Downer may have to pay higher interest on Works Finance bonds
Downer EDI's senior bondholders have a keen interest in whether the company raises fresh equity because that will have a direct bearing on whether the company loses its investment grade credit rating and therefore has to pay them higher interest.
Thursday, February 24th 2011, 1:09PM
by Jenny Ruth
Yesterday, Downer acknowledged speculation about a potential capital raising and "confirms it has been considering a range of capital management options" but says no decisions have been made yet.
It is promising an update next Monday.
In late January, international ratings agency Fitch put Downer's "BBB-" credit rating, the lowest level qualifying as investment grade, on negative watch.
That was after the company announced further production delays with the Waratah train project and the discovery of asbestos at its rail production facility in Cardiff, Australia.
As a result, Downer announced an additional A$250 million (NZ$336 million) write-down on its Waratah train project on top of the A$190 write-down in June last year.
Fitch's major concern is the company's ability to execute complex contracts such as the Waratah one.
Downer has 49% of a joint-venture with the New South Wales government to build 78 commuter trains and maintain them over a 30-year period, known as the Waratah project.
If Fitch, the only agency to rate Downer, does downgrade its rating, Downer will have to pay 1.25 percentage points more in interest on its $150 million of Works Finance senior bonds than the 9.65% coupon rate.
The bonds, which mature in September 2012, are currently trading at $104.40 per $100 face value or an annual yield of 8%. After the latest write-down and Fitch's move, the yield shot up from 7% to as high as 9.6% before drifting lower.
Downer's other Works Finance securities, $200 million of subordinated perpetual preference shares due to be reset in June 2012, which have a 9.8% coupon, last traded at $90.72 per $100 face value or a 20% annual yield. Their yield reacted even more sharply, shooting up from about 14% to as high as 24.5% before settling lower.
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