Kordia breaches banking covenants

The timing couldn’t be worse: just as the government sends a letter calling SOEs to account, state-owned Kordia slips into the red, and breaches banking covenants as debt surges to $125 million.

In its interim result for the six months ended December 31, 2008, Kordia made a pre-tax loss of $5.77 million, (after tax $9.47 million) compared to a pre-tax profit of $7.76 million for second half of 2007.

The company says the slowdown led to less business at home and overseas. It was also bit by losses on foreign exchange and currency heading of $398,000 and $4.67 million respectively.

Revenue dropped to $115.8 million from $129.8 million for the year-ago period.

Already heavily geared, Kordia also announced that its unaudited debt had risen from $106.3 million to $125.1 million.

The debt surge means Kordia is now in technical breach of its banking covenants with the BNZ, ANZ and the Commonwealth Bank of Australia, which call for it to maintain a net debt-to-Ebitda ratio of 3.5 to 1.

Debt falling due
As of December 31, Kordia owed the BNZ $34.6 million (of a $40 million facility), and the ANZ $35.6 million (of a $55 million facility.

A $55 million facility with the Commonwealth Bank of Australia is already maxed out.

The BNZ and the Commonwealth Bank of Australia have both granted Kordia waivers, but ANZ is retaining the right to take action.

Another headache: the BNZ’s facility expires in just days, on March 31.

The Commonwealth Bank of Australia and ANZ facilities don’t expire until January 2011, but Kordia chief executive Geoff Hunt says his company is in talks with all three banks to rework the terms of its loan arrangements.

Mr Hunt says Kordia is now back within the bounds of its covenants (see We're back in the black).

Legacy debt + new debt = lots of debt
SOE minister Simon Power sent a letter to state-owned companies on March 13, asking them to account for "poor and declining" results.

Kordia has told the minister that debt inherited at the time of its split from TVNZ is at the root of its current woes.

Heavy gearing from its inception saw the SOE embark on an ambitious expansion programme to generate new business. Ironically, this business development drive, including its purchase of retail ISP Orcon, for $24 million, plus more spent on local loop unbundling; its construction of a new digital radio network in partnership with Motorola; regional fibre-optic projects; and the construction of a metro wi-fi network in Auckland, has seen Kordia take on still more debt.

Future plans include a second transtasman fibre optic cable, in partnership with Australia's Pipe Networks. Kordia has ruled out taking on more bank debt to fund the submarine cable, instead chasing a mix of government and anchor-customer funding.

Including the satellite and terrestrial Freeview platforms, Kordia has spent more than $200 million on new ventures - but the majority of it profit, Mr Hunt tells NBR, is still broadcasting analogue TV; its legacy business inherited from its days as TVNZ’s transmission arm, BCL.

The current financial year will be the in Kordia's cycle of heavy investment, says Mr Hunt, necessitated by the impending loss of its analogue TV broadcast business - still the source of most of its profit - when the government makes the switch to all-digital broadcasting some time after 2011.

Kordia blamed its revenue shortfall for the six months to December 31 primarily on two large one-off items in the year-ago period: the termination of its underwrite agreement with Telecom for Telecom’s Extend broadband wireless network, and the sale of its Australian broadcast repair and maintenance business to Broadcast Australian. Mr Hunt tells NBR the two items led to a "spectacularly" profitable month in the year-ago period, which co-incicded with the drafting of the covenants, making it "almost a foregone conclusion we'd go into a technical breach".

Orcon saw a revenue shortfall of 5.8%, but improved profitability.

In its interim report, Kordia says it expects a stronger second half, as reduced overheads combine with improved performance from Orcon, Kordia Networks and its Australian contracting and consulting business. However, if “further adjustment” is needed to its New Zealand consulting business, redundancies will be required, and unbudgeted associated costs will negatively impact profit.