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 |
| 1 |
|
|
|
Calculation |
Explanation |
| 2 |
Revenue |
A |
700 |
|
projected future revenue |
| 3 |
Margin (%) |
B |
10.0% |
|
Expected margin |
| 4 |
Profit |
C |
70 |
= A x B |
= Revenue x Margin |
| 5 |
|
|
|
|
|
| 6 |
Debt swapped 'M |
D |
315 |
|
How much debt will they swap |
| 7 |
Interest rate on debt |
E |
5.0% |
|
What is the interest rate on the debt |
| 8 |
Interest foregone (M) |
F |
15.75 |
= D x E |
= How much interest they forego |
| 9 |
|
|
|
|
|
| 10 |
Risk weighting |
G |
4 |
|
What multiple should we use to reflect additional risk |
| 11 |
Risk-weighted return (M) |
H |
63 |
= F x G |
Therefore - what they need to make |
| 12 |
|
|
|
|
|
| 13 |
%age equity required |
I |
90.00% |
|
= Risk-weighted return divided by Profit |
| 14 |
Remaining % current shareholders |
J |
10.00% |
= 1 - I |
100% less %equity required to deliver the risk-weighted return |
| 15 |
|
|
|
|
|
| 16 |
Current shares on issue (M) |
K |
375 |
|
|
| 17 |
New shares on issue (M) |
L |
3375 |
=(K / J) - K |
How many new shares they need to issue to hit their equity required |
| 18 |
|
|
|
|
|
| 19 |
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.
