wisdom of one of New Zealand’s greatest leaders, Sir John Anderson.

He was a long-term friend.

I recall him ringing me to enlist my support for a rescue plan for an organisation in great trouble.

You do this . . . and I will do this . . . , Anderson urged. Between the two of us we will get the plan to the point when we can put it the stakeholders. If they vote ‘no’, we would have given it our best shot. They will vote ‘yes’. You and I implement it. We do not want anyone running interference. We can get the whole thing done in six weeks. Job done. Problem fixed.

He was right. The organisation voted for his plan and survived and thrives. Andy retired to fix other problems, in all sorts of areas, like health, education, banking and sport. He was a wonderful problem-solver, a man who rarely drove up blind alleyways.

Sadly, he died some years ago. He did not win every single battle, but he won most.

I suspect he would have been a great mentor for all who aspire to be effective in corporate governance. Is there another Sir John Anderson out there?

 _ _ _ _ _ _ _ _ _ _ _ _

WHEN our finance minister, Grant Robertson, succumbed to the selling influencers in the KiwiSaver industry, he authorised new legislation that propelled billions of KiwiSaver money into non-defensive, risk assets.

In May 2021 he was duped into touting growth assets for all those KiwiSavers who had left their savings in default schemes, the default schemes almost exclusively comprised cash and bonds, and were therefore much less volatile than balanced or growth funds.

Robertson compounded this error by implementing it immediately after a highly improbable decade of unbroken, record share market gains, hydraulicked by the free money that Robertson and his party had authorised during the busiest months of the pandemic.

His timing could not have been worse. Around 300,000 people had their money shunted into more aggressive higher risk funds, at a time that unsurprisingly proved to be the peak of exaggerated prices.

The logic was largely unchallenged, the general media unaware of the likely fate of the salesmen’s claims, and Robertson’s capitulation. The outcome has been disastrous.

People wanting to use KiwiSaver for a house deposit; people close to retirement; people whose other assets were carefully, personally placed into growth companies; and people who were convinced that the imminent future would reverse gains in asset prices had all been told that their KiwiSaver funds were in the most conservative assets. Such an allocation offset the risks they wanted to manage to meet their own needs.

As one such saver said to me: If my funds are subsidised 100%, I get a tax refund of $521, and my fund earns 2%, I can calculate exactly how much that will provide when I retire. That component of my savings is where it should be – in very low risk assets.

The saver observed that he disbelieved all the claims that one manager would be materially smarter than another so he found it easiest to leave his money in the default scheme allocated. His was a conscious, logical decision.

To be fair he would have received requests to discuss the subject, his default manager wanting to know whether his decision was conscious, or simply based on ignorance.

He would have been guilty of ignoring the requests. (Why the requests were not made by telephone might be related to the modern view that telephones are now in the same category as bullhorns, supplanted by texting.)

Well all of this came to a head last week when the research of Russell Investments NZ was released.

Most would have been better off remaining in the Conservative funds from which they were compulsorily exited, Russell’s report wrote.

Worse, those who were rewarded with charging to manage the default funds were selected mysteriously and covertly, various new boys replacing others, largely by promising lower fees (and no, or less-skilled, research capacities, by definition).

The new boys have performed materially worse than those who were replaced. Ouch!

The worst default fund has been run by Simplicity, which has no research capacity.

In the past 12 months it returned negative 12.6% for its default fund, largely because its index-based asset selection is compelled to invest in overseas bonds, which have been devalued by rising rates. It might also have been guilty of lending investors’ money at 1.5%.

The best of the new bunch returned negative 7.8%.

Those in default funds will have lost largely because of the mark-to-market losses that occur when long bond interest rates rise.

I am unsure why default funds were not invested predominantly in bank deposits, where rates were low, but the risk was minimal, as most in a default fund would have expected.

Russell’s research notes that most people in KiwiSaver funds are not interested in how their money is invested, nor focused on things like social or environmental considerations.

If their fund managers regarded these matters as of prime importance, the managers would have excluded bonds or shares in the coal and oil sectors which, ironically, were the biggest winners after Russia invaded Ukraine.

Russell concludes that investors have not been well-served by the ''we know best'' patronising decision of untrained government ministers fed by self-focused fund managers.

Investors, in my opinion, should choose their own risk settings, and deserve to have the option of a fund based solely on bank deposits (charging no fee for this service).

