MME references to covenants Replies to Tekvest and danbradster....

MME references to covenants

Replies to Tekvest and danbradster.

Summary Apologies for very long note below. I have traced references to covenants in MME docs in last 3 years. The main cause of MME’s problems was in FY22 when its assets grew nearly 400%, both organically and by acquiring Society One. (Fortunately most of the SocOne deal was settled in MME shares, only $15m paid in cash). To fund this huge growth MME took out the $50m PEP loan in Nov 2021 (of which $22m repaid another loan) (and later increased it to $75m) at painfully high interest rates. The rapid growth led to covenant breaches (both on PEP loan and two of the funding trusts) at 31 March and 30 June 22. The breaches were waived in August 22 and the covenants formally changed later to be more realistic. Despite the waivers PEP put pressure on MME to make a binding plan to raise equity to repay $25m of the loan, and also told MME to reduce the rate of its asset growth. This was sorted out by June 23 but at the painful cost of very dilutive equity raising at 8c in May/June 23. But the remaining $50m PEP loan must be repaid by Nov 2025 and is still very expensive. This repayment(or refinancing) is a serious challenge for MME

It’s good that MME disclosed which covenants were breached, but it understandably has not published the actual numerical trigger points (almost no one does!)- so we can’t use this experience to make predictions about future breach risks.

MME references to covenants

AR 2021 none

1H22 report none

AR 2022 several -seebelow (especially note 21.4)

1H23 reportseveral-see below

AR 2023 only one(P60-s aid all OK)

1H24 report none

AR 2022

Because of huge growth (receivables grew from $300m to $1.4B in FY22) - both organic and through the acquisition of SocietyOne in March 2022 -MME breached some of its debt covenants. Note 21.4 said that one breach occurred when a covenant was tested at 31March 22; others breaches occurred at 30 June 22. (The 1H22 report signed on 22 Feb 22 hadn’t mentioned any earlier breaches.) AR22 P40 & 98: financial covenant waivers (for all breaches) were received in August 2022: see detail in Note 21.4. It appears that MME has been fully compliant since August2022.

Note 21.4 MME was in breach of itsTangible Net Worth covenant for two of its larger funding warehouses (Horizon2020 Trust and Society One Funding Trust No2) but by implication the other 5 warehouseswere still compliant with their covenants.Also, MME increased its corporate facility with PEP from $50m to $75m in Feb22. This increase was intended to be temporary. The second paragraph of P96 says that this “led to” breaches of the Liquidity Ratio tested on 31 March 22 and the Loans Asset to Debt and Liquidity Ratio covenants tested on 30 June 22. From the context, these covenants were on the PEP facility, not the securitisation trusts. Although in capital letters these terms are not defined (publically) and the covenant triggers (i.e. the actual breach levels) -which would be valuable to know- are not stated anywhere. All relevant financiers waived those breaches. MME said “Successful completion of the $20m equity placement (actually made in Sept and Oct 22) will assist MME to achieve growth plans and meet cash requirements”. Alasthat proved wrong.

1H23 report

P16 “MME reset Tangible Net Worth covenants with relevant financiers and was compliant at 31 Dec 22”. P41 MME confirmed that it was in compliance with its revised (presumably more lenient) financial covenants at 31 Dec 22. Note 4.2 “going concern” said “in December 22 MME revised its loan terms with PEP, with a reset of financial covenants (plural but which?) And was required to meet milestones for raising equity and repaying$25m of the PEP debt” i.e. MME having a binding agreement by 1/4/23 to raise equity and to repay $25m of PEP’s loan by 30/9/23. If MME failed to do this, and unless PEP agreed, MME would be obliged to repay all of the PEP loan ($78m) by 31/12/23, two years earlier than scheduled. That would have been disastrous, and spurred MME to accelerate an equity raising programme. (Details on P41)