Dorchester scores an own goal

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Dorchester Pacific has landed an own goal with its low-ball offer to buy back notes issued as part of its rescue plan earlier this year.

Thursday, December 2nd 2010, 9:25PM 1 Comment

by Jenny Ruth

The nearly $20 million of notes were one of four securities issued to its long-suffering debenture holders in exchange for the 50 cents in the dollar they were still owed and which allowed the company to continue operating.

One analyst describes the company's offer to buy back the notes at 55 cents in the dollar as "a bit of an error of judgement."

Chris Lee and partner Michael Warrington were more forthright, labelling the offer "offensive" and akin to low-ball offers from outfits such as Stock & Share Trading Company. Earlier this year, Dorchester's directors warned the debenture holders against accepting a five cents in the dollar offer from Stock & Share

"The company is only still existing because the debenture holders have been kind," Lee says. "We think they (Dorchester) should be treating them with all possible affection, not kicking them.
Dorchester's offer is not only at a deep discount to the notes' face value but also well below where the notes are trading on NZX's debt board: the last few sales have been at just over 76 cents in the dollar - that's a yield of 17% compared with the 5% coupon. The notes are due to be repaid at face value in June 2013, though the high yield being demanded on NZX suggests there's a reasonable risk that won't happen.

Warrington says late on Wednesday there were people prepared to buy up to 37,000 notes at yields between 17% and 17.5%, proving there's a ready market available for holders who wish to sell.

More than 120,000 notes have changed hands since they began trading in August.

Chief executive Paul Byrnes says he was "pretty surprised and disappointed" at Lee's and Warrington's reaction and Dorchester's offer isn't in the same ballpark as Stock & Share's offer.

The company has been approached by a number of noteholders wanting to sell and had approached two brokers to see if an offer targeting smaller holders could be made but those brokers weren't interested, Byrnes says.

Of the debenture holders who voted on the reconstruction plan, 20% had voted against it, he says. Those 20% who voted against the plan would have preferred receivership, a scenario expected to return them a net present value of 38 cents in the dollar "so perhaps this offer should be seen in that light," Byrnes says.

As well, about 35% of noteholders have ended up with less than marketable parcels and so would have to pay a disproportionate brokerage to sell o the NZX, he says. Nearly 1,300 holders own less than 500 notes and a further 1,643 own between 500 and 1,000. A marketable parcel is 1,000 notes.

"We have also tried to emphasise that this is not a market valuation offer or exercise."

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