I said that loudly in 2021, and probably every year earlier.

The compulsory shunting of KiwiSaver money might not result in class actions. Almost certainly it will not.

But the government decision was most unwise, succumbing to the self-interest of fund managers.

Since when has that ever been clever?

 _ _ _ _ _ _ _ _ _ _ _ _

New Issues

Kiwi Property Group Limited 

Kiwi Property Group Limited has announced an offer of up to NZ$125 million of 6.5-year fixed-rate senior secured green bonds to institutional and New Zealand retail investors.

An interest rate above 6.50%p.a. is expected for the BBB+ rated issue. The offer is expected to open on 14 March and close on 17 March.

Heartland Bank unsecured subordinated notes

Heartland Bank Limited is considering making an offer of up to $125 million of unsecured subordinated notes.

The Notes are expected to constitute Tier 2 Capital for Heartland Bank’s regulatory capital requirements with a 10-year maturity date, but may be redeemed after 5 years or on any quarterly Interest Payment Date after that date. The Notes are expected to have a credit rating of BB+ from Fitch Australia Pty Limited. It is expected that full details of the offer will be released in mid-March 2023 and an interest rate in the vicinity of 7.00%p.a. is possible.

Please contact us if you would like to discuss any of the above investments.

_ _ _ _ _ _ _ _ _ _ _ _


Edward will be in Blenheim on 17 March, in Taupo on both 20 & 21 (AM only) March, and Wellington on 24 March. He will also be in Napier on 30 March (Crown Hotel) and 31 March (Mission Estate) and in the Wairarapa on 3 April.

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

Chris will be in Auckland and the North Shore on March 27-29.

David will be in Palmerston North on Wednesday 19 April and in Lower Hutt on Thursday 20 April.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Taking Stock 2 March 2023


FOR at least the past decade Ryman Healthcare has been touted as one of New Zealand's best-listed companies and a member of the ''top ten'' of our most important.

I have been part of this chorus. I still am.

Its business model, based on high-quality assets, long-term commitment, smart pricing of its services and skill in matching supply with future market demand, has been its hallmark.

During a period when money was virtually ''free'' it has planned its growth around land-banking, pre-selling, borrowing, creating ever better new villages in Australia and New Zealand and on ensuring it satisfies its residents. Its high standards have been maintained even during the worst of the Covid panic.

Its current resident satisfaction rating is not published in any detail, but I would expect it to be in the high 90s, a target few companies ever reach, in any business sector.

By comparison, any news media outlet that achieved readership satisfaction of 50% would be doing better than many of its competitors.

Yet today we are told that Ryman is now in a kennel, punished and banished for being exposed as being yet another victim of the United States Private Placement (USPP) loans that take no prisoners at the first sniff of any problem.

Ryman borrowed in 2021 and 2022 around US$500m via these placements, agreeing to ridiculous penalties should any covenant get within half a mile of being breached. Borrowing through US placements has been a barely forgivable error.

US insurance and investment companies provide the bulk of money that comprises a private placement (USPP).

An American investment bank generally stitches these deals together. The money provided sits somewhere between cheap and expensive but comes with conditions that must be close to usurious, if not simply rapacious.

In Ryman's case the early repayment of US$500 million, from the proceeds of a heavily discounted rights issue, is costing Ryman $134m in penalties, on top of the interest paid. That seems like an additional borrowing cost of around 15% per annum for the period that Ryman used the money.


The conditions of the loan would have been technical, often referring to financial metrics that are on the edge of being inflexible and impractical, almost esoteric.

But the likes of Ryman, determined to match the life of their assets with the duration of the debt, had found it hard to arrange long-term banking loans, so they were lured into an apparently respectable source of finance, unaware that baseball bats would target knees the moment the lenders sniffed an opportunity to behave violently.

The cruellest of the conditions is the penalty for early repayment. Heaven knows what the cost would be for late payment!

Any USPP borrower must repay all of the programmed ten-year total of interest even if the loan, as is the case now with Ryman, is repaid after just a year or two.

When fear hits banks and lenders, they would usually rejoice when they were repaid early. The worrying loan disappears from the agenda of management meetings that shiver as they discuss potential bad debts that so spook the ratings authorities and the fund managers, and so decimate executive bonuses.

