Will investors vote to pluck gamblers?
With Christmas fast approaching, the board of Chorus has an appropriately seasonal issue concentrating its mind.
It goes like this: do they bite the bullet and raise several hundred million dollars from shareholders? If they do, it will fix their groaning balance sheet but it could come at the price of their jobs - the way Chalkie hears it, some investors want heads to roll before agreeing to put money in.
So, will the turkeys vote for Christmas? Chalkie reckons this time perhaps they will, or at least, they should.
Whatever you think about the whys and wherefores of how Chorus got to this point, the troubled telco has a fundamental problem to deal with. It has $1.7 billion of debt and from 2015 will probably have a lot less income to pay for it, as a result of a Commerce Commission ruling on how much it can charge for one of its main services.
Analyst Adrian Allbon of Goldman Sachs, in a research note dated December 5, said Chorus should look at raising equity of $300 million-$500 million to give its balance sheet some breathing space.
"Our analysis at the lower UBA copper price suggests CNU absent any [Crown Fibre Holdings] concessions may lead to the company breaching its debt covenants, potentially putting its investment-grade credit rating at risk in FY15, even after cutting its dividend to zero," he wrote.
To restore its ability to pay a dividend - which requires a credit rating of at least BBB - an equity raising was essential, he said.
The likely mechanism would be a discounted underwritten rights issue, like those at Nuplex, PGG Wrightson and Fisher & Paykel Appliances in 2009.
The process would be fair to all shareholders who used the rights, Allbon noted, but "we acknowledge their previous equity returns would have now been significantly impaired."
This sort of thing is painful for shareholders and it's far from clear they would all want to stump up more cash while Chorus is surrounded by so much uncertainty. However, there may be a silver lining in the cloud - depending on how they are structured, these deals can offer tasty gains for investors through placements or underwrites.
Chalkie has heard mixed views on the appetite for a rights issue. For overseas investors it would probably be as welcome as pork in Pakistan. For locals it would be a 50:50 call.
But even local support may be highly conditional.
One said: "If they come to us we will put capital up on condition there are changes on the board. We'll force a change and do it at a cheap price."
Among the reasons for this demand is the view that Chorus's board seriously mishandled the Government and the regulatory process, just as Telecom did before being forced to split by legislation in late 2006.
After the Commerce Commission issued a draft pricing decision a year ago which portended a wholesale price cut in Chorus's unbundled bitstream access service of about 58 per cent, it appears that the company's response was to lobby the Government to over-rule the commission.
It looked like the effort was working when in August the Government issued a discussion document proposing a price reset for Chorus' copper services to counteract the commission's process.
In September Prime Minister John Key said Chorus could "go broke" if the commission decision stood, citing conversations with Chorus chairwoman Sue Sheldon as one of his reasons.
"The chairman gave me an indication of her thinking about the impact that would take place, and that gave me some understanding of the issues that it would face," Key told Parliament.
When the commission issued a final price ruling confirming a UBA price cut from $21.46 a month to $10.92, Chorus managing director Mark Ratcliffe demanded Government intervention, saying without it the company's ability to deliver ultrafast broadband installation as required by government contract would be compromised.
However, the Government's ability to over-rule the commission is now clearly a political no-goer - and probably was always a marginal option.
This basically means Chorus has to go through the standard process of appealing the decision in court, seeking a full pricing review through the commission and trying to get the Government to loosen the terms of its fibre contract.
All the while, it will have a highly geared balance sheet and a likely credit rating downgrade. That's not a great position to be in when you've got a $675m bank debt facility up for renewal on November 23, 2015.
No wonder Chorus's share price has been tanking. At the current price of about $1.40 the company is valued at about $550m - less than its balance sheet equity value of $624m and half the price it was in early September.
The upshot is that while Chorus's board was banking on the Government riding to the rescue, the cost of raising equity kept going up.
The way some investors see it, Chorus was financially ill-equipped to take on regulatory risk and the board should have recognised its weakness much earlier.
Chalkie reckons they are right - Chorus geared itself up to the eyeballs and gambled on a certain regulatory outcome.
Ironically, while there has been much gnashing of teeth about regulatory uncertainty, it surely adds uncertainty if you have a Government willing to over-rule the regulator in some circumstances, talks about it, then doesn't do it.
Market talk speculates Chorus may announce a capital raising early next year. If so, the terms will be interesting. No doubt the board will be hoping the instos have had their fill of cranberry sauce by then.
Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter