equity raising; unanswered questions

Aspen Equity Raising
Unanswered questions?

Retail investors in Aspen Group will be shortly receiving their Offer booklets inviting them to subscribe in a one for one rights issue. I am not an existing unitholder, but read the Investor Presentation with a view to buying in post raising. As I read the presentation I was struck by the lack of detail for what is a complex group with serious liquidity and gearing issues. I then asked around, I could only get my hands on one broker research note on the stock (Macquarie Equities).

This could either be seen as a warning bell to stay away, or an opportunity to invest in a stock whose price is depressed through lack of understanding. Ever the optimist, I spent a more hours than I could spare reading the annual accounts and recent announcements trying to piece the picture together.

Aspen are raising $101m to reduce existing debt and to fund future capital requirements. Without the raising Aspen price would have likely plummeted and it could well have ended up in the graveyard. The investment proposition is that after the equity raising Aspen is on an even keel and can start to trade on its fundamentals rather than as a potential basket case. And the upside is there if this occurs; for instance the presentation to institutional investors highlights the 40% discount to NTA [I think this is overstated, but even so there is material NTA upside].

The key question is: is the capital raising enough? Is it enough to allow Aspen to trade as a stable company and provide investors with a good return based on the 17 cents issue price, or will it need to conduct another raising in the near future to finish the capital repair job. And if the prevailing view is it will need a further capital raising, then the price could go into a self perpetuating downward spiral.

My view is the raising is not sufficient for the stock to return to normal trading from the outset, because there are too many unanswered questions. If more clarity (but only the good sort) can be provided and Aspen kicks a couple more goals in reducing its gearing then the stock will, in my view, start to trade on a normal basis.

By my numbers, Aspen has the necessary liquidity to
enable it to continue its core business, as well as preparing assets for sale and should not need a further capital raising. But Aspen is a many headed beast, and if I was sure it could walk away from all the non-core (read troublesome) funds which it manages and in which it has material levels of investment, then my questions would be answered and I could invest with a reasonable degree of confidence.

There is a good diagramme on page 22 of the Investor Presentation summarising the Group, which illustrates the various activities of Aspen. If it helps, here is my summary of that diagramme in words;
Aspen, the head stock, directly owns properties as long term investments and has a couple of assets up for sale. It has a small stake (<20%) in its successful Aspen Parks Fund. The directly held investment property portfolio and management of Aspen Parks is Aspen’s core business. It has larger stakes (>20%) in a various other funds which it manages, this in the non-core stuff which it wishes to wind down or exit. The non-core funds are:
- Aspen Diversified Fund: where it should be able to realise the carrying value of its $27m investment, however this fund is under bank covenant limit pressure and ultimately refinance pressure.
- Aspen Development Fund: where it will be investing $20m of the capital raising proceeds but where the recovery of this amount is uncertain as it had a negative net asset position as at 30 June 2012.
- Various single purpose residential based funds two of which appear sound (St Leonards and Enclave at St Leonards) where Aspen should be able to realise its carrying value of its $9m investment, and the rest of which are under water.

Looking at the liquidity of the core business here is what I learnt.

Aspen had $3m in cash at 30 June 2012. Add to this $34m from the capital raising and you have pro-forma cash of $37m. In addition in August it announced a new convertible note facility of $35m being provided by Telstra. On my reading the9 August ASX announcement of this new facility this new facility is for Aspen to use it as it sees fit. Conversely the Macquarie Research note states that the use of the facility is restricted to funding the completion of a specific development (ATO building in Adelaide). I have assumed Macquarie is wrong on this point, but I accept it is a critical point. If Macquarie is right, then it changes everything and Aspen has a huge liquidity issue.

On the outbound side the accounts show the following contractual and potential capital commitments:
- An immediate working capital requirement of $13m, being receivables (excluding receivables from related parties near or under water) less trade creditors (including the $1.5m Whitsundays option).
- Contracted capex of $20m in total for the completion of the Adelaide ATO HQ and loans which Aspen is under a contractual obligation to provide to certain funds which it manages. There is $12m of the Telstra construction facility available to be drawn on, so the net obligation is $8m.
- A year’s worth of amortisation totalling $3m for an asset specific NAB loan
- Potential cash calls arising on guarantees provided by Aspen in relation to borrowings by its associates:
- $10m in aggregate to three residential development funds . Given all three are reported as having negative assets as at 30 June 2012, its best to assume these guarantees will be called.
- $55m to the Aspen Development Fund No.1 . There is no further disclosure on the nature of the guarantee, but looking at the wording of the 2011 accounts, my guess is that some or all of the $55m guarantee relates to ADF#1’s $57m debt (as at 30 June). If this is the case then the amount of the guarantee should have reduced by $20m following the $20m repayment (one of the applications of the capital raising). The $37m residual debt to NAB is disclosed as having an LVR of 49%, so you would hazard that it will get fully repaid from the sell down of ADF#1’s assets and hence the guarantee will not be called upon. The guarantee might also relate to the ADF#1 put option, but if this were the case wouldn’t the there be a note saying the guarantee had been extinguished following the exercise of the put?

