Fullers Group

When the rest of the sharemarket rallied from early March, one stock, which had previously traded in lockstep with the market, was left behind: Infratil going backwards instead.

That's because some investors now think the company has a debt problem, the big bogey of the moment. Those investors may well think their fears are confirmed when Infratil reports a hefty bottom-line annual loss tomorrow, probably around the $200 million mark.

But Infratil is no Nuplex with recession-battered earnings. The losses will mostly be paper losses from writing down the value of its listed investments, particularly its 3.3% of Auckland International Airport, and 33% of Australia-based Energy Developments.

Most likely, Infratil will also write down the value of its British airports, which have been reporting mounting losses as the global recession bites particularly savagely in that country.

In a sense, that's all noise. A key number will be operating earnings, which should come in at about $350m, up 11% on the previous year. The underlying earnings of its key assets, such as its 51% stake in TrustPower and 66% of Wellington International Airport, continue to grow at a healthy pace. But the value of Infratil's assets does matter in the context of its bank debt.

Rob Bode, an analyst at First NZ Capital, says one of Infratil's three banking covenants is that shareholders' funds must be above 40% of total tangible assets.

In early April, Bode calculated this ratio could have fallen as low as 43.3% from 49% in September last year. Infratil had kilometres to spare within the other two operating earnings-based covenants, he reckoned. Later in April Matt Henry at Goldman Sachs JBWere conducted a similar exercise and estimated shareholders' funds were sitting at about 48%.

Of the company's main $520m banking facility, a third is rolled over each year and $174m was duly extended in February. A presentation the company gave to analysts this month showed $327.4m net bank debt at March 31.

Given how gloomy the mood in global financial markets was in February, I would have thought if Infratil really was in trouble with its banks, it would have shown up then. Assuming the banks keep rolling over debt, the first major refinancing event Infratil faces is in May 2011, when $112m of its listed bonds mature.

Infratil has a total of about $750m in listed bonds, including nearly $240m in perpetual bonds, all of which rank below its bank debt, which no doubt gives its bankers considerable comfort, but which also led analysts to the conclusion Infratil is over-geared in the current environment.

All of Infratil's bonds are trading at significant discounts to face value so issuing replacement bonds now doesn't look like a viable option, but who knows how sentiment will have changed by 2011.

Acting chief executive Marko Bogoievski says the bank rollover was uneventful. "There wasn't really even a conversation," he says, although the margin Infratil has to pay has gone up, in line with margins everywhere. Nevertheless, Bogoievski says investor perception is a reality which the company must address. Rather than raising equity at huge discounts, as other companies have been doing, Infratil has been selling assets.

In April it sold Fullers Ferries for $40m, yielding an estimated $12m profit over book value, and later that month it sold properties for $23.1m, a $4.1m profit over book value.

Bogoievski says Infratil will probably exercise its put option to sell its 90% stake in Luebeck Airport in Germany back to the city. That will yield about $60m.

Another possible source of funds is Infratil's warrants which lapse in July. If exercised at $1.62 they could raise $136.7m. The shares mostly traded above that level last week, increasing the likelihood the warrants will be exercised.

While Infratil clearly has plenty of time to sort out its balance sheet, Bode's argument that the company needs to position itself to take advantage of current conditions is compelling. "Arguably, Infratil's model and the market are probably much more prospective than they have been for a long time," he says. With a deregulation-minded government, likely opportunities for private participation in infrastructure projects, and the exit of private equity buyers prepared to pay over the odds for the sorts of assets Infratil favours, "the market is ripe with opportunity".

Rob Mercer at Forsyth Barr suggests Infratil also consider selling its stakes in Energy Developments, Auckland Airport and Austral Pacific.

* Jenny Ruth is a freelance journalist and a columnist for The Independent.

Auckland ferry company Fullers is assuring its thousands of passengers and 174 staff that service levels and fare concessions will not be cut under new ownership.

That includes free travel on NZ Bus services throughout mainland Auckland for holders of monthly passes for the Waiheke ferries, Fullers chief executive Douglas Hudson said.

His assurance followed an announcement yesterday by Infratil - which also owns NZ Bus - that it had sold the 11-ferry Fullers operation for $40 million to Souter Holdings, the private investment arm of Scotsman Brian Souter. Mr Souter was also chief executive of multinational public transport operator Stagecoach, which sold its New Zealand bus and ferry operations in 2005 to Infratil for $250 million.

