Todays Close, page-27

Hi Jaded,

I hadn't actually seen that announcement, as I just got back from a week of bush and no internet access. (I'd highly recommend that, by the way). Anyways, I just read that announcement, and I can't say that I'm entirely surprised. With regards to previous posts I made about the banking process for KNL, I've mentioned a number of times that a non-Chinese bank will find it almost impossible to fund any of the Chinese "off-take" deals. I use the "inverted commas" on purpose, because I wouldn't classify those (Chinese) deals as true off-takes in a banking sense of the word. I would suggest that this raising of equity indicates a couple of things:

1. The share price is too high, and management realise that it's better to raise equity instead of debt.
2. Management probably couldn't raise debt from normal channels, and it took a while for them to realise it.

On the plus side for them, their inclusion in the index means they are likely to get a whole bunch of insto support, but the mix between insto and entitlement offer is interesting (I would have thought they would have relied on insto's more), unless they expect a massive cough-up from existing shareholders.

KNL is in the opposite position. A bankable deal, with support from recognised bankers for a good deal, and a higher than normal debt raising ratio. Plus a very undervalued share price. Ergo, we'll have more debt, less (or no) equity.

The overall question I'd leave with regards to the SYR offer is this. If corporate debt costs you less than 7-8% for bankable projects (possibly less than 5%), why would you raise equity unless you had no other choice. And if SYR believes they did have a choice, then they are explicitly stating by their actions that equity will cost them less to fund the project than debt, and that's a massive flag for sub-standard returns coming up. Good luck to them though.