june 2012

June 2012 is the date when PPX has to decide what to do with PXUPA. Their choices are:
1. Redeem for cash at $100--absolutely no chance of this occuring.
2. Step up the rate--in my opinion most likely as they are not obliged to pay it, just as the present coupon is not required to be paid. BUT: not paying means that the ordinaries are in a perpetual twilight zone of never being able to be paid a dividend, and absent the company being wound up, or some stellar growth trajectory, a dividend is the only reason to invest. Failure to pay the PXUPA distributions consigns the ordinaries to the status of "Zombie Securities"...the living dead.
3. Convert into ordinary shares. While this might appear superficially tempting, what this does is transfer NTA to the PXUPA from the ordinaries. Based on the last accounts there is NTA per ordinary share of 71c (NTA of $427m divided by 604m ordinaries--assumes the accounts accurately reflect the value of tangible assets). At the present desolutory share price of PPX (7.6c) each $100 PXUPA would convert into around 1316 ordinaries resulting in a massive increase in shares on issue most of which would be held by former PXUPA holders. The NTA/$100 PXUPA security would in fact become $129 per security as the former PXUPA holders will now hold 86% of the diluted capital.

I'm pretty sure that even the board of PPX could see that this would result in a riot amongst the present ordinary shareholders.

So on the one hand the PXUPA prevent the ordinaries from receiving any income on their investment unless they get their distributions paid. And on present running yield this is very attractive and set to become more so in 2012. The option of conversion to ordinaries is just so dilutive (but very attractive to the PXUPA holders) to the ordinary holders I am sure the board would not do so (but who knows with this lot?).

At the end of the day, stepping up is the only short term solution for the company and then assessing where they go from there.

But the only solution is really to go in the market, buy some PXUPA back at the present low prices and then put up a Scheme of Arrangement that saw them cancelled. What would the price be? Well it wouldnt be $100, and it wouldnt be present market plus a derisory 20% as the 75% required would reject it out of hand. If it was say, north of $60, they would pay $171m to retire $285m of quasi debt.

The company needs to start both thinking, and thinking outside the terms of the present securities. After all, the CA and Listing Rules permit them to put up a proposal like the one I just outlined. If they actioned it then they would be rid of the PXUPA forever and free to pay dividends without them forever being in the background unwanted like Banquo at Macbeth's feast.

Lizard.....
(and of course, lizards being mere reptiles should not be relied upon)