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Goodman refinancing a nasty shock – The Australian

GREG Goodman's job became a lot shakier yesterday -- and a potential $1 billion-plus rights issue a lot harder -- after his troubled listed property trust outlined an emergency refinancing package that has left investors outraged and looking for blood. After telling anybody who would listen that Goodman Group was in talks with a strategic investor, one that was doing due diligence at the company's office, the announcement yesterday that China Investment Corporation had signed up for a bridging facility of $200 million with free highly dilutionary in-the-money options, came as a nasty surprise. Between this deal, and a similar accord struck with Macquarie Group last month, the company has effectively expanded the number of shares on issue by 25 per cent for a song. The financiers, Macquarie and CIC, receive an interest coupon, security and share price upside. The investors, who pushed the share price up 40 per cent in the past week, see their stock substantially diluted, with none of the issues around leverage, liquidity, writedowns or management resolved. Using the Black-Scholes option pricing model to value the implied cost of the option granted to CIC, the real cost of the deal to Goodman yesterday was about 15 per cent, which is far from headline commercial rates of 8-9 per cent. Translated into dollar figures, the cost is about $14m a year over two years, which is an expensive bridging loan. The deal is in two parts -- the cost of the loan and the issue of options, which is equivalent to another 7 per cent, based on the Black Scholes option pricing model. Agreeing to such a deal speaks volumes about Goodman's distressed position. Emergency funding never comes cheap and Goodman looks like the perfect candidate for the Rudd Bank bailout -- wherever it is. For shareholders there is little reprieve. If they vote against the options part of the deal at an extraordinary meeting yet to be scheduled, the company will pay the lenders a cash amount equivalent to the value of the options. In Macquarie's case, they would have to pay more than $100m in cash. As one fund manager said: "I'd love to vote against this deal but I'm not sure the company could afford to pay the cash." It is no surprise then that the share price tumbled 15 per cent to 41.5c, and splattered what little is left of the company's battered reputation. It rose 40 per cent last week as retail investors scrambled into the stock in anticipation of a deeply discounted rights issue. When the issue didn't come, investors dumped the stock. Put simply, the bridging loan gives Goodman sufficient liquidity to survive this year but it still needs to sell assets, make some asset writedowns and reduce debt. Standard & Poor's put its BBB rating on negative credit watch on May 26 and yesterday its analyst Craig Parker said that, until Goodman unveiled its long-term capital structure and extended its debt maturity profile, it would remain on negative watch. There is little doubt an equity issue is in the wings, the big question is why it didn't happen yesterday. Investors were braced for one and news reports were tipping one, without any rebuttals from the company. In a note to clients, Bank of America Merrill Lynch said: "We believe a $1.5bn capital raising would be optimal as it would reduce balance sheet gearing to around 33per cent, look-through gearing to around about 49per cent and provide enough liquidity to deal with debt maturities at the group through 2012." It said the upside could be a privatisation of the vehicle and opening up of debt markets. But new strategic partners would hold substantial bargaining power in any potential transaction and there could be fear of further dilution. "Lastly, Goodman has made significant staff cutbacks which could see its performance slip operationally going forward," Merrill Lynch said. In the meantime, when the company closes its accounts on June 30, it will have to make some tough decisions on a $1.3bn goodwill valuation sitting in its accounts. The market is split as to how much of this should be written down, but all agree impairments need to be taken. Such a move would blow out the group's net debt to equity ratios and could put it close to breaching some loan covenants. Goodman is a company that has misread the markets, its shareholders and its banks. It is exposed to the worst asset (industrial property), the worst geographic markets (Europe) and the worst type of funds management(property). The best that can be hoped of the deal announced yesterday is that the investment by CIC represents the first stage of a developing partnership between the two parties. CIC has total funds under management of $200bn, of which $20-$30bn is allocated towards real estate. The upshot is CIC was doing due diligence on the company for the past few months, along with the Canadian Pension Fund, which seems to have disappeared, and one or more might return as a partial underwriter of an equity raising by Goodman. In addition, with the threat of covenant breaches in some of Goodman's managed funds, CIC could potentially take cornerstone equity investments in some of these funds as well. For Macquarie, its long-term intentions for Goodman are unclear. What is known is that yesterday it reduced its finance facility commitment from $300m to $285m, reducing the amount of options it has in the company. While this is a small amount, it is a reminder of Macquarie's past history with Goodman, particularly when it sold a 7.7 per cent holding in the industrial property group at $5.90 a unit for about $733m in 2006. At the time, Greg Goodman increased the Goodman family interest. Its latest deal gives it the option to hold up to 15 per cent in the company if it cashes in its options at less than 40c. If there is any consolation for shareholders in this sorry mess, it is that they aren't the only ones to have lost a fortune. Greg Goodman has watched his family fortune fall from an estimated high of $1.1bn to a value of less than $50m yesterday. But after taking shareholders on a wild and aggressive ride, he still has a job. The problem it raises for the board and Goodman is how they allowed the company to get into this situation and why they haven't done anything about it.