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Excellent foraging for detail, Hounddog10. It seems to me that the biggest prize will go to whomever of GEF and GIC decides to convert part of its loan first, after july 1st. A combination of part shares/part cash conversion as per the terms of the deals struck, including the 29.9% limitation factor, means that the first conversion, by lifting the gloom and uncertainty about how GKO will extricate itself from this tied hands situation, the sp can respond favourably, possibly very favourably. In that event, the combination of shares and cash on offer to the next converter, or the next tranche by the same converter, will be less advantageous. So it's not all about the negatives in this deal for GKO, bad as it has been in hindsight. It also comes with a touch of profit-maximising risk for GEF and GIC. Mind you, given the size of GIC's aum, they are probably less concerned than GEF about how to finesse their exit.
Could be in that the last results were 30th March too.
Very interesting posts at the moment, all appreciated. I have a question: are we expecting something from GKO by the end of June, in that AIM companies have to publish audited annual results at the latest six months after the end of the period? Cheers!
The GIC stake would appear to be more passive if anything than the GEF Fund which is the one that winds up fairly soon. I've checked out the uses of the $ bond and it doesn't appear to have any restrictions although you would suppose they have spent the bulk of it by now - better LTIP value!! But HD's numbers are correct. So I think the math is right but the lingering concern here is the propensity of the management to do a dumb deal "solve" this.
I should add HD that your sleuthing is extremely helpful. Thank you!
Disappointing if there is no right to put in cash but I think that is the nub of the argument which is both funds wont want to end up holding a huge slug of some illiquid AIM stock when they might be able to take some shares and cash. One of the funds - I cant remember which one - liquidates fairly soon which compounds the issue for them. So I guess from a spreadsheet perspective this looks quite nicely poised but I worry about these guys' ability to do the right thing. I think the loans were flawed and badly constructed at the outset and I worry that the non execs don't really understand what is going on and will be led by a management team clearly focussed on MW in the ground rather than returns to shareholders. I remind that their LTIPs are based on MW installed not eps or roe or share price performance. That is a daft way to incentivise and displays the naivety of the non execs to have allowed this to happen. Nonetheless, there is a possibility that they come up with an overarching financing solution that doesn't dilute or more likely doesn't dilute as much as the market fears. Guess the way I look at it is the downside is probably around 60-70p and the upside rather higher. On balance the shares look cheap. But I've been wrong many many times before and will be wrong again!
Yes you might expect with the $550m ring fenced bond cash to be restricted but there are requirements under IFRS accounting to disclose and I don't see any mention in the accounts.
I don't see any right for GKO to pay out the convertible instruments in cash so it will be what the convertible holders want to do. But the more I think about it the less likely it seems they are going to mess around maxing out their rights to equity when they can take some cash off the table. GEF has a recent investment in another Indian green energy company so it may be happy to take 29.99% and hold. GKO says at end 2014 had $147m of net cash resources and $176m of undrawn facilities with $136m of contracted for but not incurred expenditure. So as op cash flow positive should have enough money to cut a deal with the quasi equity holders if they can be persuaded.
They certainly had a decent slug of cash although how much is restricted in the (presumably) SPVs and how much is free is anyone's guess! They are generating cash so they might also issue a bond to repay. Anything but equity!!
Presumably both would rather settle in cash and so the easiest way to avoid dilution is to repay and I guess that means asset sales. I'd certainly rather they did this than dilute. The management own 35% of this so I hope they are focussed on this although they have historically been MW obsessed.
