aapzb risk, page-2

Nothing trivial when it comes to the money I'm throwing around I can assure you. Happy to hear all opinions, especially on the contrary, to make sure all bases are covered.

Firstly, 25 days notice needs to be given to AAZPB holders prior to redemption date and the redemption price is based on 20 day VWAP less a further 2.5% discount. This means once announced, the share price will drop immediately in recognition of the dilution and pending flood of disgruntled new share holders to hit the market. Shares would be issued at a cheap price based on the forward looking market getting out of the way before the flood hits. In addition as Watford pointed out one could always go short to hedge during the 25 day notice period.

As you rightly point out no AAZPB holders were ever in to become shareholders. In fact the vast majority are institutions running cash management funds fundmentally restricted from holding shares as such. With this knowledge in mind, I personally doubt the board would in any but the most extreme circumstances redeem for shares. Far better to do a book build and place shares to committed holders, raising money to buy out the hybrids rather than place more shares, at a lower price into very weak hands to further damage the share price.

What is the actual cost of carrying the hybrids in lieu of commercial rate debt? After step-up the hybrids cost 4.8% above BBSW instead of say 1% at best on a syndicated loan basis. At around 3.8% on $270M the additional carrying cost against other credit is about $10Mpa. Given credit is very tight, fear and loathing stalks the market, I say $10M is a small annual burden against talk of ALZ going belly up and holders losing $2.3B of equity (NTA).

IMO the board is pretty relaxed about an extra $10m annual cost to a company when others are talking about it's imminent demise. $10M from an annual underlying operating profit circa $120M and revenue circa $800m pa is annoying but nothing in terms of ensuring survival of a company with $2.3B equity (post entitlements). There is no rush to redeem the AAZPB because $10M will not make any difference to the company surviving or not and the gearing wont change even if profits and divis drop to zero!

IMO ALZ will keep on paying the $10M until the credit market relaxes and it can be swapped for syndicated debt. If things get really ugly and the whole $30Mpa cost of the hybrids becomes critical, they will raise capital through share issue to motivated buyers of shares to buy out hybrids and avoid further serious share price damage. This is an absolute last resort because the dilution would be at levels obviously a lot lower than 60c.

One can never say never but existing share holders may get slowly diluted over time if things get really bad but ALZ should keep its head above water. At least there will be plenty of liquidity to sell into by then...lol.

Happy to hear other opinions on whether the above sounds strategically sound or if there are other factors that might influence the boards direction.

cheers