PAUL MCBETH: Govt finding funds in fibre

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years.

The government’s decision to look at selling the billion dollars or so of Chorus debt and equity instruments might not be a fire sale, but it certainly shows how hungry the Crown is for cash.

If anything, it might be a little late to the party.

Chorus made its first repayment of the government’s interest free loans in the June 2025 year, and redeemed $85.3 million of the non-voting equities securities in June after selling $170 million of capital notes to refinance some of that Crown funding.

The government’s preference shares attract an annual dividend of six percentage points above the 180-day bank bill rate, with payments kicking off in the June 2025 year, or roughly 8.5% at the current level, so it was something of a no-brainer for Chorus to seek a cheaper option given the notes carry a 5.9% interest rate.

You can’t blame politicians for realising they’re sitting on some attractive cashflows that will be an easy sell to investors, freeing up some cash to plough into whatever desperate infrastructure project needs some money.

And unless you were a telecommunications tragic, you might not have even realised there were some future fishhooks that came with the $929 million thrown Chorus’s way back when it was officially carved out of Telecom.

Riding on anything

The funding, in the form of debt and equities securities, start being repaid in 2025 while the preference shares attract accelerating returns over the coming decade if Chorus doesn’t redeem them either in cash or convert them to ordinary shares at a 5% discount.

On top of that, the government received warrants entitling it to participate in any upside if Chorus shares managed to beat the rather high hurdle of a 16% total shareholder return.

The fact that almost 7.6 million warrants were cancelled after their June 30 expiry date without being called and chief executive Mark Aue’s long-term incentive is tied to a total shareholder return of between 8.04% and 8.79% might give you a hint as to how realistic that lofty goal is.

All this being a far cry from the fears that Telecom was getting thrown a blank cheque back in 2011 when it agreed to end the funny-money-go-round of pretending the network operator Chorus was a separate company, splitting it out properly to let the unit tap into Steven Joyce’s vision for fibre running to urban homes, and freeing what’s now Spark New Zealand from the iron grip of the Commerce Commission’s Telecommunications Commissioner.

Of course, the great minds at Chorus might’ve been a little blind to their own gaming of the system when the new regime reversed the way regulated prices were set to access the wholesale telco network. The formula moved from being based on the retail price minus the margin that had prevailed during the Telecom reign to one starting with the cost of delivery plus an appropriate profit.

That is the luck you crave

The end result being a far lower price than the network company was willing to swallow, leading to plenty of billable hours while Chorus’s lawyers argued and lost their case.

An attempt to circumvent the regime by legislative means by then-communications minister Amy Adams was outmanoeuvred by her government’s support partners, and she ultimately had to come up with financing arrangements and a new regulatory regime to set wholesale telco network access prices along the same lines as electricity distribution firms, such as Vector.

One of the more surprising elements was how Chorus’s chief Mark Ratcliffe – who’d overseen Telecom’s separation of the unit – managed to keep his job through the turmoil. Truly one of the more amazing seasons of corporate survivor.

That Chorus managed to get on with doing its job of rolling out fibre up and down much of the country while retailers pushed actual broadband on to their customers – helped in part by the advent of Netflix and other streaming services – might’ve had something to do with it, and when Ratcliffe left in February 2017 the network operator was heading in the right direction.

After almost 14 years as a standalone company, Chorus is looking sharp as it extends its fibre network’s frontier and has a more favourable regime letting it spit out reliable dividends as a utility should.

The vital connection is made

Which brings us back to the government’s plan to cash in those future cashflows.

It’s a bit of a nonsense to say there’s no policy reason to keep the various securities. The fact that the taxpayer can benefit in the value created through the sweetheart loans to Chorus are a perfectly good rationale to keep them.

In saying that, these securities were never the family silver, which was sold many moons ago when Telecom was first privatised in 1990, and we don’t really have the balance sheet to sweat the decade or so needed to extract the maximum value from the Chorus assets.

It’s easy to argue that the thick end of a billion dollars now can be of more use paying for new school and hospital buildings and equipment, although it’s more a drop in the bucket given the government spent about $15 billion on physical and intangible assets in the June 2025 year.

And that was still about $2 billion short of the budget forecast in May, as the never-ending laundry list of sods to be turned and ribbons to be cut by grinning ministers always outpaces the number of chippies on the ground to actually do the work.

It might not be much in the way of leadership, but you have to give a thumbs up to adequate asset management.

Image from Shahadat Rahman on Unsplash.

This story has been updated to fix a missing word showing Chorus is extending its frontier.