Custodians of the asset set limits Ātihau-Whanganui Incorporation’s Finance Manager Brenton Barker talks about the Treasury Policy in place to keep shareholder assets secure.
In the last issue of AWHI Magazine, I talked about how we use debt to invest in the future of the incorporation, our shareholders and their whānau, tamariki and mokopuna. This issue, I want to explain the controls we have in place to make sure our debt levels remain in balance with our assets, the investments we need to make in our existing businesses and the new opportunities we want to explore to optimise shareholder return over the medium and long term. These controls are called the Treasury Policy and are essentially a set of rules, or guidelines, set by the Board. Each guideline must be met before the Board will grant permission for an investment to be made. Generational responsibility is the key to considerations. The guidelines are that a business case must be made that shows the benefit it will bring to the organisation, how the debt will be managed, what return the investment will bring in monetary terms and that due diligence (confirming the facts of the proposal are all as claimed) is carried out.
Ātihau-Whanganui Inc has a net worth in purely monetary terms of more than $160M - the table below lays out the limitations the Board has set in terms of borrowing funds for investment. All this is termed as ‘mitigating risk’. Risk can be an emotive word, you ‘risk your neck’, for example, but we all takes risks every day, and most of the time we don’t even notice! Taking out a mortgage is a ‘risk’ there is a risk you can’t make the payments, that the interest rates will shoot up alarmingly, that your house (your asset) will get blown away. But all those things can be managed you are good at what you do so keep your job, you ‘fix’ the rate of interest you’ll be paying and you have home insurance. You have mitigated your risk. Ātihau-Whanganui Inc takes the same approach when using debt to invest. We parcel the debt up into packages so we can get the best possible interest rate. So say we invested $4m. We could say lets parcel up $2m that we will pay off at a rate of 3.5% over 10 years, another $1m at a rate of 4% over the next 8 years and the last $1m we will pay off quickly over 5 years at a rate of 4.5%. (The longer the term,
BORROWING LIMITS Debt is managed within the following macro limits & ratios. Ratio
Preferred Policy Limits
Net Interest as % of EBIT Net debt as a % of realisable assetts** Net debt as a % of equity
<40% <100% <30%
*EBIT defined as earnings before interest & tax & depreciation (excluding depreciation on farm development capitalised) **Reliable assets defined as all assets except for that land which was reclaimed as part of the original settlement. 4
TOITŪ TE MANA
generally speaking, the lower the interest rate.) This way, we are making sure we can service the debt, but we are also making sure we reduce our debt levels when we can. We are mitigating the risk. The Executive Team has the challenge of putting up clearly considered investment opportunities to the Board that are aligned with our strategic plan and comply with the Treasury Policy. It is then up to the Board if they grant approval or not. Sometimes, that approval is not given which is a clear indicator of the robust financial governance we have in place, together with a strong business partnership with our funding provider BNZ. So, we can’t just invest in whatever takes our fancy. Our treasury policy defines the framework and sets clear expectations of what we need to consider. We monitor, we test and we reflect before we go ahead, conscious at all times of the responsibility we carry to all our shareholders, the ones that have gone before, those that look to us now and the ones to come. The maturity profile of the total committed funding in respect of all losses and committed facilities is to be controlled by the following limits: Period
Minimum
Maximum
0 to 1 years
15%
60%
1 to 3 years
15%
60%
3 to 5 years
0%
50%
Period
0%
20%