You might think early repayment might more logically come with a discount. The explanation is that the lenders insure every imaginable variable by taking out derivative contracts for the whole of the loan. Cancelling those derivatives would involve penalty payments, using a similar logic to that used by the banks when a mortgage borrower tries to repay their mortgage early.

Ryman erred when it entered this USPP market. The conditions of the loan were ugly. The Ryman directors should not have signed the contract that has proved so costly for the company, its directors and executives. In pursuit of long-term finance, they overlooked much less-dangerous alternatives.

Ryman could have entered into a long-term retail bond issuance programme. It could have had an equity placement or rights issue. In 2021 and 2022, it could have raised hundreds of millions of 5-10 year finance by simply doing what Infratil has done so well for nearly 30 years - paying an attractive rate and committing to honour the retail borrowers.

I recall that much smaller companies like Arvida and Oceania Healthcare could, and did, successfully raise long-term retail money at rates around 2.25%. Ryman could, and should, have raised enough to preclude any need for the USPP option. I suspect very few investors of Ryman shares - retail and professional - were aware of the USPP risks that Ryman's directors accepted, after deciding not to raise capital or issue retail debt.

Ryman certainly did not display the risks of the USPP plan. It should have. My guess is that in future every user of the US market will be forced to disclose the loans and discuss the risks.

The Financial Markets Authority should act quickly to ensure this disclosure occurs.

My underlying concern remains the ongoing incidence of New Zealand company directors who do not understand such risks.

The most obvious textbook on the subject comes from the entrails of the late Allan Hubbard's company, South Canterbury Finance.

At a time when its stupid, high-risk property development loans were leading to almost exponential growth, it sent a director and its CFO over to America to raise around $120m of long-term funding at expensive rates with horrid covenants. Later its directors claimed that they were unaware of the terms of the loan. I doubt if any of them ever were asked to join Mensa.

The covenants of SCF's loan were eerily similar to Ryman's, even back then in 2006, when SCF's gormless directors were signing the contract. When SCF began to falter it lost its investment-grade credit rating and was forced to repay USPP lenders. The credit rating was a condition for the loan. In 2008 SCF faced USPP penalties of tens of millions, just as Ryman faces 15 years later.

Hubbard, by then ill, old and under intense pressure, paid $15m to a young ambitious sharebroker to negotiate lower penalties, or so Hubbard told me in a letter. Unsurprisingly, this money was poorly spent.

The penalties largely remained, the loan and penalties had to be repaid, and that led to a series of idiotic, often illegal, responses from Hubbard, involving the misuse of money from the various silos that he controlled, ultimately leading to his loss of control of the company.

As we all know, this in turn led to childishly elementary errors and cover-ups by John Key's government and various government departments, exacerbated by incompetence from various private sector parties, and catastrophic decisions by its inept board, executive and, later, receivers and other insolvency goofs!

Quite unnecessarily all of this resulted in the taxpayer losing more than a billion dollars under its guarantee arrangements. Hubbard died before he would have faced the consequences in court. Many others should have been charged. Cover-ups were widespread!

I do not suggest Ryman Healthcare faces a similar financial collapse, but I do suggest the Hubbard USPP experience should be sent to every director before he or she ever approves the use of such one-sided facilities. The Ryman directors learnt nothing from Hubbard's errors.

I also suggest that the Institute of Directors, from where mundane information springs, should run a compulsory course for its aspiring directors on the importance of reading and understanding contracts. We often hear that most public company directors are inappropriately trained. Let this be Chapter One of a new manual.

It is not just money-lending contracts that need to be analysed and understood. I have observed countless utterly stupid contracts being accepted, in my five-decade career, including ridiculous promises that grossly over-rewarded those holding management contracts and I recall employment contracts that ultimately provided millions of dollars belonging to shareholders but paid to people who were hopeless, $5m going to one employee who lasted a week in a job requiring low levels of skill.

When directors learn to sign only those contracts that are logical and fair, New Zealand will be a better-governed country.

My respect for the Ryman business model is intact but I would feel more comfortable if its directors had studied the SCF case file.

The price at which Ryman set its rights issue was designed to ensure it raised $902m through the take up by retail investors and through an underwriting agreement purchased at considerable expense, which guaranteed Ryman would receive all the money it sought.

