Using debt to enable growth

Ātihau-Whanganui Incorporation (AWHI) Finance Manager Brenton Barker explains the approach the incorporation takes to debt.

Each financial year the AWHI board and management team consider debt levels when compiling and approving budgets.

The budget is prepared by the management team and includes debt repayment and asset development plans. The board considers and provides a proposed dividend distribution.

These considerations include a long-term view for both current and future shareholders by allowing for the resumption of leases, development of existing assets and the take-up of new opportunities for AWHI.

Current debt facilities total $39.6 million at their seasonal peak, as noted it consists of both long term and seasonal debt. We have assets totalling $200 million.

What is a good debt level?

Some may say none! But our debt at 25% of total equity at its seasonal peak, with low interest rates and ongoing improvements in operating profit can comfortably be serviced each year. We also have a component of debt on fixed interest rates, which may cost us more in the short-term, but protects us from sharp increases in interest costs. For example, if interest rates doubled tomorrow, it would take five years before the full impact was felt, which gives a lot of time to make adjustments to be able to cope with such an increase.

These are all signs we hold good debt as opposed to bad debt.

Debt has enabled us to resume and develop leases for the benefit of current and future shareholders.

We currently own $35 million worth of livestock we need to keep safe and manage effectively with quality fencing. Fencing helps to keep track of our own stock, and helps us increase production and profitability. Stockyards are another example; without them we would struggle to manage livestock in line with best practice while enabling our farm staff to undertake mahi safely and efficiently as they deal with large numbers of animals. In recent years we have chosen to develop our apiary investment.

All of these examples have required investment to enable us to develop our asset and achieve sound investment returns whilst caring for our people and land. At the moment, because we can comfortably pay our interest bill, we have managed any risk associated with a spike in interest rates, and our debt is at controllable levels, so continuing to invest in the business makes good business sense.

In future years we have further lease resumptions to prepare for; we will continue to develop our apiary operations and improve our farming infrastructure. This will take time and money along with great teamwork from our management team, which will be supported by our skilled Board.

At the same time, debt levels and interest costs will be continually monitored to ensure good debt is maintained, and bad debt doesn’t get a foot in the door.