But the major lenders with exposure in the rural market have dealt with that by setting their own value for shares based on a longer term view.
Rabobank New Zealand chief executive Ben Russell said how to treat shares following the launch of TAF was something the bank pondered on for some time.
The concept of a rolling 12-month value was considered, together with estimates of various equities analysts. Ultimately the bank settled on a long-term value of $6/share.
As it’s turned out that’s been a somewhat conservative number given units in the Fonterra Shareholders Fund and shares in the Fonterra Co-operative Group market have averaged a little above $7 over the past 11 months.
But it’s not out of line with other banks which have also set long term valuations at a similarly conservative level.
Russell said the level of information and effort Fonterra put into explaining the new capital structure to banks before its launch helped in planning just how the shares would be treated as a security.
“It (TAF) was going to make it a bit trickier for us to lend against. Banks would be making long term lending decisions against a security that goes up and down on a daily basis. No one really knew how it was going to track.”
ANZ economist Con Williams had significant input into setting his bank’s value on the shares.
He admitted it was no easy task looking into the multiple factors likely to impact on it three to five years out and was particularly difficult at the outset of TAF before the market began to settle.
“TAF was new and it was unique and that added to the difficulty,” he said.
“To come to a view you have to make an assessment on the longer term earnings outlook, which includes assessing how Fonterra’s key businesses are performing and the execution of their business strategies.
“You also need to understand the key drivers that are affecting and driving the share price in both markets, which may include general factors driving equity markets.”
When considering all these factors the value the bank sets for shares to lend against means determining what factors are structural trends as opposed to cyclical or short term.
“Our first crack at that was when TAF was very new and now that we have seen more trading and Fonterra’s first financial results are out (since TAF was implemented) it is time for a review.”
ANZ originally assigned a value of $5.75 to each share, but there will be some upward pressure on that at the next review, Williams said.
The process for assessing the value on shares is very similar to how the bank derives a long term view of the milk price and other farmgate returns for other sectors.
Historically these assessments have generally been found to be conservative for a range of reasons. The conservative approach is extended further by the banks in that they also have a policy of lending only to 60-65% of the share value they’ve set. At $5.75 to $6/share that’s up to $3.73-$3.90.
Another layer of risk management employed is to limit the total number of shares included in any security to 75% of milk production, or the three-year rolling average share standard set by Fonterra each year.
That, in part, reflects the fact farmers can sell up to 25% of their production-backed share rights.
So to break that down, that means the banks will generally lend on 65% to 75% of a farmer’s share standard with the value of the shares set close to $6/share.