GIC's conversion rights appear to have the following limitations (i) GKO share price determining dilution; (ii) no more than 49% of Greenko Mauritius (GM); (iii) no more than 29.99% of GKO; and (iv) only two stabs at conversion. Although the GIC March 2013 Circular talks of "an" adjustment my reading is that an adjustment takes place on each of the (up to) two times exchange rights are exercised. Assuming GEF goes first (for reasons set out in previous post) then GKO shares will have gone up by 76m shares to 228m. I think compounded GIC has c£145m of investment at 1 July 2015 which at 45p converts into c322m of shares (so no this is not a restriction). However, it appears that GIC will be limited by the 29.99% so it gets 114m of shares on a first exchange increasing GKO shares to 342m and 171m on a second conversion (assuming first tranche sold) taking GKO shares to 513m. So non GEC and GIC shareholders will still own c30% of the company. This would seem to me to be the worst case scenario. For example - and I haven't worked it out yet - as have been trying to see GM's current capital structure (can't seem to locate the accounts in the Mauritius Companies House) it may be that the 49% in GM is a limitation before the 29.99% in GKO. This would be particularly the case if GIC converts before GEF (it appears GEF has about 17% of GM so leaving only 33% of GM that GIC can initially convert into before exchanging to GKO shares). However, there is a clause on page 11 of the GIC March 2013 Circular which says that "within a period of twelve months" (unhelpfully does not say from when but I would guess from the end of the conversion period ie from 1 July 2017 to 1 July 2018) GIC can require any balance of GM shares to be exchanged (but it cannot breach 29.99%) or paid out in cash. So this is I guess really a third go and is perhaps where the notion of unlimited dilution has arisen. However, this third right is a long time in the future. Personally I think it is a bit theoretical that GIC (or indeed GEF) could easily sell 29.99% at a decent price and then come back for more. Although obviously normally big sales would depress the share price accentuating dilution my guess would be that GKO's share price is so bombed out by the dilution issue that the moment it starts to clear with conversions it will start to rise, possibly rapidly, therefore working against any plan to come back for another quick 29.99%. Sorry to debut on the Board with long notes but aside from the contributors on this Board I haven't seen anyone try to really get to grips with what the extent of the dilution might be and why. The IC articles I have read are very general. Don't have access to analyst reports (which may be a good thing) so not sure what their logic is. I hope I have done the math right and there are clearly a number of scenarios that could be run but the three times 29.99% seems to be the worst case.
I've been following this thread and done quite a bit of reading of the various docs which are not easy to follow. So a few thoughts starting with GEF. Although GEF's original conversion period was July 2014 - 2017 this got amended when GIC came in "to extend those original commercial terms and the exercise window for the GEF put option by one year" (page 8 of the GIC March 2013 Circular). I take from this that an extra year of compounding at 16% to 30 June 2015 was permitted. I assume this is the commercial scenario as GEF agreed to keep its investment going for another year and I doubt GKO would have agreed to take compounding to 30 June 2017, although this is what was granted to GIC. Quite why GKO cannot simply state what changed is beyond me. So I would assume as Parkside points out in Friday's very lucid post on conversion that from 1 July 2015 GEF will be immediately motivated to do something as the investment no longer gives a return and one would hope the share price is about as low as it can be. As with Parkside I reckon the compounded value of the GEF investment is c$106m at an exchange rate of 1.6 and a share price of 45p I reckon this entitles them to c147m of shares. However, it seems clear to me (page 8 of the GEF October 2009 Circular) that they can only go to 29.99% of the enlarged share capital of GKO with the remaining amount paid in cash - so c76m of shares (GKO has 152m of shares) and c$51m of cash. Looking at GKO's last balance sheet they should not have a problem paying this. I had not initially noticed but as Parkside points out GEF can have multiple stabs at conversion but would need to sell shares to do so. I should imagine to sell a stake of 29.99% or even 20% or 10% would not be particularly easy (may have to worry about concert party rules under Blue Book as well) and any buyer, unless they were after building a stake for control, would presumably look for a discount. So it is difficult to see why GEF would not take the easy route and take the cash. The share price would seem to fully price in dilution and as dilution unwinds and (barring mishaps) the interim results come through with completed projects the share price should rise reducing the shares GEF would receive. In fact by my calculations if the share price goes to 87p they will only get 29.99% shares and no cash. On its website GEF seems to have $1bn under management and its GKO investment is from just one of their funds - Fund III (and there may have been subsequent ones - although earlier ones may have been liquidated). So the assumption must be that the GKO investment is highly material to Fund III and they have done very nicely at 16% compounded from 2009 (and I would guess these gains have already been booked in past accounts and performance stats). So my guess would be that GEF takes the simple route and at 45p gets a nice even balance of shares (at a bargain price) and cash as soon as possible after 1 July 2015.
