tag:blogger.com,1999:blog-2830084253401570472.post3068379877643756144..comments2024-03-28T09:22:36.967+13:00Comments on Offsetting Behaviour: Debt for DividendsEric Cramptonhttp://www.blogger.com/profile/15831696523324469713noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2830084253401570472.post-63711932843615889512013-07-14T19:44:40.396+12:002013-07-14T19:44:40.396+12:00I can hardly believe, and I do not understand the ...I can hardly believe, and I do not understand the simpleton argument that if i borrow money from you and I need to pay you back that I should borrow from another person. And you know i do not think Eric or Matt can explain this, and if you can Eric, do so now or be silent forever, , it is a fundamental equation, give away your words Eric, Christchurch University is closed,paulscottnoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-11668207646659464622013-07-13T16:32:57.826+12:002013-07-13T16:32:57.826+12:00So the CCC want CCHL to increase its dividend. One...So the CCC want CCHL to increase its dividend. One of the best performing businesses owned by CCHL is Orion. Orion wants special permission to charge its customers more (http://www.stuff.co.nz/the-press/business/8914251/Network-claw-back-criticised) to rebuild its damaged network (all the while paying more money to its shareholders). This is looking increasingly like a rates rise by stealth.Jacknoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-3756615456399181822013-07-13T11:28:18.077+12:002013-07-13T11:28:18.077+12:00Nothing inherently wrong with borrowing to pay div...Nothing inherently wrong with borrowing to pay dividends. Usually it's a way for a company to lever up to a lower weighted average cost of capital. Other reasons to do it are to reconfigure agency issues (debt holders keep firmer eyes on companies than equity holders in many cases). This can in fact be the cause of lower WACC.Financenoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-87319030332363001712013-07-13T11:21:12.525+12:002013-07-13T11:21:12.525+12:00The first question to ask is: what are these incre...The first question to ask is: what are these increased dividends going to be used for? There are two possibilities - greater council spending or lower rates. It's hard to believe it couldn't be anything but the former.<br /><br />That being the case, what really matters is the quality of the intended spending, i.e., is it covering its cost of capital? (which is more than just the cost of the borrowing used to finance the spending) Since we don't know what the increased spending is going to be on, it's impossible to say anything definite about this. But the quality of council spending over recent years, and the quality of the 'analysis' underpinning it (e.g., the $70m cycleway), means the most plausible assumption is to place 0% probability on these borrowed funds being spent wisely.<br /><br />There are other interesting undercurrents in all this though. First, by getting CCHL to do the borrowing, the council is avoiding the need to reveal it on its own books, i.e., it's cunningly 'hiding' the extent of its indebtedness. Second, and more importantly, the council is effectively saying it can invest new capital more productively than CCHL. This is intriguing, given that we're repeatedly told what great investments the CCHL assets are, that they return 15% per annum, and how rates would be so much higher if we didn't have them. If all this were true, then the best strategy available to the council would be to reinvest the borrowed funds in the CCHL assets to provide for further growth. By implicitly saying it could do better than this, the council clearly doesn't believe its own spin. <br /><br />This is hardly surprising. The arguments trotted out to justify the 'keep-the-CCHL-assets' line are so transparently flawed that the only plausible explanation for the council's behaviour is good old fashioned empire building (something that those of us who work at the University of Canterbury are familiar with). <br /><br />But now the chickens are coming home to roost. As well as the disturbing announcement identified by Eric, this week we've also learnt that (i) Red Bus earned basically zero profit in the last financial year and will pay no dividend, and (ii) the council has sold one asset (Jet Engine Facility - what on earth was it doing owning it in the first place?) in order to prop up another loss-making subsidiary (VBase).<br /><br />It's like living in an episode of Mad Men (without the fun parts).Glenn Boylenoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-32783475169688683932013-07-13T05:26:33.206+12:002013-07-13T05:26:33.206+12:00Can anyone remember whether the Council's orig...Can anyone remember whether the Council's original recovery plan (the one that had all the public input) included the covered stadium and convention centre? I think they may have only turned up once the government usurped the process.Donaldnoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-23757264663374425702013-07-13T04:05:53.799+12:002013-07-13T04:05:53.799+12:00But they Council do want to build stadiums and con...But they Council do want to build stadiums and convention centres. 150,000 ratepayers and one $150 million stadium thats $1000 each. Add in a convention centre, thats another $1000 each. And it is something I would consider while the car's suspension is getting fixed again, I think the Council may possibly collapse and be taken over by Government . The sickness is just too too deep and longstanding.paul scottnoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-36661729115001886552013-07-12T20:13:20.494+12:002013-07-12T20:13:20.494+12:00In the Press piece Bruce Irvine is quoted as sayin...In the Press piece Bruce Irvine is quoted as saying CCHL will only borrow if it has to implying that he is confident they can make the payments. Given that CCHL is invested in monopolies its not too hard to join the dots. After all CIAL could contribute the increased dividend by itself from its parking charges.Donaldnoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-80219559719561667192013-07-12T18:05:49.268+12:002013-07-12T18:05:49.268+12:00Had a quick look at the Fy12 AR for CHHL... seems...Had a quick look at the Fy12 AR for CHHL... seems its has debt of $667m and equity of $1.3 billion.... so a D/E ratio of around 50% - this could be pushed a bit higher - but it also depends on the existing debt in place and the terms of new borrowings - the risk is that a lender to CHHL wants to get some form of 'revenue bond' security to enhance their position...<br /><br /><br />Not good.boristhefrognoreply@blogger.comtag:blogger.com,1999:blog-2830084253401570472.post-43549004925860697432013-07-12T15:19:48.554+12:002013-07-12T15:19:48.554+12:00I think they call it asset stripping, tranz rail i...I think they call it asset stripping, tranz rail is a good local example, gear up the balance sheet and under no circumstances re invest in maintaining your capital investment. Doesn't really square up with city care employing ex mainzeal staff to have a crack at becoming a building company which I am sure will end really well.<br />One would imagine that the Port and Airport need as much capital as they possibly can while they both expand ?<br />Partial asset sales despite all the pundits saying were wildly unpopular has been an incredibly good way of Labour to soar in the polls and Key to be smashed, Oh wait. I don't think ratepayers care who owns the port etc and is not something they mull over while waiting to get the cars suspension fixed againDavidnoreply@blogger.com