I have read through the documentation as well, and agree with your comments. It is puzzling (and concerning), as this note introduces a significant disincentive to declare large dividends, just at a time when i had hoped they would do so.
To check the mechanics, i spent a bit of time putting together a spreadsheet to model the outcomes for noteholders and shareholders. Excluding other potential factors such as cap raises, other dilution events etc, the outcomes for each are driven by dividends paid and share price movements.
My basic working file is shown below. Under this scenario, i assume a 16 cents annual dividend for the next 5 years, and no change in share price (i.e. it is $1.86 in 5 years when it comes time to convert). Under this scenario, shareholders get a total return of 38%, comprising $0.80 in dividends, less the impact of dilution of $0.09. So in other words a $0.71 profit on todays price of $1.86. 38% total return or 7% per annum for 5 years.
Under this scenario, noteholder's get a similar return - 36%. They are able to convert shares at $1.30 (after reducing for dividends) and therefore get a one off benefit at conversion. Note: i have excluded the return associated with interest payments, as i believe this part of the return should be considered separately, as it is simply the price of debt.
At this point it all seems quite reasonable.
| NHC Convertible Note Analysis |
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| 1 | Current shares on issue: | 832,357,082 |
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| 2 |
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| 3 | Scenario | 1 |
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| 4 | NHC shares on issue 7/7/21 | 832,357,082 |
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| 5 | NHC share price 7/7/21 | $1.86 |
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| 6 | NHC market cap 7/7/21 | $1,548,184,173 |
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| 7 | Annual dividend ($) | $0.16 |
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| 8 | Total dividend paid over 5 years ($) | $0.80 |
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| 9 | Initial conversion price per share ($) | $2.10 |
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| 10 | Adjusted conversion price per share ($) | $1.30 |
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| 11 | Convertible Amount ($) | $200,000,000 |
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| 12 | Change in market value (ex notes) | $- |
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| 13 | NHC share price 2/7/26 (pre conversion) | $1.86 |
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| 14 | NHC market cap 2/7/26 (pre conversion) | $1,548,184,173 |
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| 15 | Notes in money? | 1 |
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| 16 | Cash from notes conversion | $200,000,000 |
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| 17 | NHC market cap 3/7/26 (post conversion) | 1,748,184,173 |
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| 18 | New shares issued | 153,846,154 |
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| 19 | NHC shares on issue 3/7/26 | 986,203,236 |
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| 20 | NHC share price 3/7/26 (post conversion) | $1.77 |
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| 21 |
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| 22 | Shareholder Returns | |
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| 23 | Paid out in dividends | $0.80 |
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| 24 | Share price pre conversion | $1.86 |
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| 25 | Dilution at conversion (value transfer to noteholder) | $(0.09) |
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| 26 | Value to shareholder | $2.57 |
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| 27 | Investment | $1.86 |
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| 28 | Return on investment (total) | 38% |
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| 29 | Return on investment (annualised) | 7% |
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| 30 |
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| 31 | Noteholder Returns | |
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| 32 | Noteholder value (post conversion) | $272,713,982 |
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| 33 | Investment | $200,000,000 |
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| 34 | Return on Investment | 36% |
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| 35 | Return on investment (annualised) | 6% |
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It becomes more interesting when you look at the various permutations of dividends paid and share price movement, and the impact this has on returns to shareholders vs noteholders.
This analysis is shown below.
The top table is the
annualised return to shareholders and the bottom table is the return to noteholders. This clearly illustrates the point. Returns to noteholders increases in a logical fashion as dividends and share price increases. However, paradoxically, the return to shareholders actually decreases if NHC pay out high dividends, even holding the share price movement the same. There is a clear benefit to shareholders in avoiding high dividends which will end up diluting the value of their shares.
In the tables below, the green shading represents a relatively favourable outcome for shareholders or noteholders and red shading the opposite. It clearly shows if you start paying out more than about 16 cents per annum (and the share price holds up), there is a lot of value transfer to noteholders at the expense of shareholder.
| Shareholder return on investment | Annual Dividend Payment |
| 5 year, per annum | $- | $0.08 | $0.16 | $0.24 | $0.32 | $0.40 |
| Movement in share price (from today) | $(1.00) | -14% | -7% | -2% | 2% | 5% | 5% |
| $(0.50) | -6% | -1% | 3% | 6% | 8% | 6% |
| $- | 0% | 4% | 7% | 9% | 10% | 7% |
| $0.50 | 5% | 8% | 10% | 12% | 13% | 8% |
| $1.00 | 8% | 11% | 13% | 14% | 15% | 9% |
| $1.50 | 12% | 14% | 16% | 17% | 17% | 10% |
| $2.00 | 15% | 17% | 18% | 19% | 19% | 11% |
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| Noteholder return on investment | Annual Dividend Payment |
| 5 year, per annum | $- | $0.08 | $0.16 | $0.24 | $0.32 | $0.40 |
| Movement in share price (from today) | $(1.00) | 0% | 0% | 0% | 0% | 8% | 26% |
| $(0.50) | 0% | 0% | 1% | 7% | 17% | 36% |
| $- | 0% | 2% | 6% | 13% | 23% | 44% |
| $0.50 | 2% | 6% | 11% | 18% | 29% | 50% |
| $1.00 | 6% | 10% | 15% | 22% | 33% | 56% |
| $1.50 | 9% | 13% | 19% | 26% | 37% | 60% |
| $2.00 | 12% | 16% | 22% | 29% | 41% | 65% |
My take on this is similar to others - it is unnecessarily complicated and has the potential to create perverse outcomes. Even if they want to make an acquisition, there are surely better ways to raise money.
I had hoped they would manage the business as a cash cow and deliver significant dividends over the remaining life of Bengalla, but in the short term that is no longer a good option - we are better to horde the cash to avoid dilution.
The one positive is that NHC management have the ability to adjust dividend payments to protect shareholder wealth, so lets hope they do that. But i really struggle to understand the rationale for this move.
(20min delay)