Happy to run numbers... For reference - the model is here:...

Happy to run numbers...

For reference - the model is here: https://hotcopper.com.au/threads/turning-the-ship-around.3351954/#.WVLnhxN94UE

There are some key inputs that feed into it - Revenue and Margin are critical (as what you are really getting with equity is a share in future profits).

Potential future revenue and margins have been done to death on this forum - ranging from the heroic ($800M @ 15%) to current (~$680M @ -28%) - and will likely fall somewhere between these extremes. The capitalisation of interest and additional $40M loan at end of March suggests to me that this half's figures are more likely to be "lukewarm" at best - however the basic business is sound and without the debt burden and some restructuring, I expect them to eventually get back to somewhere around 7-12% margin.

For the sake of this calculation, I have used $700M @ 10% margin. I think this is optimistic in the short term, but achievable longer term. I'm trying to get the best possible outcome for your 50% @Braintot!

You also need to consider what would be a fair "risk weighting" to apply to "risky" equity vs. "guaranteed" debt. It is very unlikely that someone would value $1 of debt as highly as $1 of equity.

Put simply - for every $100M in debt, the lenders would already be receiving interest @ say 5% = $5M.

So - if they exchange that $100M debt with a guaranteed $5M interest payment for equity, then they are swapping it for $xM in future dividends - which come from Revenue and Margins. Because Revenue and Margins are not guaranteed, a risk weighting will be applied to the debt - so $1 of debt would typically be exchanged for more than $1 of equity.

To arrive at a "fair and reasonable" risk multiple:
Cash funds are delivering 2.5% return and ASX-300 index funds are returning 10.5%, so this suggests a little over 4x risk multiple (at the lowest risk end of the ASX).

Anchorage have a guaranteed 5% interest return and SGH are arguably at the riskiest end of the investment spectrum.

However, let's use the most generous risk weighting of 4x - indicating that SGH has the same risk profile of an ASX-300 index fund.

Based on these assumptions:
Revenue: $700M
Margin: 10%
Risk weight: 4x

	Column 1	Column 2	Column 3	Column 4	Column 5
0				Calculation	Explanation
1	Revenue	A	700		projected future revenue
2	Margin (%)	B	10.0%		Expected margin
3	Profit	C	70	= A x B	= Revenue x Margin
4
5	Debt swapped 'M	D	250		How much debt will they swap
6	Interest rate on debt	E	3.5%		What is the interest rate on the debt
7	Interest foregone (M)	F	8.75	= D x E	= How much interest they forego
8
9	Risk weighting	G	4		What multiple should we use to reflect additional risk
10	Risk-weighted return (M)	H	35	= F x G	Therefore - what they need to make
11
12	%age equity required	I	50.00%		= Risk-weighted return divided by Profit
13	Remaining % current shareholders	J	50.00%	= 1 - I	100% less %equity required to deliver the risk-weighted return
14
15	Current shares on issue (M)	K	375
16	New shares on issue (M)	L	375	=(K / J) - K	How many new shares they need to issue to hit their equity required
17
18	Issue price	M	$0.667	= D / L	= Debt swapped divided into New shares issued

This suggests that they would be swapping $250M (of the $800M owed) for 50% of the equity - at a D4E valuation of $0.667.

Note: If you use a higher risk weighting, then you end up swapping less debt - so at a risk weighting of 5x, you only swap $200M of debt @ $0.533.

Personally, I am not convinced that $200M-$250M would put enough of a dent into the $810M debt pile to get SGH back to a solvent footing - those interest payments would still be taking a huge chunk out of cashflow - though it might well suit the debt holders to retain the lion's share of the less risky debt, milk it for a few years and then flick it.

I guess we shall see...

Hope this helps

Steve