Traditionally, underwriters offload the risk of a shortfall by auctioning off in advance any surplus shares created by investor reticence. Institutions and wholesale players, like our business, bid for shares from such shortfalls.

The institutional bidding for Ryman's surplus shares was so enthusiastic that the price to buy via the shortfall was $6, a full dollar more than the retail investors were paying. The stock reopened after its trading halt (to allow the process to be conducted), the opening market price well below $6, but creating ample opportunity for Ryman shareholders to sell some of their existing stock to provide the cash to take up their rights. The $6 price was, to be polite, overloaded with enthusiasm.

Our business had written to clients advising that our value of the surplus stock was $5.15, well below the eventual strike price, so we acquired none of the surplus from the underwrites. We were underbidding the levels at which other wholesale players were indicating, confirming our expectation that the other bids were overvaluing the rights.

Our view was and is that Ryman is a worthy company with a compelling story addressing a growing market.

Yet in contrast it displayed governance ineptitude in its use of the USPP market. It faces rising interest costs, staff shortages, lower sales margins, an unnecessary enquiry into all retirement villages, gross underfunding by the Crown and some awkward but probably ill-advised fund manager commentary on its ability to service and ultimately reduce debt.

Given these headwinds, which do not mention the aftershocks of Cyclone Gabrielle, at $6 its share price looked vulnerable. Indeed, the whole equity market looks vulnerable, in my opinion!

If, perhaps when, Ryman's share price falls to $5.15, I might be a buyer. I like its long-term prospects.

_ _ _ _ _ _ _ _ _ _ _ _

MARKETS were stressed, near to breaking point, before New Zealand suffered the Gabrielle storm whose consequences will far exceed those of the Christchurch earthquake, though the lives lost will be far fewer.

Now that Gabrielle has added greatly to existing market stress the tension will be higher. When markets are stressed our best business leaders shine but always away from the vision of the media.

One such leader hired aircraft to fly to stricken areas to locate his staff and ensure they were safe, and to hand over huge bundles of old-fashioned cash, before he contemplated any commercial matters. ATMs were down. Cash was king.

Great leaders know that their prime assets are great staff, and they understand that to thrive people must survive! NZ does have some great leaders though few of them engage with the media.

By contrast, the less skilled public and private sector chiefs react to stress unintelligently. They wait for others to perform the salvage, they lie to their own people, investors, and their clients, and they seek to hide the damage done to their business, while hydraulicking their insurance claims. As just one example, they assure the public that no looting is occurring.

They used the media to gloss up their behaviour. It may be too early for this sort of behaviour but it was visible in 1987, in 2001, in 2008 and in 2020. If it does not happen this time, that might be seen as a first.

To jog one's memory, just think of the finance company leaders after the property lending collapse in 2007-08. Their lies were their legacy.

During the lull, some market makers and fund managers have been posturing in a gung-ho, macho manner, pretending that their pricing models have already adjusted to developing news. They claimed that markets would soon be restored.

This, of course, is not far removed from the brain-dead bleat that anytime soon normality will be restored. Others preach that whatever your age, your risk tolerance, or your ability to outlast downturns, you should ''hang tough''. Normal service will resume . . . next week, next month, next year, or next decade. Trust us. We know.


It will take months or years to process the consequence and cost of the Gabrielle storm.

We assume politicians will massively increase borrowing to reduce the misery in many communities.

The productive sector will slog away, surviving somehow. Insurance will pay for some, but not much, of the costs.

Sovereign debt levels will rise somehow to pay the uninsured and no doubt those seeking support from voters, shareholders or lenders will comfort us that they have a plan. There can be no useful plan for a long time.

Ad hoc solutions are needed, like band aids.

Planning will take time, if it is to be effective.

If the end result were a new reset with a carefully devised very long-term strategic plan, we might be able, one day, to say from this catastrophe that the ultimate outcome had some compensation.

Do we need the best of our private sector leaders to be co-opted to form a brains trust, in the interests of building a better future for the country?

How else can we recalibrate, to think of the long term and to aspire to make excellence our goal?

_ _ _ _ _ _ _ _ _ _ _ _


Chris will be available to see clients in Cromwell on the morning of Friday March 10.

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

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

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

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club, but his diary is now full. However, Chris will be in Christchurch on April 18 and 19.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Ltd

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