Zenith Energy Market Update
On 5 June 2019, Zenith Energy (Zenith, Company) released a market update following Gascoyne Resources (Gascoyne) appointing a voluntary administrator. Gascoyne has a power purchase agreement (PPA) with Zenith to provide 15MW of power at its Dalgaranga mine site and administrators have indicated that the mine will continue to operate as a going concern while they explore recapitalisation options. Given this, Zenith will continue to be paid for the provision of power as expected under the contract and this development is expected to have no implications on the Company’s FY19 forecasts.
In its release, Zenith noted that there are four potential outcomes under the PPA agreement:
- The administrator continues to operate the Dalgaranga mine as a going concern and confirms its obligations under the PPA while reviewing recapitalisation options. Under this scenario Zenith expects at worst immaterial impacts on FY19 earnings, with implications for FY20 earnings dependent on the timing of the review completion.
- Gascoyne exercises its right under the PPA to buyout the power plant assets, in which case Zenith will receive a cash payment sufficient to cover all debt secured against the project.
- Gascoyne terminates the PPA and Zenith has a claim for the termination payment.
- Zenith terminates the contract for breach or insolvency.
Under the latter two scenarios, the Company would be able to repay secured debt at the project level with the termination payment or breach of contract claim. It should be noted that any obligation to repay debt due to a contract termination only applies to the senior bank debt. Under the terms of the notes, Zenith needs to comply with certain financial covenants on an ongoing basis.
Following comments from the administrators, we believe it most likely that the site will continue to operate through the voluntary administration process and as such, Zenith will continue to receive payments under the PPA. Should this not eventuate, the Company is comfortable that it will be able to redeploy the assets to other sites in the near term. Further, Zenith noted that, removing the Gascoyne contract entirely from its FY20 forecasts, the Company would anticipate revenues and EBITDA of AUD59m-AUD62m and AUD24.5m-AUD26.5m, respectively. This remains in line with our forecasts and we remain comfortable that the Company will continue to meet its obligations under the notes. We view the redeployment of assets as a realistic scenario, given Zenith’s recent run of new contract wins which would require deployment of new generation assets.
SBS Bank FY19 Results – Solid Outcome
Southland Building Society, trading as SBS Bank, reported an increase in net profit after tax of 16% to NZD30.8m for the financial year ending March 31, 2019 (FY19). Lending was up 5%, while net interest margins were unchanged at 2.60%. Capital was stronger with Tier 1 at 11.4% (up ~50bps on pcp), while non-performing loans (90-days past due and impaired loans) were low and unchanged at 36bps.
StockCo announces establishment of new warehouse facility
On 7 June 2019, StockCo announced it had entered into an agreement with Goldman Sachs for the establishment of a 3-year, AUD150m warehouse facility. The new warehouse facility will replace a substantial portion of StockCo’s existing senior debt club facilities. We believe the establishment of a securitisation facility is appropriate for StockCo, which has outgrown its current capital structure, and provides the company with a consolidated and scalable funding source.
The plan to establish a warehouse facility was highlighted to noteholders on 5 June 2018 as part of a consent event.