Ann: Change of Director's Interest Notice - A Abercrombie, page-8

Hi tamz

I agree with your comments. At HUM’s AGM, I asked the CFO to confirm to the meeting that, not only were the corporate debt facilities in compliance with their covenants, but all the securitisation facilities were compliant as well (much important as they are 25x larger). He gave that confirmation.

Covenants for securitisation facilities are never published, unless they are breached (see TGA for example), because they are commercially sensitive for both funders and borrowers. However, I’m sure the most important one for HUM would be levels of credit losses. The 3Q results, released on 3 May, showed further improvements in credit losses except for a small rise in AU cards. Since HUM was fully compliant at the time of the agm, and loss rates have decreased since then, they should still be OK now. That’s not to say that they won’t deteriorate- they probably will, as the economy slows- but HUM is well aware of this fundamental risk.

Even if HUM breached, and didn’t rectify, a covenant, I believe that the consequence would be that that facility would be put into amortisation- i.e. it wouldn’t be allowed to write further business and would just run down (repay its debt) in line with cash inflows. In such a scenario HUM would probably be allowed first to rectify the breach by investing more cash into that vehicle. However, under that hypothesis, I can’t imagine HUM would be willing to consider an equity raising at a large discount to NTA to rectify it. In any case HUM does have $100m free cash, so unless the level of default were extreme, new equity would be the last resort.

I don’t have access to the Morningstar report, so can’t comment on his points, but as you say he was banging on about a CR last year and it never happened. I believe talk of a CR is ill informed and alarmist. I understand that HUM is followed by 4 or 5 brokers: it’s a pity that they (or HUM) appear not to publish argument to rebut such weak analysis.

Not advice. DYOR