It's hard to find a set of figures that deliver a reasonable chunk of debt reduction, based on attainable revenue and margin numbers with what I think hedge funds would see as "acceptable" risk/return weightings.
I'm not sitting in the negotiations - so take all of this with an extremely large grain of salt - just my opinion...
After running numerous scenarios I believe it is most likely that current s/holders will be offered a token amount (<$0.05) and will be left with about 5% of the company - the debt holders will take the rest.
That said - debt holders may be prepared to give away a little more to make it easier to get the recap deal across the line - though I don't think they are in any particular hurry or under any great pressure - so I'm not expecting extraordinary generosity.
To get a deal close to the current share price, you'd still have to assume reasonably optimistic revenue and margin figures (or at least a very quick turnaround from the last half's figures) - and a low risk-weighting on the D4E swap.
If you swap a little more debt on the figures I used above, you get a share price close to current:
Revenue: $700M
Margin: 10%
Risk-weighting: 4x
Swap $315M gets D4E @ $0.093 - which is pretty much spot-on VWAP - and 90% dilution
Column 1
Column 2
Column 3
Column 4
Column 5
0
Calculation
Explanation
1
Revenue
A
700
projected future revenue
2
Margin (%)
B
10.0%
Expected margin
3
Profit
C
70
= A x B
= Revenue x Margin
4
5
Debt swapped 'M
D
315
How much debt will they swap
6
Interest rate on debt
E
5.0%
What is the interest rate on the debt
7
Interest foregone (M)
F
15.75
= D x E
= How much interest they forego
8
9
Risk weighting
G
4
What multiple should we use to reflect additional risk
10
Risk-weighted return (M)
H
63
= F x G
Therefore - what they need to make
11
12
%age equity required
I
90.00%
= Risk-weighted return divided by Profit
13
Remaining % current shareholders
J
10.00%
= 1 - I
100% less %equity required to deliver the risk-weighted return
14
15
Current shares on issue (M)
K
375
16
New shares on issue (M)
L
3375
=(K / J) - K
How many new shares they need to issue to hit their equity required
17
18
Issue price
M
$0.093
= D / L
= Debt swapped divided into New shares issued
I agree - hard to see D4E being done at a substantial (or indeed any!) premium to current SP - the prolonged range trading around 9.5c is certainly something the hedge funds can point to and say "The market values it at $35M - and we're offering you $250M or $350M (in debt) for 90% of it - effectively valuing it at 10x market value".
Whether this translates into an actual uplift in the SP post-D4E remains to be seen of course.
SGH Price at posting:
9.2¢ Sentiment: Sell Disclosure: Not Held