bad news

Beleaguered pig and poultry drug maker Chemeq could be wound up as early as this year because of an alleged breach of contract with its bondholders..

Bond calls put Chemeq's head on block
Nabila Ahmed
October 27, 2006

BELEAGUERED pig and poultry drug maker Chemeq could be wound up as early as this year because of an alleged breach of contract with its bondholders.

As shares in the one-time biotech high-flyer plummeted more than 33 per cent to a record low of 20¢ yesterday, analysts predicted the end of the company, despite Chemeq's pledge to fight for its future.

Chemeq yesterday revealed it had received a notice of redemption from its major bondholder, US group Stark Investments, alleging that the company had failed to meet one of the requirements of the bond contract.

Stark says an "event of default has occurred in that Chemeq has allegedly failed to achieve a total gross revenue from all sources of at least $4 million for the financial year ending June 30, 2006".

It is seeking the repayment within 10 business days of the convertible bonds, which have a face value of $50 million.

However, Chemeq is adamant is has met the final milestone covenant, and says its revenue for 2006 is $4.15 million.

Chemeq is counting an as yet unpaid amount of $1.47 million in its revenue figure, from a sale in South Africa.

But analysts cast doubt over Chemeq's ability to recover the money from its South African distributor Inviro, with whom the company has been in dispute for several months.

"There does seem to be a lot of uncertainty on whether that money will come in to Chemeq, and should it not come in then obviously they will be in default of the terms of the bond," said Patersons Securities analyst Matthijs Smith.

"Should that occur, there are really two options for the bondholders. One is to convert the shares, which, with the current share price, is probably not that likely. The other alternative is for bondholders to try and recover as much of the debt as possible, and that would include the cash and possibly sale of any assets. If they elected to go down that route, that would pretty much be the end of Chemeq."

Chemeq chief executive David Williams said the company would fight.

"We don't accept that their notice is valid, and therefore there is nothing to deal with," Mr Williams said. "We have satisfied the milestone covenant."

Chemeq announced the resignation of non-executive director John Nicholls, who is on the board of another Chemeq bondholder, Harmony Investment