Hi Jack,
Here are my responses to your points for what they are worth. I am posting them because I am interested in the merits of investing in the company again (not prior to H1 FY17 results) and I think there is some value in debating these points. If it makes me a bear for suggesting an opposing opinion so be it. All IMO and DYOR.
1. DE may or may not occur, if it does occur the dilution effect won't hit SGH until the facilities are due in 2018.
Your response to Beave:
I can't be certain, but when you put the pieces together, you got to ask what's in it for each of the parties. If simply out of desperation and DE is required, why did the bank chose to extend the loan in April 2016, when they had the most bargaining power? Why would they force DE, when banks have supported SGH during the period of maximum risk? Now ship has stabilized they just have to sit on their eggs and reap the reward for the risk they have taken earlier, why would they chose to do something that revokes their previous decision that was assumed to be the most beneficial for them?
The banks are self-motivated to recover their capital. They chose to extend the loan in April 2016 based on the PIP that was presented to them, which I assume gave them the best option for recovering their capital. You can hear this in BH's word (in answer to your question) around 20:30 at the below link. He only speaks for a few mins.
http://www.openbriefing.com/OB/Slat...6/2/29/H1-FY16-Results-Presentation/2086.aspx
Although NIHL settlements were disappointing in 1H FY16 (as outlined by BH in the webinar link above), SGH still had the benefit of time on its side to implement PIP to enhance performance. NIHL resolution/settlement ability was still largely unproven (i.e. still a reasonable chance), I even argued this point myself against Alex post-FY16 results. So I would assume there was more willingness to extend some rope and maintain the maturity profile on the basis that the maturity dates were further out and there was a big ticket item with some promise of showing earlier results (still yet to materialise but not completely ruled out yet).
Not sure if you read The Australian article posted earlier today by HaveACrack or someone else but worth a read on Why would they force DE? In short, they would only where it's in their self-interest. I don't need to repeat all the points again but suffice to say, banks aren't set up to take equity but now that two other lenders are on the scene with appetite for equity, is there not a greater chance the banks could just sell down a portion of their holdings?
Their previous decision to extend the loan was based on the PIP that was presented to them. We know that a new agreement has been reach (with details TBC) and my read is most people here assume they've probably breached some financial or operational convenant (with details TBC). Now covenants were reset in April 2016 to allow for ample headroom for PIP, and despite this headroom there are media reports that one or more of these were breached. So banks would choose to revoke or at least change the structure of their previous decision because the landscape has in fact changed.
NIHL has yet to come off, a covenant(s) has potentially been breached demonstrating PIP implementation not as progressed as would have hoped, and two new owners of the debt have an appetite for equity where this did not exist at April 2016.
You have also neglected the semi-annual debt amortisation that kicks in at July 2017. Let the 1H FY17 results speak for themselves but if PIP results are lagging, all this talk of $1bn revenue is meaningless if they can't produce a decent profit to pay back a (speculated) marginal amount of debt. Noone knowns the quantum of this payment or the rest of the amortisation schedule but I am happy to concede it was negotiated to be a relatively small/achievable amount (~<$20m as a guesstimate).
The company also explicitly uses the word recapitalisation now where as this was not mentioned in April 2016. Take from that what you will.
2. MQG has no cross-liability to the CAs - it underwrote the retail entitlement offer underpinning the PSD acquisition, it was not an advisor to the acquisition as was Citi. In any case, Anchorage (as part of a syndicate) and DB are the new owners of the debt. The motivation of the sellers matters little anymore.
3. What matters is that operating margins in the UK business are achieved. Fyi, they were materially negative in the last half. There is no point generating ~$1bn in revenue when you are making a loss. Happy to let the 1H 17 results speak for themselves and be proved wrong but taking into account the succession of media speculation and recent announcement, who is being the up/down ramper based on available information/speculation?
I also don't think your maths makes any sense. What is BAU based on? Are you predicting 20% operating margins across all business ex-NIHL? How do you account for the recent debt amendment if it's BAU? I am legitimately interested in your answers.
4. SGH is oversold because it appointed a new GCFO in 2015? I like the guy but I'm failing to see the correlation between his hire and the SP. If anything the SP has gone done since his hire, not suggesting it's his fault but can't quite follow your thinking. He seems more capable than his predecessor.
5. What has been fixed? We don't have 1H FY17 results yet. What we do have is reported secondary sales of debt for sub 50 cents on the dollar, and a new debt amendment without details to make an informed opinion on.
Common guys, make up your own mind, if you have some cash to spare, get in at this price and hold for a year, that's value investing.
And I am meant to be the one giving personal financial advice @brad0990 ha!