Possibly. I'll do the math tomorrow at 29.9% and cash.
Really suprised IC have also got this wrong. Seems this dilution issue is over done imo. GEF are not going to convert shares at this price and GIC would not also imo. Theres a legacy fund that has been selling but they are almost done now I beleive. Could see a strong rebound imo
Used to be fund manager so can still get reports if i need them. It's a couple of weeks old.
I'll check. Might teach me (again) not to trust an analyst. If it is capped at 29.9% then need to model that and the other loan (which I think is 29.9% too) then model impact rest in cash. But I checked the (basic) loan docs and there it says 29.9% as you described but analyst report def says unlimited dilution!! So need to check.
Parkside your wrong on GEF. Maximium shares that can be issued is 29.99 %. Its all there in circular. Also conversion dates were july 2014 -June 2017 so they could have already converted into shares which they have not. Below is from circular. . Depending on the prevailing market price of the Ordinary Shares, the exercise by the Preference Shareholders of their rights under the Put Option may result in their receiving a value exceeding 29.99 per cent. of the Enlarged Issued Share Capital. In these circumstances the Company will issue Ordinary Shares equal to 29.99 per cent. of the Enlarged Issued Share Capital at the date of exercise and pay the balance in cash.
The equity value of GKO is nigh on impossible to ascertain. So many projects, non recourse finance and then they have the Dollar loan which is swapped into Rupees I guess. So the capital structure is messy too, compounded by these loans. I share your annoyance at the idiocy of the GEF loan but I can't believe they don't have a containment to the equity dilution, being a cash option for repayment. Surely to goodness they are not that stupid although I've heard they are pretty naive! Which might be the same thing in effect. But I guess (at least I hope) they are working on this and we aren't going to get hit with a "shocker" of an RNS saying that either we are being annihilated else they have come up with some other crazy quasi equity structure else they are just issuing equity and be damned. They own 35% of it so they should be motivated but my point remains about the LTIPs which are truly based on MW installed!! They or the Board can clearly be stupid!
Conversion is based on delivering a notional return of 16% to GEF and 18% to GIC with the number of ordinary shares issued at the price on the day of conversion being equal to a sum that would equate to this return. GEF gets no additional return beyond 1 July 2015 but for GIC the value of the conversion is likely to be maximised the longer the holding period all other things being equal (payment of a dividend might encourage early conversion). Conversion is subject to a minimum number of shares being issued. The minimums are 29,123,371 shares in the case of GEF and 44,861,538 in the case of GIC. There is no maximum number of shares that can be issued in the case of GEF. In the case of GIC, the number of new plc shares that can be issued is limited at 29.9%, equivalent to 79.2m shares. Any entitlement over and above this limit would simply remain unconverted as subsidiary shares. However GIC can convert in two tranches so that if it converted so as to result in a plc holding of 29.9% it could then sell some or all of these shares and then convert again subject to an overall limit of 49.0%. Any remaining holding in the subsidiary has no rights to any dividend or distribution and is therefore worthless. Additionally if conversion is left until the end point of 30 June 2017 anything over 29.9% is paid in cash. Think key to recover this is to try and buy out GEF for cash and the notional price could be say $106m. They might have the cash for this or sell assets. That might mean the shares rise and as they rise then they rise as the GIC loan becomes less dilutive. But GEF is key I think. Would they want control of GKO? I hope not!!
