RE: Happy Bond Purchasing and Cancelling Day!!14 Aug 2020 11:57
Don't confuse your bond mechanisms.
1). Redeem - Hurricane can elect to redeem the bonds, the bonds must be redeemed at par plus accrued interest and across the entire issue, (in practice this means the entire convertible bond issue can be refinanced by Hurricane at any time after 14th August 2020, today).
2). Convert - Hurricane can elect to convert the bonds, Hurricane can settle conversion by delivery of ordinary shares, or by a cash equivalent (determined by VWAP), or a combination of shares and cash (settling in shares dilutes existing shareholders, this is the last thing shareholders want). If cash reserves + operating income fall short of the amount required to convert the bonds at par, the equity will be diluted by the extent of the shortfall.
3). Purchase and Cancel - Hurricane can elect to cancel any bonds that are owned by Hurricane, but first Hurricane must purchase them (when the bonds are trading at 50c and Hurricane is generating free cash flow, this is a no brainer. It is by far the cheapest way out of the debt).
These three different mechanisms are specifically mentioned in the "Results of Convertible Bond Offering" document.
Bonds that are purchased by Hurricane are considered cancelled, this is so that Hurricane cannot accrue controlling voting rights among the outstanding bondholders (avoids a potential conflict of interest).
Given that Hurricane are making money hand over fist (whilst the rest of the industry is not), and that the bonds are trading at a material discount, this is one of those very rare situations where it makes perfect sense for the issuer to purchase their own issued bonds and cancel them.
It is likely that the bond market is very illiquid and that not many bonds can be purchased, DO IT ANYWAY. The bond price is an important proxy for the health of Hurricane and is used by institutional investors AND SUPPLIERS to determine the financial health of the company.
This should be the primary objective for the use of the companies (otherwise idle) cash reserves. It improves the balance sheet by £2 for every £1 spent (at current bond price) and creates space for recapitalising if/when the EPS is successfully navigated.
The only potential hurdle to this is the OWC commitment drilling. But existing cash reserves should already cover the expense of these commitments. Some meaningful quantity of the uncommitted cash should already be available for addressing the 2022 bonds.
Given the growing uncommitted cash position, there should exists a purchase and cancel policy to take advantage of the current bond discount. Even without the current discount, purchase and cancel reduces the ongoing cost of the 7.5% coupon and therefore is a mechanism to improve the post-2022 uncommitted cash position above what it would otherwise be.
The fact that this glaringly obvious use of the uncommitted cash hasn't happened, is why I believe there are talks around someone else acquiring that uncommitted cas
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