RE: Bonds28 Sep 2019 14:19
Its so funny that you guys started on the bonds this morning: I'm trying to do a bit of research into that right now! Thanks, Kabaa for the v helpful note below.
This is being priced as though the bond holders step in to dilute equity upon a breach of the loan notes (which I am not sure they can, immediately). We all know it's a cash generative business with assets which are sufficient to pay off the debt over time. I also agree with all the points made about 2022 maturity being an irrelevance: people on the board are right to say a rollover/restructure will happen which means that we aren't going to face a liquidity event at that point.
The reason, I think, that the price has been so beaten up is that certain shareholders recognise the risk (by no means certain) that covenants are breached in the shorter term. As I mentioned in posts last week, covenants get much stricter for the 12 months ending on 30 June next year (i.e. in nine months' time). Indeed, Duffy is quoted as follows in that piece in miningmx yesterday: "“Given where the market is, and the ongoing weakness, it’s prudent of us to engage with lenders. Certain of our covenants may be threatened,” Duffy says in an interview with Finweek following the UK firm’s year-end results."
A summary of the debt security is set out at the foot of page 139 in last year's accounts if anyone wants to take a look: of course things may have changed after the restructuring of covenants this year. I've tried to find the loan note documentation on line; I haven't yet managed to do so. It does a appear that the loan notes are fairly widely held, which may favour us shareholders if there is a breach. I can't find anything re a potential dilution but the liens on mining rights and other assets are clear (and entirely to be expected of course).
So if you're Mr Duffy and you are concerned about a covenant breach, what do you do?
You know your company has had a recent rights issue (so you can't do that again easily, 10p is the min (thanks Mr Smoke) and you'd need to dilute bucketloads at current lowly prices).
Your only option if a breach is coming up looks like selling an asset. As Jon Ferro on a Bloomberg Radio advert says, mistakes are made when you sell something because you need to sell it. So with that in mind, it is probably better to put an asset up for sale sooner rather than later if the directors think we're heading for a loan note covenant breach. Now before the nutters go crazy at me, the BoD may simply talk to the lead bondholders who may say, we'll give you some grace. It is of course also possible that market conditions, cost savings, capex reduction, FX fluctuations, big stones, zombie apocalypses and thus cash generation may avoid the need for any of this. Only the BoD truly know the answers to those questions.
I've now got a non-trivial (though hardly huge) position here. If anyone can lay hands on the loan note documentation and share it, I for one would
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