Another perspective from a Bondholder's position !

Came across the below from the net. It says GEM is going to be in a string financial position after all that has happened recently. Article follows :-



CIPI share placement runs into issues

Investor negativity stemmed from the inability of CIPI (as manager of the First Capital Australia Education Master Fund) to complete the second tranche of a share placement exercise in May; CIPI (a subsidiary of HK-listed China First Capital Group Limited) had earlier agreed to invest approximately A$212.8m by purchasing shares at A$3.88. CIPI had earlier invested A$63.8m on 24 February 2017 in the first tranche of the transaction, but failed to complete the second tranche (which amounted to A$149m, due 17 May 2017); instead, CIPI had asked for a 180 day extension for payment on the second tranche. This was rejected by G8, and the placement (involving the second tranche of the share placement) was terminated.



G8 does an institutional share placement exercise instead

While the inability of CIPI to stump up an additional A$149m is clearly a negative development (given the company's intention to utilise the funds to pay down debt and partially fund a sizable number of committed centre acquisitions), the company reached out to existing and new shareholders via a fully-underwritten share placement exercise to raise A$100m - this was conducted yesterday, with the shares priced at S$3.20 (a 7.2% discount to last close prior to the placement). To close the gap between the anticipated A$149m (which would have come from CIPI) and the A$100m raised from the institutional share placement, G8 is also taking in A$31.8m from CIPI in a newly-negotiated second share placement tranche (also priced at A$3.88 a share), which means the "shortfall" from the lack of CIPI's ability to complete the second tranche of the share placement exercise is a much more manageable A$17.2m.


Our take

While the uncertainty over the share placement is clearly not good for investor sentiment, we think the latest developments are generally positive from a bondholder perspective - the placement of A$100m of discounted shares (17.5% below CIPI's expected investment cost) hurts shareholders, but from a bondholder perspective, the company has still raised A$195.6m, which has been identified to be used to reduce A$90m of borrowings. This equity injection (on aggregate, including CIPI's earlier equity injection) will help to reduce net debt from A$384m (as of end-Dec 16) to A$189m, which is just marginally higher than the A$172m of EBITDA generated in FY16 (A$169m of operating cash flow was generated before interest and taxes) - this essentially means that the company's operating cash flows over a year are almost enough to cover the entire net debt position, indicating that the company is in a very strong financial position.
Some negatives for bondholders are the fairly strong pipeline of committed acquisitions (A$200m for 49 centres over 2 years), although we note that a positive to emerge is that G8 "has elected, at this time, not to pursue any opportunities in relation to the early education sector in China" - this may have transpired from the lack of CIPI's completion of the share placement, marginalising the importance of CIPI as a strategic shareholder; while this may not be the most favourable outcome for shareholders, we clearly think any expansionary plans into a new overseas market (like China) will be fairly capital intensive, and may not be in the best interests of bondholders who may prefer a more conservative approach to capital expenditure.


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