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Thorn, I have included the scenario in there where the share price remains flat for the 3 years. The dilution after 12 payments in that scenario is still just 11.68%.
If you think it's going to go down when the trial is going well, then I would find a different stock to invest in.
Now let's consider the scenarios where the share price increase per quarter is between 5-10% (rows 4 and 5). I would still classify this as highly conservative when you consider what could happen between now and then. After 12 payments, the share price range would still only be between 86-143p, which is perfectly within historical bounds, and the percentage dilution between 8.03-9.55%. I haven't adjusted for the new conversion rate at 103p, but frankly it doesn't make a lot of difference if we are considering this time frame.
Why have I just wanted to focus on this timeframe? For a few reasons:
- there is a fair weighting to that final repayment, but we don't have to worry about that until around 22-10-2027, around 3.5 years away.
- 3 years should give avacta plenty of time to commercialise, at which point the remaining payments, including the final payment, could be repaid in cash, not shares
- 3 years gives plenty of time for DX to become profitable and sold - giving options to repay in cash
So to summarise, even the most conservative increases in the share price over time don't result in any kind of doomsday scenario, and when the numbers are laid out in this way, it's clear that the convertible bond is not too big an issue even after the share price has taken this hit.
Continued...
+--------+---------+------------+---------+------------+----------+-------------+
| SP % | 4P SP | 4P Dil % | 8P SP | 8P Dil % | 12P SP | 12P Dil % |
|--------+---------+------------+---------+------------+----------+-------------|
| 0 | 0.5 | 5.07 | 0.5 | 8.83 | 0.5 | 11.68 |
| 1 | 0.52 | 5 | 0.54 | 8.58 | 0.56 | 11.19 |
| 3 | 0.55 | 4.87 | 0.61 | 8.11 | 0.69 | 10.32 |
| 5 | 0.58 | 4.75 | 0.7 | 7.68 | 0.86 | 9.55 |
| 10 | 0.67 | 4.47 | 0.97 | 6.79 | 1.43 | 8.03 |
| 15 | 0.76 | 4.23 | 1.33 | 6.08 | 2.33 | 6.92 |
| 20 | 0.86 | 4.02 | 1.79 | 5.52 | 3.72 | 6.09 |
+--------+---------+------------+---------+------------+----------+-------------+
+--------+----------+-------------+----------+-------------+
| SP % | 15P SP | 15P Dil % | 16P SP | 16P Dil % |
|--------+----------+-------------+----------+-------------|
| 0 | 0.5 | 13.38 | 0.5 | 20.32 |
| 1 | 0.57 | 12.7 | 0.58 | 18.84 |
| 3 | 0.76 | 11.52 | 0.78 | 16.3 |
| 5 | 0.99 | 10.51 | 1.04 | 14.22 |
| 10 | 1.9 | 8.58 | 2.09 | 10.54 |
| 15 | 3.54 | 7.24 | 4.07 | 8.29 |
| 20 | 6.42 | 6.28 | 7.7 | 6.85 |
+--------+----------+-------------+----------+-------------+
(copy and paste these into notepad to straighten out the formatting)
The 15P pair represent all the quarterly payments, and 16P also includes the final repayment when the bond matures. There is a fairly big remaining balance left over at maturity, so as you can see the dilution percentage jumps a fair bit at this point.
What does this tell us? Well the first table with the 12P columns takes us to 3 years from now, so that's 2027! Even if the share price remains at 50p, which it is unlikely to do, then even after 3 years the additional dilution is just 11.68%, which I'm sure you'll agree is in itself not the end of the world.
Convertible bond repayments - not as bad as you might think
The convertible bond repayments get thrown around a lot, along with various doomsday scenarios, but without any backing up. It's difficult to counter these arguments, or indeed to allay ones own doubts, without cold hard numbers, so I had a crack at generating these - again with the help of co-pilot.
Here are the initial assumptions:
remaining payments: 15
final payment: there will be an outstanding balance at the end of the 15 payments, around Oct 2027, which can be settled in cash or shares using the same calculations as are used for quarterly repayments
current number of shares in circulation: 350m
Starting share price: 50p
The results can be summarised in the following couple of tables. Each row represents a scenario, where the share price increases each quarter by the percentage in "SP %". After this the columns come in pairs e.g. '4P SP' and '4P Dil %' show the share price and share dilution percentage after 4 payments have been made from this point in time.
As an example, the first row reads as: in a scenario where the share price increases by 0% each quarter (i.e. remains flat), after 4 payments the share price is 50p, the dilution is 5.07%, after 8 payments the share price is 50p and the dilution is 8.83% and so on...
SP % 4P S 4P D 8P S 8P D 12P S 12P D
0 0.5 5.07 0.5 8.83 0.5 11.68
1 0.52 5 0.54 8.58 0.56 11.19
3 0.55 4.87 0.61 8.11 0.69 10.32
5 0.58 4.75 0.7 7.68 0.86 9.55
10 0.67 4.47 0.97 6.79 1.43 8.03
15 0.76 4.23 1.33 6.08 2.33 6.92
20 0.86 4.02 1.79 5.52 3.72 6.09
The 15P pair represent all the quarterly payments, and 16P also includes the final repayment when the bond matu
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.
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.
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:
----------------------------------------------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------------------------------------------
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.
If there is some feedback loop from Turner Pope to Avacta, that can only be a good thing. As for AS looking tired, this could be interpreted as a positive i.e. team avacta are pulling out all the stops to progress this trial. I would be more disconcerted if he turned up for the interview in a Hawaiian shirt and a deep orange tan.
Actually RAH has extracted the relevant part on deal making:
https://x.com/RAH00084/status/1778314136218181714
Yes although "strengthen negotiating position" kind of implies "keeping going independently for as long as possible", so naturally they would want to borrow as much as possible balanced against dilution.