Resin manufacturer Nuplex Industries is in danger of breaching its debt covenant, after yesterday cutting its earnings forecast due to soft market conditions.

Based on the company’s revised full year ebitda guidance of $NZ85 million, First NZ Capital is warning that the Nuplex’s debt cover covenant may be breached.

Debt cover is calculated by dividing a company's net bank debt by its ebitda.

In Nuplex's case, analyst Jason Familton says its covenant requires the company's net debt to be no more than three times its ebitda.

He says Nuplex would have to reduce its net bank debt by about $45 million to get back in line with the covenant. An update on the debt position is expected when the company reports its first half results on 26 February.

Mr Familton also pointed out the decline in the New Zealand and Australian dollars as another factor that could affect the convent.

With Nuplex loans denominated in foreign currency, he says the decline in the various currencies since the end of June has seen the level of bank debt increase by $26.5 million to $376.7 million.

However, this was somewhat offset by Nuplex having $50.8 million in cash held in
foreign currency at June 30.

The two other covenants Nuplex has, relating to interest cover and quasi-equity ratios, showed little danger of being breached according to Mr Familton, although he notes there is increasingly less room to move in the interest cover covenant.

First NZ Capital is now forecasting a full year ebitda (excluding non-recurring items) of $93.4 million, slightly up on the company’s prediction of $90.3m.

In a market update released yesterday, Nuplex said its operations continued to be affected by volatile trading conditions. Restructuring costs and non-recurring items totalling $2.1 million plus additional provisions for bad and doubtful debts of $3.2 million had reduced ebitda for the first half of the 2009 financial year to $42.5 million, a little below guidance provided in November.

The company warned that market conditions worldwide remain generally soft with those sectors exposed to high levels of discretionary spending, such as new automobile production and the leisure segments of the composites industry, suffering the most.

Nuplex says it is now implementing a broad range of initiatives to conserve cash and minimise costs, ensuring the company has the productive capacity and cost base to be highly competitive when a pick-up in demand occurs.

The specialty resins and chemicals manufacturer and marketer has had a rough ride on the sharemarket over the past few months, with the market update seeing it end yesterday down 21c at 267, half its value at the start of November.