OK, printer issues remain but I am just adding some thoughts here, parkside. According to the iii post (r21442), the GIC and GEF combined have an investment in gko via its Mauritian sub of £215mn, which far exceeds the MC of GKO common (£68mn) or indeed the net assets of GKO held (circa £170mn?). But they have the right to convert their holdings in the Mauritian sub into common shares of GKO after July 1st, presumably on a dollar for dollar basis at some market-related price at that time they elect to convert. What is totally unclear to me, because I can see no reference to it in GKO's Interim Results or the rns associated with the new loan, is the following: 1) What precise terms are laid down for the sp conversion price after July 1st? An average over so many days, for instance? No floor? Totally at the discretion of GIC and/or GEF? 2) What is the relevance of the £2.40 sp for a PIK payment? Does this simply relate to the part of these entities' coupon payments not taken as a cash payment? 3) Who advised GKO management of these conversion terms? They need to be hung, drawn and quartered!!! Even allowing for GIC and GEF not being able to acquire 29.9% or more of GKO's total enlarged equity after a conversion, they will still own substantial stakes in the Mauritian sub, given the current MC of GKO will not allow for much conversion under the 29.9% restriction. Am I on the right lines so far? So GKO shareholders, who have suffered a 75% wipeout from last year's peak levels, might still be exposed to further dilution in ownership, should GIC and GEF exercise their conversion rights in totality. Not a pretty sight. What am I missing? What olive branch might GIC and GEF offer to GKO management? After all, they are passive shareholders, not wanting to take over ad operate these Indian assets.
Lucky you!! I'm retired from fund management but still working as my wife wont let me stop as I'll go bonkers and so will she. Good luck with the printer.
At last, a meaningful post to digest. Can't reply now as I'm busy installing a new printer, but i will revert. BTW I, too, am an ex-portfolio fund manager with a Swiss bank, now retired (sadly).
And you believe anything GKO says? Frankly, and I say this with 25 years of managing unit and investment trusts, if you do you are deluded. GKO generally has focussed on MW targets. Its LTIPs are based on MWs in the ground not on profits as measured by say EBITDA or better ROE or EPS. That is not a way to align management and shareholder interests - even you might admit that. So that is why they continuously focus on MW targets, whether wind or solar. Secondly, their financing is incredibly risky for the Ordinary shares in that the GEF loan has a potentially unending dilution - the other at least is capped. Therefore when the shares are rising all is well but clearly when they fall that creates a big issue, as you are seeing. Also operationally it doesn't look so great; the last set of numbers were poor so whilst they sort of hit revenue numbers they totally missed at the level that might be expected to drive returns to shareholders ie earnings. I can accept that, to a degree, earnings are a bit meaningless as wind assets are not particularly earnings producing, at least in the early years, a result of heavy depreciation and finance costs eating into EBITDA but nonetheless the real measure - cash - wasn't that great either. Nonetheless, I think at this level they are worth a "punt" as if they get the loans sorted the numbers, as published by Arden and Cantors, sort of look okay. And generally Indians are alright engineers and modellers so you'd hope the projects themselves are reasonable. I'd also note the value of recent wind transactions in India although there is no direct read across as equity value depends heavily on wind resource, grid cost, PPA structure etc etc. So I do read quite a bit, I understand wind and value from wind projects and I understand the Company's balance sheet. What I do treat sceptically is anything management says.
Parkside, not only do you not read fully the RNSs from GKo re Interims/dividend possibilities (their words, not mine) but you don't read other posters' posts either (eg mine). What a first-class twit you are.
You are delusional if you really believe GKO can pay a dividend given its straitened balance sheet and particularly the GEF issue. You also clearly don't understand the (possible) implications of the GEF loan to the existing equity. Anyhow, yes it is my only remaining equity holding only because I think there is value if they sort out the loan(s). That despite the lack of communication from management.