Chris Heminway, Exec-Chair at Time To ACT, explains why now is the right time for the Group to IPO. Watch the video here.
Long and wrong in this one, thankfully not a core holding but I had high hopes for it as looked like a good cyclical recovery play post SFO settlement. In retrospect, the junk bond issue was a big red flag and looking at how severely discounted this is now, it’s increasingly difficult to see how any stakeholder comes out of this without being burnt, barring a full takeover. At least the stock is still liquid so cutting my losses and running. Good luck for all you still holding on for the takeover, balls of steel…
There isn’t much of a capital hierarchy here, just the share capital then the junk bond and banking facilities with nothing in between (no unsecured debt, no sub debt, no converts, nothing). In a default scenario, what is the likely recovery rate for BHs? Likely very far south of 40c. So not in BHs interests to push for a default. Unlike a situation where there was a lot of recoverable value through fixed asset sales for example. PFC’s value lies in its order book, which will evaporate in a default scenario.
Spx c25p, current mkt cap around usd170m, implied mkt value of bonds at 40c in the dollar around usd240m. Co swaps out bonds for c740m new shares with tiered lock-ins preventing immediate dumping. Now co is free of junk debt, banks agree rollover of existing facilities and write APGs for entire order book, stock flies on the news albeit subject to overhang from former bond holders, shorters get a bit toasted…
And it would have to be a very sexy valuation to get BH’s and RCF to sign off on it since it’s their collateral.
How strong are the restrictive covenants on the junk bond, Paul? Is there a specific list of prohibited assets in terms of disposals? And are there no carve outs if proceeds are to be reinvested (as is usually the case)?
Any new debt issuance, be it in the form of a term loan, revolver, bond issue or even convertible bond issue will be priced with reference to existing traded debt’s credit spread. But you’re right, there’s no way on earth that banks will price a new loan at a 40% yield. They simply won’t lend until they see more equity on the balance sheet.
A rights issue at these levels is a disaster for SHs - only administration would trump this and that’s the only reason that the BoD would consider issuing equity down here at these levels. Of course bank finance would be a much better alternative but it’s because the banks are reluctant to provide continued support that the company are in this position. After the SFO settlement, the company was in a better position than now from a balance sheet perspective and still couldn’t raise debt financing at less than 9.75% (which in current circumstances would be fantastic!!) - that 9.75% is now more than 40% (bond yield today). This is why the company needs a strategic investor (or better, full TO). Perhaps from the East, where they do great business.
That’s not a potential loss, it’s an ACTUAL loss, and a big one. This occurred at the end of November. They clearly didn’t like the answers the company were giving them regarding the slide in spx to c50p at that point and decided to bail. PFC really needs a strategic investor to step in now.
Of course the BoD won’t back the issue of new shares to facilitate the shorters. You’ve completely missed his point: he’s saying the shorters KNOW they can’t possibly exit without being squeezed unless there’s a substantial new share issue but are happy being short nonetheless because they’re utterly convinced that this share issue is coming.
Broadly agree with the first part of your post. Looks to me like the company’s advisors began to investigate financing options when the co realised that they had a big problem with the APGs, this leaked and prompted the shorts to pile in. But don’t hold your breath re the regulator - UK has a terrible record on prosecuting in this area.
We can rule out refinancing with a new bond issue for the simple reason that the existing bond yields over 40%. The existing bond is implying a high probability of a haircut for bond investors. In those circumstances, (we) equity holders are in trouble. The company has acknowledged it has a problem (read the notes in the half year report) and has appointed a non exec to specifically address this (see last RNS).
Less than 20% chance of happening so makes sense to be short. I suspect the co soft marketed an equity placing weeks/months ago, shorters got wind and piled in. However, my hope is that the shorters are well out of the loop as far as TOs/strategic investment is concerned since the decision makers on this don’t sit in leaky London but are likely much further East. Don’t see much of a link between the main short funds and the Arab world - very much in a buyer’s interest not to let news leak as the short funds will effectively provide them with a discount.
I broadly agree with your view. Roughly speaking, the shorters expect a deep discounted placement (say 3 for 1 at 10p raising around 150m) or insolvency, giving them upside of around 18-28p per share. If we assume a TO at 150p, then their downside is around 120p per share. They’re confident that the latter scenario much
We still don’t know what it will take to convince the lenders to write an advanced payment guarantee. Only those inside PFC and at the lenders will know this for sure. The shortfall in cash flow is because of the lack of appetite for APGs - this is partly down to the deterioration in PFCs finances (vicious circle) but also because this has become an increasingly difficult market generally. Hopefully the company has a clear idea from their lenders in what they have to do to unlock APGs and have the wherewithal to achieve this without too much dilution for shareholders.
The new guy joining the pfc board is ex-arrow grass, a now defunct UK hedge fund (they were spun out from deutsche bank and were large multi billion players a few years ago). Suspect he is on board to try to negotiate a deal with bond holders.
They haven’t breached liquidity but they will almost certainly have breached EBITDA, hence the cash flow warning. So ultimately still reliant on lenders, as anyone with any sense already knew. Those who were warning weeks ago about the advanced payment guarantees have been vindicated, as this appears to be the key given today’s statement. As a LT holder I’m a bit more hopeful as at least the board have made a statement but we won’t really know how much our stock is worth until we find out how much dilution is required to unlock the APGs.
The company warned in note 2.4 of the interims that if they were not able to make timely cash collections on legacy contracts they would be in breach of the bank loan EBITDA covenant and reliant on their lenders to renegotiate the covenant (not for the first time). Reading between the lines, it looks like the lenders are holding PFC’s feet to the fire on this with the implicit threat of loan default. The lenders would probably be better off simply waiving the covenant in the short term and allowing PFC to make good on their new contract wins. Obviously, If that doesn’t happen in the next fortnight or so, current shareholders are toast. PFC looked super cheap evenly before the latest short attack but cash is king and if lenders withdraw liquidity on the basis of a covenant breach, the receivers will be called in. My bet is that doesn’t happen and that the covenant is renegotiated in the short term but liquidity concerns will persist beyond the next update until the company closes out its legacy issues and starts converting the order book into cash.
The price falls in the bonds and SP points to the company talking to the banks about refinancing- perhaps potential problem with covenants related to legacy contract cashflow issues. Clearly the info (ie bank refinancing) has leaked which is pretty disgusting as far as retail investors are concerned. Company not saying anything because they can’t until and unless they sort it out and can announce something positive. Hopefully the banks see enough upside in the order book to continue to back the company. In my view, the high yield bond was a bit of a shocker at the time but whilst orders have increased very positively, cashflow has remained a problem.
Not at all surprised by today’s announcement - much of the recent shorting activity was based on the expectation of further negative disclosures in the short term. The Tennet deal is a game changer however, a big positive surprise, and medium term this stock is going to turn very positive as a result. Liquidity looks ok but would be good to see the banks reassess lending terms on the back of the new contract(s) and allow PFC to call it’s junk bond this November…