Debt for Dividends

By Eric Crampton 16/07/2013

Christchurch City Council refuses to sell Council-owned assets to help pay for the earthquake rebuild. They should sell some of those assets, so long as it’s to pay for roads and sewers rather than for stadiums. But, a lot of folks just hate the idea of selling off the assets, and so it isn’t happening.

Instead, Council-owned companies look like they’ll be taking on debt to pay a higher dividend to Council.

The Christchurch City Council’s investment arm may have to borrow to meet higher dividend commitments of $140 million over three years to the council.
Christchurch City Holdings (CCHL), which oversees the council’s trading companies such as Orion and Christchurch Airport, promised to step up dividends after the earthquakes.
Its new statement of intent for the next three years from July 1 this year to June 30, 2016, forecasts dividends of $46m, $46m and $48m to the council.
It is a significantly higher level of ordinary dividends than before the quakes, when dividends ranged from about $30m to $35m each year.
CCHL’s profits for the three years are forecast to be $33.1 m, $37.6m and $43.1m. CCHL will need to borrow $26.2m to meet its commitment to the council, unless it receives more dividends from the council’s seven trading companies, increasing its profits.
CCHL chairman Bruce Irvine confirmed CCHL would borrow to meet the gap between its forecast profits and the dividends if needed.

I’m not a corporate finance guy, but it seems a bit odd to be borrowing to pay dividends to current shareholders. It’s not something I’d expect would typically be recommended. Borrowing money to finance projects that yield a longer term rate of return in excess of the borrowing costs – that tends to be recommended. If firm shareholders have short term financial issues that mean they’ve a strong preference for having cash now, sensible Boards, I’d have thought, would have reminded those shareholders that they could divest themselves of a few shares if they needed a short-term cash hit.

When companies instead are borrowing to make their big shareholder happy about the current dividend flows, I start worrying about a whole pile of other ugliness that could be going on. Like, whether the company is making adequate investments in the maintenance of its physical assets or whether it’s deferring maintenance to make the dividend payments. But again, I’m not an accountant or a corporate finance guy, and I’ve certainly not cracked open the CCHL books. It just smells a bit off. When a company is taking the dividend as a constraint against which to optimise instead of as the residual of what’s left over after they’ve paid the bills, I wonder whether they really ought to have different owners.

But maybe a finance type who reads the blog can set my mind at ease here. Or maybe this is just standard practice when the government owns NZ companies. I remember something about something involving Solid Energy doing something like this.


  • Apple has borrowed to cover dividends and share buyback. Borrowing for a share buyback is different: the firm gets to own more of itself. And Apple had tax reasons to borrow rather than to bring its overseas cash back to the US.
  • Weird stuff can happen such that companies can’t make a scheduled dividend payment while all is fine, or where a profitable company hits a liquidity constraint and so has to borrow despite profits in excess of the dividend payment. But here CCHL deliberately lifted the dividend payment to transfer more money to Council post quake. If they’re doing that, why not just sell some shares in it instead?