And then there is general capex requirements such as leasing incentives and any expenditure required to prepare the two assets Aspen holds for sale and potentially further investment into Aspen Diversified Fund to protect its current $27m investment. The offer document doesn’t give a figure for this expenditure, so I am allowing somewhat arbitrarily $15m.

So summarising the above Aspen has $72m of cash and unused bank facility and $49m of capex pending, leaving surplus liquidity of $23m.

In addition to the capex described above, Aspen has to repay NAB by $37m by 30 June 2013 and another $33m reduction by Dec 2013. Now the strange thing is the disclosure in the Investor Presentation states that this $37m reduction is to be off NAB facilities “across the Aspen Group”. Does this mean Aspen can choose which facilities to pay down ? or is there a specific schedule of how much each facility needs to be paid down by? If the latter then this could mean Aspen has to throw money down into the funds where the probability of recovery is uncertain or unlikely. If the former then any sale of an asset subject to a NAB facility can count towards the $37m target. To this point, Aspen Diversified Property Fund has recently sold an industrial asset which should enable $17m to be repaid. I presume that such a pay down will count towards the $37m target. This combined with the excess liquidity is enough to satisfy the $37m by 30 June 2013 requirement. It’s then not a stretch to presume further asset sales can be achieved to meet the Dec 2013 $33m amortisation.

Next is the risk of the banks (NAB and Bendigo) demanding their loans be repaid before their scheduled maturity date due to an event of default. The various facilities have different financial covenants, which I will come to. But the threshold question is whether a default under any of the NAB loans to the funds managed by Aspen triggers a cross default in Aspen’s main NAB or Bendigo facility? If there are such provisions in the Funds’ loan documents then it changes the playing field because Aspen may have to support one or more of its funds, including the funds which are underwater, to prevent NAB accelerating its own loan.

There is no disclosure on the interplay, or lack thereof, of the various loan facilities in the accounts or the offer document. I assume that there is no such cross defaults based on the statements by Aspen that it will only make further loans to the funds it manages to the extent it has due to a binding agreement, in other words Aspen is prepared to let the managed funds fail if it comes to that. That said, it is uncomforting this aspect is not clarified in the offer document.

Turning to the financial covenants, Aspen has a degree of buffer from the financial covenants in its NAB loans. Yes it does have temporary respite on its minimum lease term covenant, but this is not a difficult hurdle to navigate. The Bendigo loan on the Ballina Retirment Village is hard up against its 60% LVR covenant, and the covenant itself is reducing to 50% by 30 June 2013. That will require a debt repayment of $3m. Aspen has the liquidity to make such a repayment by virtue of the new convertible note facility, but it would be good to have confirmed that the NAB facility doesn’t prohibit paying down the Bendigo loan using group cash.

Aspen Diversified Fund (in which Aspen has a $27m investment) is hard up against its 65% LVR, however the recent sale of one of the funds properties will reduce the actual LVR by approx 5%, so the pressure is reduced.

So presuming all my questions are clarified to the positive, you can look at Aspen’s core business as a stand alone business firewalled from the non-core funds (save for the known loan funding requirement and guarantees).

What is its value? I only had time to look at NTA. This can be done by sorting the group’s asset and liabilities under the head stock and the individual funds and then discarding those with there is negative or no value but including the negative impact of guarantees and loan funding obligations.

My assumptions were;
- the $20m in ADF#1 will not be recovered, but there is no call on the $55m guarantee
- the under water residential funds remain under water and that Aspen will be hit up for the $10m in guarantees to these funds,
- the carrying values of the investments in the Aspen Diversified Fund and the two St Leonards development projects is realised
- of Aspens $7m in commitment to lend to the funds (its not clear whether its $7m of $5m as at 30 June) I arbitrarily assume half of this is to funds where recovery does not occur.

Putting all this together gives an economic NTA for the security holders in Aspen of approx 24 cents.
Its not the 40 cents shown in the offer document, but it still represents a premium over the offer price of 40%.
If I got the answers to my questions (to the positive) then I would invest, but until then I think I’ll hold fire.

Disclaimer: I did this on my kitchen table, when I should have been painting the house. I hope it helps you in your own investment considerations but please do not rely on its accuracy or acumen. It took a while to piece this together, and I haven’t looked at the valuations of the investment properties, which is obviously important for estimating NTA, but there comes a point where you have to rely on the accounts.