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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.
The other comment that stood out yesterday was that the cash runway was required to strengthen the negotiating position, so that may have also been a clue as to what prevailed here.
I speculate that there were some prospective smallish license deals bubbling away (hence the previous bullishness), but the negotiations didn't go too well. Perhaps the avacta negotiating team weren't strong enough, or perhaps the second party felt they could get away with undercutting the deal based on Avacta's financial situation. At some point someone came in and said a. the terms of that deal are selling avacta down the river and b. it is likely to damage future deals with bigger players (also hinted at in yesterday's webinar), and so the whole deal was pulled. At which point avacta was at the mercy of the city boys, resulting in the heavily discounted placing.
So, yes of course any investment is a risk, however, my feeling is that it was the timings were maybe 12 months out for Avacta to have been able to effectively leverage what they have in any negotiations. I feel more confident that with the growing body of data, especially with the ongoing 2w trial, and the cash runway, that subsequent negotiations are going take place on a more level playing field.
Given the obnoxious fund managers we have seen paraded on vox markets by Paul Hill, and the throw away comment by AS about PI's importance, I suspect the truth is somewhere along the lines of:
A small amount was sold to respectable funds to give a semblance of legitimacy, and the remains were sold to cretinous hedge funds with the strapline "you can have these cheap and double your money - this is a private investors wet dream and they'll provide the liquidity" (excuse the awful pun)
Now I don't think Avacta management went out of their way to concoct this scenario, and reckon that the UK financial markets just suck at the moment (as evidenced by a few recent anecdotes of biotechs having a really hard time raising funds) and this time they were just caught out, plain and simple.
Again, when they talk about market size of 1,2,3 bn, do you assume that translates into revenue equivalent to 100% of a given market? I certainly never did, and I’d be far happier for Avacta to take the most direct route to market for ava6k even if that meant a 100m, 200m revenue. That would do the job to get Avacta bought out.
They can start making money from ava6000 if approval given during/after phase 2. This could give the option to go phase 3 alone although it sounded like phase 3 would be with a bigger player, and frankly in this scenario Avacta already bought out.