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More wisdom and insight from the share guru JAdam.... how lucky we all are for him to share his perception with us, such a privilege.
Stu,
You know your bonds it seems, I hope the CFO does too!?
Just in case, why not email Hur and make your case, it might just get some attention.
"HUR can now refinance the bonds to a longer maturity, as of 14th August 2020 (today) they have the right to redeem all of the convertible bonds (at par plus accrued interest) and replace the debt with longer dated bonds."
That is simply not the case.
It is conditional on the underlying ordinary SP, (as in your first bullet point in the original post) and currently that is not satisfied.
That was not the case in the halcyon days at the time of the AGM in 2019 when AS spoke of the 'options' open to them.
50p --> 5p explains it all.
joe
DiveCentre,
I have access to the exchange on which the bonds are listed. I can see the bid price and the ask price in real time.
-34.34% is not the discount to principle, it is the change in price between the last two trades.
44p is the last price at which the bonds traded. That represents a 56% discount.
I quoted a discount of 45% because the ask price is 55 pence.
The spread is approximately 10 pence (it varies), which is about 20% of the mid price.
If HUR push up their own bond price with open market operations this is not a bad thing!! I agree the bonds are illiquid and probably not for sale in large volumes.
As I said previously HUR should have a 'purchase and cancel policy' on the bonds, they should purchase aggressively at any discount, but also purchase at par as this saves the coupon.
Why pay the coupon when the capital is not employed?
HUR should use free cash to support the bond holders liquidity and keep the secondary market for the bonds at close to par, this policy would make the bonds much more attractive as financial securities.
HUR can now refinance the bonds to a longer maturity, as of 14th August 2020 (today) they have the right to redeem all of the convertible bonds (at par plus accrued interest) and replace the debt with longer dated bonds.
These actions are a sensible route to avoid a 2022 cash crunch and avoid shareholder dilution. It's just good business.
Those posting of "no brainer" options for cash use ere, please let us know if your qualifications and experience should give any credence cat all to your opinions.
The HUR BoD will undoubtedly be advised by our professionally qualified and suitably experienced FD on the available options. Both he and they will have far more facts at their fingertips than any of us PIs. They will know the likely or contractual obligations to OGs, rig contractors, Bluewater, and CB holders.
They will be better placed than us to assess the risks to future cashflow, and will have better financial modelling teechniques, DCF models, accrued tax losses, etc, etc.
So by all meansm discuss options. But thinking any PI knows better than the Bod what the options are/should be is a delusion, of which there is far too much on this BB from the exclamation mark brigade.
Stu255
The discount is not 45%. The link provided by JoeSoap indicates 34.34% but when you account for the spread it is probably more likely to be 31%-32%.
The unknown is whether the terms and condition on issue contained any provision preventing the Company from trading their own bonds on the open market. I am inclined to ask HUR is there is such a provision but have not done so yet. If there is no restriction then it would be eminently sensible to start buying as it will reduce the overall redemption cost and save on interest payments.
If it is an option open to the Company I doubt they would announce it as an intended plan as it will put the bondholders on notice and the price will go up. Also it is most unlikely that that could buy in quantity as it will push up the price. Nevertheless buying up in small tranches over a period of months will result in savings.
Afraid that is not correct no matter how many times it's posted.
Similarly, the significance of today's date and what it permits is also apparently lost on Stu, as there is no date specified for the purchase of Bonds by the issuer to hold in treasury (and therefore be excluded from voting rights, but could be resold into the market) or to cancel.
What is not known is the number of Bonds that are for sale and whether such action is worthwhile when looking at the bigger financial demands that the company may or may not have.
If only there was a plan....
This link is provided on Adfvn.
https://markets.businessinsider.com/bonds/hurricane_energy_plcdl-conv_bonds_201722-bond-2022-xs1641462277
suggesting an eyewatering yield when compared to your bank!
joe
IAmNotAnAnalyst,
Nope, the bonds must be redeemed at par, or converted at par, but they can be purchased on the secondary market at whatever price they are offered for sale. They can do this now.
Once purchased by the issuer the bonds are treated as cancelled (in theory they could be held to maturity in treasury but this complicates voting rights and under normal practice is forbidden in the terms).
Bond purchase and cancel benefits shareholders by increasing shareholder equity on the balance sheet.
