Synlait secures $130 million line of credit as frustrated farmers look to leave in droves

Tuesday, 4 June 2024

Synlait was created in 2000. Just over two decades later, it is fighting for its survival.

Troubled dairy company Synlait Milk has done a deal with its major shareholder to give it the financial headroom it needs to complete a plan to sell assets to reduce debt to sustainable levels.

The company is working on selling its Auckland and Pōkeno manufacturing plants as part of a plan to reduce its debts by $300 million, which also included raising equity from investors.

It’s also fighting to win back the trust of farmers, with over half of the farms supplying it having now sent “cessation notices” telling Synlait they did not intend to continue supplying their milk to it after their current contracts expire.

In order to buy time to complete its deleveraging plan, Synlait needed to find funding to make repayments on its current debts.

In a statement to the NZX stock exchange on Wednesday the company says it has struck a deal with Bright Dairy, a Chinese company that owns 39.01% of Synlait, which will provide a loan of up to $130m, which Synlait expects to need all of.

The money will be used to pay Synlait’s syndicate of senior lenders by July 15.

A worker at one of Synlait’s world-class manufacturing sites.

That syndicate comprises ANZ, Bank of China, China Construction Bank, HSBC and Rabobank.

The deal with Bright Dairy depends on shareholders, and authorities agreeing the deal can go ahead.

“The loan would be a related party transaction under the NZX Listing Rules, requiring approval of Synlait's shareholders (other than Bright) at a special meeting by way of an ordinary resolution,” the company said.

The deal must also meet the terms and conditions of Synlait’s banking syndicate, but the company warned it was in negotiations with the syndicate to waive certain covenants it was now expecting to breach, which would put it into default on its debts.

“The banking syndicate is currently reviewing a package of proposed waivers put forward by the company,” Synlait said.

Synlait hit trouble after a large pre-pandemic investment programme, which included spending $280m on a manufacturing plant at Pōkeno, $125m on a new liquid plant at Dunsandel and $150m on cheese companies Talbot Forest Cheese and Dairyworks.

Synlait also remains in dispute with a2 Milk over a manufacturing deal with the infant formula maker.

Its troubles have taken a heavy toll on the value of the company, with its shares having fallen from $3.66 in late 2022 to under 50 cents.

Synlait chairperson George Adams said: “We are actively working with Bright Dairy on the remaining work relating to this shareholder loan and a future equity raise.”

The shareholder loan, and the future equity raising, would enable Synlait to reduce its debt to a sustainable level, he said.

More than half of the farmers supplying Synlait want out.

To reduce debt Synlait is trying to sell its consumer Dairyworks business, which owns brands include Rolling Meadow, and which it values after sale costs at around $120m.

However, that may not now happen as Adams said offers for the business had not “materialised at a level that would be acceptable”.

“Although the company would consider credible offers, the sale process no longer remains formally open,” he said.

Synlait is fighting to keep farmers on board, and a “significant majority” of the company’s farmer supplier base had submitted cessation notices saying they wanted out.

“Retention of milk supply remains a critical priority. Farmer suppliers have signalled they want to see Synlait’s balance sheet deleveraged, so advanced rates can be lifted further, and submitting a cessation notice provides an option, rather than a clear intention to sign with other processors,” Synlait said.

“Synlait is committed to working with its farmer suppliers to improve its offering,” the company said.

The company also warned that while it would still deliver earnings before interest, taxes, depreciation, and amortisation in the range of $45m to $60m in its current financial year, it would be at the lower end of that range.

That was caused by a drop in margins on its ingredients business due to foreign exchange rates and pricing, as well as other factors like further planned write-downs in the value of assets, and increased costs for its debt.