A debt repayment deadline for Synlait is fast approaching.
Synlait Milk has $130 million in debt falling due at the end of this month, yet there are no clear signs as to how the cash-strapped dairy processor can repay it.
The company,
which was to have reported its six-month result on March 25, has pushed that out to April 2 – the very last day allowable under NZX reporting rules – in a move seen as buying more time to resolve its balance sheet issues.
Last September, the company completed a refinancing.
Part of the deal involves a revolving credit facility of $230m, to be stepped between July this year and October 1, 2025.
In addition, Synlait was required to make a prepayment of at least $130m by no later than March 31, 2024.
Synlait’s new banking syndicate members are ANZ, Bank of China, China Construction Bank, HSBC and Rabobank.
The company has had its Dairyworks business, with an estimated price tag of around $130m, up for sale since June last year, but there’s been no news as to progress on that front.
Dairyworks is profitable, and Synlait has in the past said it would not sell at a bargain basement price.
If a sale does not proceed the company faces some options, that are unlikely to be palatable for itself or its two key shareholders, China’s Bright Dairy (39 per cent) and a2 Milk (just under 20 per cent).
Forsyth Barr senior analyst Matt Montgomerie said the reporting extension implied that Synlait wanted to buy themselves some time, potentially for the balance sheet.
“But it just adds more questions.”
Synlait’s debt repayment options
Montgomerie said the sale of Dairyworks “looks highly unlikely at this stage”.
The second option would be an equity raise in conjunction with a Dairyworks sale, but at a lower price than that signalled.
“We think that the company will need at least $150m in capital, if not $200m or more, so that combination is possible,” he said.
Synlait’s shares closed at 69c on Friday, having dropped by 81 per cent over the last 12 months.
“Raising a large amount of equity with the share price being where it is, clearly, will not be easy and it will likely be highly dilutive.
“If the Dairyworks sale was not to go ahead, then you are looking at other asset sales,” Montgomerie said.
Synlait – a2 Milk’s sole supplier of infant formula – has extensive processing facilities at Pōkeno, near Auckland, and Dunsandel, in South Canterbury.
Its Dunsandel plant has hard-won registration from Chinese regulators, enabling it to make formula destined for the Peoples’ Republic of China.
“We struggle to see how competitive a process it would be if they were to sell Pōkeno,” Montgomerie said.
“Across the New Zealand dairy landscape, there is already stainless steel [factories] on the market.
“Then there is Dunsandel and, of course, a2 Milk is a natural buyer for that asset.”
A2 Milk is heavily cashed up and has said it is looking for acquisitions.
“Over and above a2, there is no one else that comes to mind straight away.”
However selling Dunsandel, which is profitable, would leave Synlait without its core asset.
“The preferable option would be if they could do a combination of a Dairyworks sale, and win the support of Bright Dairy and a2 Milk for an equity raise, in the hope that profitability improves from here.”
Selling Dairyworks, when prospective buyers know that it needs to be sold, is “not the easiest of situations”.
As the debt deadline looms, Montgomerie said a rescheduling of the company’s debt was possible.
“Whilst the syndicate has changed over the last few years, the banks have been flexible for Synlait.
“That obviously comes at the cost of high rates, and maybe some sort of penalty, but it’s not impossible.
“For that to happen, the syndicate would need to see some sort of confirmation from the company that either an asset sale was imminent, or there had been a marked change in the profit outlook.
“I would not rule out that possibility.”
Synlait’s NZX-traded bonds, which fall due in December this year, were last quoted at a yield of 37 per cent – indicative of the risk the market sees on Synlait’s debt.
In an earnings guidance issued in February, Synlait has already said that its result for the six months would show a loss in the range of $17m to $21m.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.