Buying SGH, page-316

Russ, your comments are noted.

According to H17, the SFA was fully drawn to its facility limit of $737.6M at Dec31. This was as against a limit of $765.6M at Jun30, with the main difference being due to FX variation. Refer note 5.1. The reference therefore to “a majority of lenders by value” can really only have proper effect if given its literal meaning which is drawn down limit value, divided by 2, plus 1. In other words, represented by those lenders holding >50% of the drawn down debt (at the relevant time of having to decide something). Given then the Dec31 closing position, this would require lenders holding >$382,800,000 in drawn down value to vote in favour of the proposal.

I would therefore consider a “majority of lenders by value” as being >50% of the drawn down debt value as at each relevant determination date (ie: 26/5/17).

Both WBC and NAB are the two largest members of the syndicate with WBC’s exposure at >$300M and NAB’s at about the same. The remainder of the exposure was originally split over a raft of second tier lenders, most of whom have since on-sold their debt loads to distressed /vulture funds such as Anchorage. Citi was one such example of this.

For Malcolm however to stay in the Lodge, he needs to maintain a majority on the House floor, being 75 + 1. Same thing for the banks, except that their House is reflected in the SFA drawn down values.

The next part of the equation concerns the need for the banking syndicate to agree. In this regard, they must agree to the recapitalisation by 26/5/17 otherwise all bets are off. The wording used in note 1.2 was:
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“Under the SFA, a majority of lenders by value must agree to a satisfactory recapitalisation plan by 26 May 2017. “

Absent this occurring, note 1.2 goes on to state that:
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“the borrowings under the SFA may become due and payable within a further 14 days of this date.”

The mixed use of “must” vs “may” however can be reconciled the following basis:

1. 26/5/17 – Must

Any recapitalisation decision has to be approved by 26/5/17. There is no further room for extension beyond this meaning that it is an absolute date by which certain actions must be complied with. This also represents a date which is within SGH’s ability to influence (ie: by what it brings to the table, etc). So, the mandatory style of the term here needs to be interpreted from the perspective of the writer, in this instance, being SGH.

So far as SGH is concerned, it has the ability to still influence the 26/5/17 decision which means that the obligation of compliance here equally falls upon SGH as in, it is SGH which wears the burden of having to convince a majority of lenders (by value) of its recapitalisation plan and, in order for this to be effective, it needs to be done, completed and approved by 26/5/217.

1. >26/5/17 – May

Thereafter, if not approved by a majority of lenders (by value), SGH loses any other ability to influence, participate and /or to arrange. That is, SGH no longer then has any say in the matter as this is wholly for the banks to do. What this means is that the banks (either collectively or acting individually) then have the ability to individually call up their own holdings for payment within a further 14 days. It means that the entire SFA is at call, but that further separate, independent actions are required by each of the banks in order for the loans to be separately called up.

Typically, this would require a default notice to be issued, etc. This however is not a process that SGH can influence. Equally, it may be that some but not all facility members may call in their loans at this time, so even if NAB and /or WBC are not willing to call them in, they might in any event be forced to either call up their loans or potentially buy out the junior syndicate members to the extent that they want their funds back.

This, in my view, reminds me of just how perilously close Newscorp came to going to the wall back in 1991 due to a single bank being owed circa $30M in amongst a $2B facility in circumstances where all others had agreed to the facility. In this instance however, it could well be the vulture funds, such as Anchorage who could well be taking a 2-way bet here – (1) of forcing SGH to pay up, and the other of (2) pressuring NAB and /or WBC to buy them out in the event of neither of the majors wanting to otherwise pull the plug. Either way, I reckon that it will be the vulture funds who will not be agreeing to any recapitalisation program unless they get paid out 100c/$.   Given though that SGH doesn’t have any say, sway or influence over what happens next, they have stated this post 26/5/17 obligation in its permissive sense.

Ahead of all this though, I would venture that if the banks have not agreed to the recapitalisation by 26/5/17, that the SGH board will very quickly convene after that time and appoint a VA, simply because they will have had enough information to suggest that without a recapitalisation they will not have the funds with which to repay the SFA. In many respects, the banks by not agreeing would simply force (through example) for SGH to take its own steps of appointing.

It therefore really comes down to this – SGH is gambling on the banks in some way agreeing to the recapitalisation by 26/5/17, or if they do not, that the 2 big banks will not then tip them over (or indeed might well buy out the junior syndicate members), or alternatively that a lesser form of capital raising can then be done in order to take out the junior members.

The trouble with all these scenarios however is that it occupies an equally crowded as it is a fragile space where anything, and quite literally everything, can all go to *hit in a heartbeat. Expect therefore for the vulture funds to be increasingly making their presence felt over the coming 12 weeks. They’re trying to turn a 40 – 60% investment into a 100% payday, with cash, not with shares.

As for what this might mean for the rest of the profession out there, blow back is already starting to happen with the banks - asking more questions, demanding more information and documents, bringing forward reviews, not being as friendly, demanding confirmation and assurances as to payment of taxation obligations /tax portal information, etc. The sins of SGH's excesses are therefore very likely to be visited upon the profession as a whole, and especially upon the practices, the firms and the owners thereof. To some degree, it's already started.