Since that sale, he had returned to New Zealand to buy Howick and Eastern bus company in Auckland and a 74 per cent stake in Mana Coachlines in Wellington.

His New Zealand-based executive chairman Bill Rae said there would be no retrenchments or restructuring of the Fullers operation and his firm had full confidence in the management.

Campaign for Fairer Ferry Fares spokeswoman Cathy Urquhart, whose group was continuing to push for a reversal of fare rises imposed last year on the Waiheke Island runs, said she feared having to deal with yet another tier of decision-makers and wondered about the future of the free bus travel for monthly ferry ticket holders.

Infratil's sale of Fullers ferries is part of a retreat from underperforming businesses to repay debt.

The infrastructure investor yesterday announced that subsidiary NZ Bus is selling its interest in Fullers for $40 million to Souter Holdings, majority owned by Stagecoach co-founder Brian Souter. Infratil will retain its NZ Bus operations in Wellington, Hutt Valley, Auckland and Whangarei.

Infratil says the deal was part of a programme of divestments which would realise more than $100 million in this financial year. The money would be used to repay debt of about $1.2 billion including infrastructure bonds, perpetual bonds and bank debt. Infratil executive Tim Brown said the $100 million also included exercising the right to sell Lubeck Airport in Germany, worth about $60 million, and the sale of some bus depot properties in Auckland.

"In this environment we do have to look at recycling some capital and cut back on where you can't see them generating strong returns. The short term for us is going to be debt repayment but in the medium term there are various opportunities."

He would not comment directly on one analyst's suggestion that Infratil's other underperforming European airports could be next but said it was hard to run with a loss on a low-return asset in the current environment. Around 75 per cent of Infratil's investments, including Wellington Airport and TrustPower, were performing well, Brown said. "You have to say to yourself, can you have 25 per cent of the business not generating a return? In this type of environment you can't."

Souter's purchase of Fullers sees Brian Souter back on deck there after four years. In 2005 Stagecoach NZ sold its bus services and ferry business to Infratil for $253 million. Souter Holdings, which operates Howick & Eastern buses in Auckland, also has a 74 per cent ownership of Mana Coachlines in Wellington.

Brown said the Fullers sale signalled the intention of NZ Bus to focus on developing its core bus business. "The bus business is definitely one we like and we're enthusiastic about it."

Fullers' sale price reflected the market. "It wasn't a great price but I think it was a fair price," he said.

Forsyth Barr's head of research, Rob Mercer, said the sale was a signal that in tough conditions assets that were not strategic would be sold. "Their European airports are underperforming and I suspect they'll be looking to liquidate those unless they want to hold on to them long term. "It sets the scene for how they're going to shore up their balance sheet and get themselves in a position to go forward when they can see the light of day."

Infratil shares closed unchanged at $1.47.

Listed infrastructure investor Infratil could exit its $250 million bus and ferry services if radical transport proposals are pursued by local government.

Infratil director Tim Brown said the proposals would ultimately see the country's bus and ferry networks run by bureaucrats who would collect the fares and pay private operators a fee to provide the service.

They would also have the right to buy the business if it did not meet local authority targets.  "It is not a system Infratil would be willing to operate under," he said.

The warning comes after Infratil's ferry company Fullers came under fire for abandoning 120 people overnight on Waiheke Island, near Auckland, last weekend.  Brown said the incident was a very disappointing service failure, "and we will make sure it does not happen again".  But one shortfall in service did not mean the private sector did not have a role in public transport, he said.

The exact nature of that role is once again under the spotlight as central and local government undertake complementary studies intended to rejuvenate Auckland's decaying public transport network.

Scottish transport group Stagecoach put Stagecoach NZ, the country's biggest bus service, on the market nearly two years ago because it was unhappy with new ownership models put forward for public transport.  Infratil bought Stagecoach knowing changes were in the wind, but it believed it would be able to make a difference as a highly-regarded local infrastructure company which had good relations with politicians.

Brown said Infratil hoped that as new rules evolved they would be more sympathetic to private operators than was originally proposed. But the company's expectations were not being realised.  Brown said: "Some officials say extremely encouraging things to us like 'We are keen to work with you'," he said.

Competing with Infratil to buy Stagecoach were two Australian private equity firms, who typically take a position in a business with a definite exit strategy in mind.

