Hi all,
I think if you take a step back and look at the current loan arrangement with the bank you may get some new perspective:
Say, if SGS didn’t have the cash burn and no impairment, what’s the expected time frame to payback the A$800m loan? A Net profit of approx. $200m (achievable in previous forecast) would mean the loan is paid in 4 years or so. So why did they set the optional loan repayment date at 2017, which is only 2 years from acquisition?
Hence, the date is only there to be used as a check point, and gives the bank some protection and ability to put pressure on SGH if they are not performing.
My current role gave me some good insight into how banks approve loans. A key question they ask is “how are you going to repay the principle when it’s due”. Often, they will take security in an asset, and only lend you a % of the current market value of that asset. But in this case, they can’t securitise, because the biggest asset owned by SGH is Intangibles… I mean you are not going to get your money back by selling SGH’s buildings.
Hence my conclusion from the above is that”:
- Bank knew SGH won’t be able to pay the loan back by 2017, and original plan was never to get them to pay by 2017. They probably had a repayment plan, and SGH is trying hard to go back to that original plan – let’s call this plan A.
- The option for the early repayment date means if someone try to take over SGH at the current cheap-ass price, banks can effectively pull the pin and threat the buyer that the loan is due next year. Hence, the early repayment clause actually prevents aggressive take overs (I didn’t touch on this in my previous Finance studies, but I think this is the “poison pill” that Mel mentioned in her earlier posts). This suggest that banks are on SGH’s side rather than trying to destroy it just for the sake of getting their money back.
- Remember the assumption is that the loan was never intended to be paid by normal repayments to start with. AG possibly had an equity raising in plan, but only when things are in the “Sweet Spots”. Going back to the hypothetical case, if everything went OK, and SGH makes $200m profit, and no issues in the 1H, what would share price be worth now? Would everyone be jumping up and down if a capital raising was done at a more reasonable share price to repay to loan?
- Say the intention was never to repay the loan in 2 years, and if cash flow have now turned positive, what’s the rush to raise equity at ultra low SP (even at $1, this is low in my perspective). If cashflow is good, what’s the rush for banks to enforce repayment earlier to kill the company? AG will hold the card for equity raising until things turn more favorable.
- Banks had a bad run this year… I doubt they would create a situation, where another Arium happens. (On a side note, our Corp Finance team got invited to the Arium syndicate, but our CRO rejected the deal, reason being the declining steel industry, and that Arium’s products were much more expensive than what you can get from China! In hindsight, he is happy with his decision.) On the same token, I actually see growth in SGH due to their market leadership, so why would the bank pull the pin? (now I think I can say this with more confidence, as how things are playing out, with the release of the AFR news article today.)
Again, my sentiment is unchanged, buy if prices dip, and hold (although I already committed all my spare money at $0.24). The bare minimum value per share is $1. At current price <30% of the value per share, I still think that I got a bargain.
Jack5588
