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Gje excellent thank you.
At 50p a share then our quarterly payment will sting but given the volume traded here it will come and go pretty quickly. That's if they haven't already been forward selling which I know they're not supposed to but neither are placings supposed to be leaked or insiders to trade etc and it happens
Think of a quarterly payments and notice of conversion as two separate things. The former is the standard loan repayment (capital and interest) which trigger’s automatically every quarter and the second is an ad hoc event that the bond holder (HC) can initiate at any time.
The quarterly payment is payable in cash or shares, with shares being worth their current share price. A conversion notice gets paid in shares only, but in this case the shares are worth the conversion price (103p) for the purposes of that transaction.
When the SP is below the conversion price then the bond holder would never initiate a bond conversion (unless they desperately needed their back money at a loss) and so we don’t have to worry about this event for now. The quarterly payment still takes place regardless of the current share price.
Gje again thanks. So if we don't get clobbered by conversion I.e. heights don't convert to shares then dump on the market how will we get clobbered financially i am really struggling to understand this cln and you seem to have a great handle on it and are willing to share as well.
Does this mean we have to pay back the money this quarter in cash if the share price is below the conversion price?
There's a lot of nonsense and arguing on this bored so useful information like you have posted us highly appreciated and refreshing. Thank you
Thanks Gje, that is very helpful.
Thanks Apre.
Aldebaran, the summary is that we are unlikely to get clobbered by any notice of conversion by HC whilst we're down at these prices, as it's not in their interest to do so. However until the share price recovers, we will get a bit clobbered every quarter with the repayments.
I actually started this exercise so that I could calculate the overall HC dilution in various scenarios. Will try and post those calculations tomorrow.
Gje this is all very complicated but appreciate the work you have put into it.
What does it mean in simple terms tho
Gje, always enjoyed your posts. Last few days you have been on top note. Tonight you have excelled. Well done, thank you.
Thanks, yes it's 5% per quarter.
"Amortisation: 5% per annum, payable quarterly (this is the repayment of the capital)"
..er 20% per annum ie 5 year loan note
Good work gje 👍🏻
Thanks Gje.
Now for those terms after the placing. These are dictated by anti-dilution rules, and which serve to protect the bond holder in the event of a dilution by recalculating the conversion rate downwards in their favour.
I worked through this calculation with copilots help, so please shout if it looks completely wrong. I fed in the rules and copilot asked me for missing variables which I tried to supply:
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The adjustment factor is calculated as (A + B) / (A + C), where:
• A = 288286207 (number of Shares in issue immediately before the Pricing Date)
• B = 41000000 (calculated from the gross proceeds of the Bookbuild and the Current Market Price)
• C = 62296557 (number of Shares comprised in the Bookbuild)
So, the adjustment factor is:
Adjustment Factor = (288286207 + 41000000) / (288286207 + 62296557) = approximately 0.87
Now, the initial conversion price is 118.75p (which is a 25% premium to the offer price of 95p). The new conversion price is calculated by multiplying the initial conversion price by the adjustment factor:
New Conversion Price = Initial Conversion Price * Adjustment Factor New Conversion Price = 118.75p * 0.87 = approximately 103.31p
So, the new conversion price would be approximately 103.31p.
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So the conversion rate has in effect dropped from 118.75p to 103.31p which represents a drop of around 13%. Not too bad on the face of it then when it comes to the change to the conversion rate.
In addition to the quarterly payments, the bond holder can convert the bond into shares at any time, and any amount. The difference here to the quarterly payments is that this is fixed at the conversion price, which is 118.75p. In the case where the price has dropped to 50p, then it makes no sense for the bond holder to issue a notice to convert. They would just lose money as they are being issued share at 118p when they're worth 50p. When the share price is much higher then it does make sense for them to convert and pocket the difference. We saw this in Feb last year in the following RNS when a Notice of Conversion was issued:
Avacta Group Regulatory News. Live AVCT RNS. Regulatory News Articles for Avacta Group Plc Ord 10p (lse.co.uk)
After 18 months the conversion value can be reset to the higher of the original offer price, or the current market price (using some 15 day vwap calculation of the price). Therefore there is a floor that the conversion price cannot go below, which is the original offer price. This gives some protection to the issuing company I guess, when the price tanks, and stops the bond holder from converting and taking a massive share of the company.
If the share price is higher than the offer price, then after the 18 month period the conversion price goes up, and this means if the company wishes to repay in shares it gives away less share of the company. The bond holder has less difference to pocket in effect.
I've had a go at unpicking the details of the convertible bond, as it has been mentioned in other threads a few times. It's a tricky instrument to internalise and I've leant heavily on copilot to get me over the line, so figures may be out and I would be none the wiser! They look ball park figure right anyway, so here goes:
The terms of the bond prior to the placing were:
Coupon rate: 6.5% per annum, payable quarterly (this is the interest rate)
Amortisation: 5% per annum, payable quarterly (this is the repayment of the capital)
Initial offer price: 95p (the fixed floor of the bond when it comes to the conversion price)
Conversion rate: 25% premium to the offer
Conversion price: 118.75p
Quarterly repayments are made either by the issue of shares at the current market price or cash, and this is at the discretion of the issuing company. If the company chooses to repay in shares, then the value of the issued shares is taken from the lower of the conversion price (118.75p) or a 10% discount to the market price leading up to the repayment (using a vwap calculation of closing prices leading up to that payment).
So in this case, if the share price is lower than the conversion price the company loses, as it has to repay more shares, and the bond holder only benefits to the tune of 10%. If the share price is higher than the conversion price then the bond holder wins, because the conversion price represents an upper value at which the issuing company can issue the shares at. If the share price is much higher, the bond holder pockets the difference.