It does this because every £1 of cash (current assets) spent purchasing bonds will reduce the bond (long term liabilities) by £1 multiplied by whatever the discount to maturity is. Currently the bonds yield 7.5% and are discounted by about 45%.
So Hurricane are in a position to purchase £1.15 of their long term liabilities for just 55p
The difference is added straight onto the shareholder equity on the balance sheet.
Some people might consider failure to do this, as negligent of fiduciary duty.
It is interesting but Hurricane's path forward looks like this:
1). Move OWC parameter to enclosure depth
2). Formally write off, reserves and resources (already valued by market at £0.00).
3). Renegotiate commitment wells
4). Purchase and cancel the bond
5). Reassess position in 2021 <-- should look significantly more favourable (+250 - 400% shareholder equity).
6). Remodel the geometry on cashflow defined reserves
7). Refinance remaining debt
8). Go again.
It looks like they are preparing to present some format of this. It looks good.
Hasn't it already been posted numerous times that the bonds can only be purchased by HUR at par. Otherwise there'd be a perverse incentive for them to make it seem like they can't pay the bonds and then sweep them up on the cheap - any bondholder would want to be protected against this.
MCB55
Buying the CB's in the market is something I have mentioned previously on a number of occasions. I believe that they are trading at between 25% to 33% discount and certainly not 50%
http://cbonds.com/emissions/issue/326067
The management has stated that their goal was to conserve cash and maximise production.
How does your postings fit in with that?
Stu,
"The fact that this glaringly obvious use of the uncommitted cash hasn't happened,"
First of all I was impressed with your well argued CB posting, you seem to know your financial stuff. I think that was one of Dr T's failings......not interested in the financial side except for budgets to do work!
Anyway I agree that BoD / CFO ought to be at least thinking along your lines, however the issue is really what spare cash will they have once they have paid for the forward work program (not yet defined).
At present there are too many unknowns, mainly the forward work program, the long term production performance and the long term poo. Once those are agreed then the cash flow forecast can be made and free cash calculated.
I like the idea off buying cheap bonds in the open market and maybe even consider a bank loan in addition to free cash to do so since as you say the benefit is huge, buying at a 50% discount.
You got cut short there Stu.
Character allowances and all that.
Don't confuse your bond mechanisms.
1). Redeem - Hurricane can elect to redeem the bonds, the bonds must be redeemed at par plus accrued interest and across the entire issue, (in practice this means the entire convertible bond issue can be refinanced by Hurricane at any time after 14th August 2020, today).
2). Convert - Hurricane can elect to convert the bonds, Hurricane can settle conversion by delivery of ordinary shares, or by a cash equivalent (determined by VWAP), or a combination of shares and cash (settling in shares dilutes existing shareholders, this is the last thing shareholders want). If cash reserves + operating income fall short of the amount required to convert the bonds at par, the equity will be diluted by the extent of the shortfall.
3). Purchase and Cancel - Hurricane can elect to cancel any bonds that are owned by Hurricane, but first Hurricane must purchase them (when the bonds are trading at 50c and Hurricane is generating free cash flow, this is a no brainer. It is by far the cheapest way out of the debt).
These three different mechanisms are specifically mentioned in the "Results of Convertible Bond Offering" document.
Bonds that are purchased by Hurricane are considered cancelled, this is so that Hurricane cannot accrue controlling voting rights among the outstanding bondholders (avoids a potential conflict of interest).
Given that Hurricane are making money hand over fist (whilst the rest of the industry is not), and that the bonds are trading at a material discount, this is one of those very rare situations where it makes perfect sense for the issuer to purchase their own issued bonds and cancel them.
It is likely that the bond market is very illiquid and that not many bonds can be purchased, DO IT ANYWAY. The bond price is an important proxy for the health of Hurricane and is used by institutional investors AND SUPPLIERS to determine the financial health of the company.
This should be the primary objective for the use of the companies (otherwise idle) cash reserves. It improves the balance sheet by £2 for every £1 spent (at current bond price) and creates space for recapitalising if/when the EPS is successfully navigated.
The only potential hurdle to this is the OWC commitment drilling. But existing cash reserves should already cover the expense of these commitments. Some meaningful quantity of the uncommitted cash should already be available for addressing the 2022 bonds.
