Rutherford exposes Greens financial illiteracy

Hamish Rutherford (a former business journalist) writes at Stuff:

With co-leader and economic spokesman Russel Norman overseas this week, it fell on the shoulders of Green Party energy spokesman Gareth Hughes to reveal what he sees as the Government’s latest skulduggery.

With “the stroke of a pen” Solid Energy has been privatised, Hughes said, and not to mums and dads, but to foreign banks.

But what has really happened:

Hughes based his claim on a Beehive announcement that banks which lent hundreds of millions to Solid Energy were converting $75m of loans into “non-voting redeemable preference shares” as part of a rescue deal.

Suddenly at least 14 per cent of the company was owned by four Australian banks, Hughes reasoned, putting “privileged, powerful banking interests ahead of New Zealanders”.

For a start this overlooked that a New Zealand building society, TSB, also loaned Solid Energy tens of millions of dollars and was facing the prospect of losses, a detail made public months ago.

That aside, even though the banks are technically acquiring equity in Solid Energy, the lack of insight as to who was on the receiving end of the deal was striking.

Since revealing the scale of Solid Energy’s problems in February, with debt spiralling to near $400m, Finance Minister Bill English has promised those who funded its ill-fated expansion would not get off scot-free.

The negotiations dragged on for months, and now we know why.

The Government is about to mete out the kind of treatment the Greens seem to wish they could hand out to big business, and the banks are signing up only because the alternative is writing off the debt entirely.

Yes, the Crown is injecting $25m cash into Solid Energy, but for every dollar it is putting up, the lenders face losing three.

The banks are not getting any sort of reward or return. They are in fact taking a big hit.

What do the banks get in return? Shares which will never be worth more than the original amount – Solid Energy can buy the stock back at any time at face value.

It is unclear whether Solid Energy has any motivation to buy the stock back, ever, but certainly it won’t do so before it pays off all or most of the rest of the hundreds of millions of dollars of debt it still carries.

Even if coal prices recover, that will take years. During that period the value of the equity will evaporate through inflation and the lost opportunity to earn interest.

Worst of all (for the banks) is that although English has signed off on fresh loans worth at least $100m, in return he takes security over all of Solid Energy’s assets.

Looks like a very good commercial negotiation from the Government, doing its best to protect taxpayers. As I said, the real shame is that Solid Energy wasn’tt sold off years ago. The next time someone claims the Government must own these commercial companies, think of Solid Energy.

In terms of repayment, the banks’ “equity” stands somewhere near the contractor who cleans the windows at company headquarters.

If the Green Party really believes that kind of ownership is a kind worth buying, then heaven help the taxpayer when it gets near the purse strings of the Treasury.

Indeed.