I was emailed this yesterday. Interesting analysis. The analyst...

I was emailed this yesterday. Interesting analysis. The analyst is a senior fixed interest analyst, not an equities analyst. He is looking at this purely from the debt side.

"Subsequent to my previous email, the company has advised that "there has been no change to the situation or the Terms & Conditions for the note holders as a result of the new senior debt facility announcement". Further the company has stated that it "can reconfirm that we have allowed for the AFGHA interest payments in our forward cash flows".

Given that the senior debt facility has been renegotiated to reflect the interest margins as per the schedule below, it is clearly not in the company's interest to attempt to repay (even if it could) the subordinated notes early as the margin on these was set at 2.10% above the 180 bank bill rate which is below that being paid to the banks at present. So for now the fact that these interest payments have been factored into the company's cash flows we should expect interest to continue to be paid. Repayment of capital will be an issue for another day and would not have been a factor in the normal course of events in any case until the reset date in November 2012 or final maturity in November 2017.

If we assume that the company remains a going concern as is indicated by the fact the ordinary equity is trading above zero, then the appropriate margin for the subordinated notes must by definition be above that being charged by the banks on senior debt, but one would question whether it should be at the current implied credit spread of ~70% (gross yield ~78%). Clearly this is because the market remains unconvinced as to Allco's viability and as a consequence its ability to repay the principal.

The table below shows an approximate price matrix assuming a range of interest rate margins on the notes. Given that we do not have full information and there are clearly a number of uncertainties and hurdles to yet jump it is difficult to assign an precise "fair" credit spread. However even if we assumed that the appropriate margin were something in the order of 30% this would imply a traded price of circa $47 as at today.

Margin over Swap. Approx Implied Yield
10% $80
20% $61
30% $47
40% $38
50% $30
60% $25
70% $21

Another way of considering this is that at a current price of $21 it will take just 2 years of interest payments (assuming current interest rate levels) to recoup your investment, remembering that interest is paid on the face value of the notes not the traded price. This effectively provides a "free" but not riskless ride from any increase in price going forward and ultimately a return of face value at maturity. Based on this, we would view AFGHA as a SPECULATIVE BUY at current levels.