Brown said Infratil was an experienced long-term infrastructure investor which took an active involvement in the investment.  "But if the nature of the business ends up dramatically different from what we bought into, then one of New Zealand's major public transport providers may not have a local (private) owner," he said.

Under proposals being considered, regional governments would also have the right to take over ownership of the business of private operators if they failed to perform.

Brown said such proposals were "extremely unattractive" to Infratil.  "We like to invest in businesses where our success is determined by our ability to satisfy customers - in this case bus and ferry users," he said.

Proposals being floated by officials within Land Transport NZ and the Auckland Regional Transport Authority (ARTA) would make bureaucrats the end-customer of a private bus or ferry operator. And that would remove a powerful driver for commercially-driven operators, said Brown.

The end result would be a public transport system run by public operators.  "But we have been there before, and public operators presided over periods of much greater decline in the use of public transport then when private operators became involved," said Brown.

Under existing laws, the Auckland Regional Transport Authority calls for tenders for bus services and relies on the free market to come up with the best price.  If an operator can run a service profitably without a subsidy, then the authority accepts and registers that service.  It then decides what fill-in services are required to complete the network and calls tenders for non-commercial routes.

ARTA has been concerned it cannot require any operator to adopt any performance or customer service standards on commercial services.  Under new proposals, ARTA would introduce integrated timetables, ticketing and fares.

But Brown said that would effectively return public transport to public ownership.  Being paid a fee by bureaucrats rather a fare from an end-passenger removed a huge driver for a private enterprise.  "We would also be giving another party a call-option over our business," he said.

The name Fullers is virtually synonymous with the ferries that connect Auckland with the North Shore and the Gulf islands. The company has dominated the city's water transport for so long that complacency is a constant risk. How else to explain its outrageous dereliction of duty last weekend, when it left about 120 customers stranded overnight on Waiheke?

They were left behind when the last ferry on Saturday night departed carrying as many passengers as it could safely take. Those left behind say they were told, by local police at least, that another ferry would be sent for them. They waited, dressed lightly for the evening, and as time went on and no ferry came, they did what they could to keep warm. Some reportedly tried to light fires. Two men allegedly broke into the ferry terminal and have been charged with unlawful entry and burglary. It was a cold, bitter, seven-hour wait for the first ferry of the following day.

Fullers later denied giving any assurance that a boat would be sent back for those it left on the pier that night - and, incredibly, issued that denial without the slightest sign of embarrassment.

"When most of the people choose to come back on the last sailing it makes it a little difficult," said Fullers Group operations manager Ian Greenslade. Later the chief executive, Douglas Hudson, expressed regret for the incident but insisted the company was not solely to blame. He said it had dispatched a larger vessel than usual to Waiheke on the last sailing because it expected a large crowd from a dance party at Stonyridge Vineyard. The company did not have staff on call to do another run in the early hours of Sunday, he said.

Doubtless it is "a little difficult" to provide return transport for a crowd, but Fullers has been in this business for a long time. The company admitted it knew an event was bound to put heavy demand on the last sailing of Saturday night and it did nothing to prepare for an overflow. When ferry crew saw what had happened, they evidently felt no obligation to make one more trip for customers who were plainly relying on them.

This is not the normal culture of a business that runs a public service; it is not even the culture of state-owned service providers these days. Fullers' behaviour last Saturday night was a throw-back to the days when so-called public servants would close the counter on a queue of customers if the clock struck closing time.

The best it has offered is to meet police and dance party organisers to try to co-ordinate things better somehow. That is mere flannel; organisers and patrons of events on the Gulf islands should not have dance to the ferry company's convenience. Fullers is contracted by the Auckland Regional Council to provide a service and, thankfully, the council does not sound satisfied with the company's performance. Chairman Mike Lee says a similar incident happened at New Year. "Two stranding incidents are a matter of real concern. The feeling is with ferries, you take people to an island, you should be able to bring them back." Quite.

Mr Lee believes the regional council has the leverage to improve the culture in Fullers. It issues bus and ferry contracts worth millions of dollars. The council has every reason to use that weapon to utmost effect; its urban transport plans hold ferry services to have potential for expansion to many of the residential bays around the region, attracting commuters who might take a bus and ferry to work rather than drive.

But if commuters are going to have confidence in sea transport, ferry operators will need to be inculcated with the principle that, come hell or high water, passengers must not be marooned.