Given the growing uncommitted cash position, there should exists a purchase and cancel policy to take advantage of the current bond discount. Even without the current discount, purchase and cancel reduces the ongoing cost of the 7.5% coupon and therefore is a mechanism to improve the post-2022 uncommitted cash position above what it would otherwise be.
The fact that this glaringly obvious use of the uncommitted cash hasn't happened, is why I believe there are talks around someone else acquiring that uncommitted cas
That is my understanding as well so any discussion re. buying back some of the bonds is unsurprisingly not possible. Probably the most comprehensive documentation for those that are interested.
https://www.hurricaneenergy.com/download_file/force/364/309
GLA.
The Company will have the option to redeem all, but not some only, of the outstanding Bonds:
• at any time on or after 14 August 2020 at par plus accrued interest if the value of the Ordinary Shares underlying a Bond (calculated over a specified period) shall have been at least US$300,000; and
Note "...after 14 August 2020 at par plus interest..." This indicates that HUR must purchase them at the full face value and furthermore it must purchase all of them!
Any other entity, however, is free to purchase piecemeal amounts at a discounted price in the Bond market.
Happy to be corrected.
At the last (2019) AGM, former FD Stobie indicated that the plan was to pay off the bonds early. Obviously he's long gone and we don't know if this is still the plan.
I believe that there is a balance to be achieved here. No point clearing the CB unless you're certain of getting a much cheaper line of credit. However a smaller debt burden would be a big positive going forward.
Going forward is the conundrum atm. Personally I'd favour well 8. Lancaster has much to offer and I believe is the safest bet atm. However current OGA commitments and the Spirit JV are there. Current is the operative word . Who knows what's happening behind the scenes with the upcoming changes in HUR's reserves.
The important thing here is that there are many,many options and I wouldn't be surprised if we've all missed what actually finally transpires.
Or for £18m at todays sp they can buy back c.20% of the issued shares to raise the sp, reduce any shortfall on bond payback and mitigate future dilution.
Stu255......
"they have the right to settle conversion obligations as a combination of cash and equity. MAXIMUM DOWNSIDE here is 2.50 pence.'
Wow, Still 50% to go down?
Are you for real?
;o)
"... and suddenly all future free cash flow is pure shareholder equity'
Well, You clearly omitted cost of increasing water disposal, further drilling and probably most expensive divorce with Spirit.
;o)
*****
Unless previously converted, redeemed, or purchased and cancelled, the Bonds will be redeemed at par on 24 July 2022.
The Company will have the option to redeem all, but not some only, of the outstanding Bonds:
• at any time on or after 14 August 2020 at par plus accrued interest if the value of the Ordinary Shares underlying a Bond (calculated over a specified period) shall have been at least US$300,000; and
• at any time, if 85 per cent. or more of the aggregate Principal Amount of the Bonds originally issued shall have been previously converted, redeemed, or purchased and cancelled (the “Clean-up Call”).
Settlement and delivery of the Bonds is expected to take place on or about 24 July 2017 (the “Closing Date”).
*****
So from 14th August 2020... Hurricane can begin purchasing the bonds in the open market and cancelling them and thus reducing the forward interest, and therefore improving cash flow and b/e point. The bonds are currently offered at 60p. <- OBVIOUS balance sheet management here!
Also of interest...
*****
Upon conversion of the Bonds, the Company may elect to settle its obligations by way of delivery of ordinary shares, payment of a cash alternative amount (calculated by reference to the volume weighted average price of an Ordinary Share over of a specified period) or a combination of the two.
*****
In 2022, Hurricane doesn’t have to repay 100.00% of the bonds in cash, if they fall short (which they will not, because they will be purchasing and cancelling the bonds) they could eg just pay 80% cash and issue new shares to cover what remains.
Hurricane already have ~$110m in cash, so if they never make another penny of profit ever again, and do nothing to purchase and cancel their outstanding bonds... the maximum equity dilution is about $110m, or 50% dilution at the current share price, as they have the right to settle conversion obligations as a combination of cash and equity. MAXIMUM DOWNSIDE here is 2.50 pence.
Some of you will notice that HUR already has enough cash on hand to purchase and cancel the bonds at the current bond price.
The 14th August 2020 is the first day Hurricane can legally begin this operation, as per the bond closing prospectus.
Some people would see a fiduciary duty to do exactly that.
... and suddenly all future free cash flow is pure shareholder equity.