Member Info for wwguk

Reveekcm and GK, thanks for sharing this Podcast interview (about a half hour long).
I found it very interesting - a story from Starzecki's personal understanding and experience on his work at Sirius, global marketing and team working for this project from its very beginning to now, and into the future.

JT Starzecki -- Chief Marketing Officer, Sirius Minerals, on
Advancing an Exploratory Mining/Fertilizer Company and Bettering His Leadership Skills Along the Way

The Ascent Podcast with Joe Burgess
Release Date: 08/16/2019

Simpl, so you mean that this 226m shares was existing SM shares owned by a subsidiary of SM.
These shares were converted into Exchangeable Bond that was bought by Citi (and they may still be converted back SM shares if Citi wants)?
So, it is just coincidence that the maturity dates of these bonds were set on the same year as the new CB?

John2015, the maturity date of the old CB is 2023; while the new CB is 2027.
What I refer to are the two dates: 23/05/2027 and 13/05/2027 associated with the two Exchangeable Bonds in the RNS.
Simpl, if they are not the new CB, then SM would have got some new money and these Exchangeable Bonds should be convertible as corresponding number of shares are listed in the RNS.

I remember that Myo has questioned the term and the maturity dates of the Exchangeable Bond. I am not sure, if this question has been answered, if so, in which post?

Are they the new CB? If yes, why do they have different maturity dates?
It seems that the maturity dates of the new CB can be slightly changed by the owner and SM.
As no new shares reported due to the Exchangeable Bond issuance, it seems that they are just the new CB, and that the owners of the new CB could trade (or transfer) the new CB between them (while their paid money on the new CB is still in escrow).

correction: if the shares go to zero, the only loss of Citi will be the 20m shares (even if this happens, they will still get some money from part of these shares on loan to the shorters).

correction: if the shares go to zero, Citi would keep the initial value of the swapped shares (the value of the shares goes to zero; while Citi would get interest plus the initial value of the shares at the contract date, i.e., all the initial value becomes the spread).

Simpl, as you mentioned if 46m before the the SM bond critical date, it would has no hedging effort. The latest changes in today RNS include:
- nearly 20m shares (9.7m shares, 10m shares on loan; almost the same as before; recalled 3.5m)
- ES 106m shares (increased from 95m to 106m, all after the MS bond critical date)
- Exchangeable bond: 226m shares (the same as before)

The major change is to move the 46m to a date after the life/death date of the Initial Bonds.
The total number of shares in the swaps also increased from 95m to 106m (almost the same as in the first RNS). This conformed our hypothesis that the initial equity swap contract was signed before August 1 when the life/death date of the Initial Bonds was expected on the 9th of August (therefore the first swap date was the 3rd of September). As the revisit date will be in early September and the deadline of the initial will be the end of September, therefore, the series of swaps changed. The counter party seems to be very confident on the success of the bond. For Citi, this is still a safe play. The equity swaps more hedge all the risk of its shares; actually, if the shares go to zero, they would double the value of the swapped shares; and the money on the exchangeable bonds would return to them from the escrow. If the stage 2 successful, then they would enjoy the big return from the 246m shares; and the return of the 106m shares will be bank to them when all the pre-set dates passed by.

Teaye, some of those numbers might be done by MM (as you said where they execute multiple small trades on a client’s behalf in one). The RNS today was on the situation by 16 August. Therefore, we do not know if Citi was selling today. Each trade, has a buyer and a seller, and MM
may be involved in many trades, as mentioned multiple times by many on this board, the Buy or Sell mark may not be an accurate indication on Buy or Sell (i.e., LSE may have just tried their best to infer this).

Simpl: "On another note, which makes me feel there may be a little more to this, is that if there’s no news by 3rd Sept".

One possibility is that when they negotiated the series of swaps, they need to balance the gain/risk at the contract time for each party. Therefore, some dates are good for Citi; while others are good for the other party.

Another possibility is that the contract was signed before August 1 (the day when Trump made the comments). At that time the unknown party had planned to backstop the bonds (with the amount they and SM/JPM had expected (Citi and other IIs would not know this, as the negotiation might be one-one between SM/JPM and each of potential purchasers)), however, after the Trump comment relating to the trade war, market sentiment changed and some potential purchasers retreated, which made the unknown party not afford to make up all the shortfall (but would still committed to the amount they had planned to purchase when SM revisit the market).

Teaye72, your post led me to have had a look at the out of the hours trades after today's close, and noticed that over 10m shares marked as "Buy" in three trades (2.5m, 6m, 2.5m) which seem to have not happened in past few days when the daily trading volumes and the volumes of most trades were quite low.

Sorry for typo, I mean big guys - big players, big IIs.

Simpl and Thornback, I hope that your speculated scenario is true; i.e., the other party in the swap may be a very powerful one that can backstop the $500m bond sell, therefore, very sure the bond issuance will be successful. Given the feedback from their own negotiation participation before, in, and after the roadshow, they can infer how much shortfall SM/JPM may have to reach the $500m; and they know they have the money (this is not inside trade, as they would still take some risk (due to the changing situation)).

It could also be a combination of the scenario I mentioned and yours, i.e., the other party in this swap used their fixed income investment for the exchange of cashflow (at the current extreme low share price); and then use the money at hand in September to purchase the SM H.Y.bonds.

The big gays have all the legal means/ways to earn big money safely (often or always at the expense of the small PIs).

Simpl: "why [the other party] not just buy the shares? "

The other party wants to enjoy the return of the SM shares. They could buy these shares from the market at the recent extremely low price if they had the money. However, their money may have been invested in other financial products, for example, savings of fixed interest rate for fixed years, or savings with a float interest 2 points above the central bank interest rate, or treasure bonds. They cannot draw-down or sell these immediately to raise the cash for purchasing SM shares. By signing the equity swap contract with Citi, they can exchange the cashflow (return) of their financial product with the cashflow (return) of the SM shares own by Citi (of the same value of their own financial product at the contract time) ; they can then enjoy the return of these shares, as if they own these shares, of course, they also possibly suffer from the return of these shares (as the return may be negative if the share price on the pre-set future date (and their agreed time) would be lower than the price when the contract was signed.

Both Citi and the other party would not know for sure if the future price at all those pre-set dates would be higher or lower than the price at time the equity swap contract was signed.

They may know some of them, for example, they both would know the price at the 3rd of September (i.e., the one involving 46.6m shares) may be one (possible around current price) before a big jump (e.g., over 17p) or big drop (e.g., 4p) as by then SM bond has not been issued (the very beginning of September is a time when H.Y.bond investors just return from their summer holidays, and SM is to revisit the market to reengage with the potential purchasers, come up with price range, and then close/end the deal in three days after a guide price is given).

However, for those swaps after the first swap, i.e., those in Oct, Nov, dec this year, august next year, and the ones in 2021, 2022, and 2023; the share price would be either 0 (stage 2 failed) or much higher (after a successful stage close, say at 17p, 20p, 30p, 40p) than the price (when the contract was signed say 8.5p).

Citi, of course, know the positive potential, and they still have enough shares (20m shares) and convertible bonds (of 226m shares' value) to enjoy the up side; however, due to the uncertainty (i.e., the possibility of a stage 2 failure), they would be willing to give up the positive potential (up to 2023) of around 95m shares by making a bet on the opposite direction using the equity swap derivative.

After 2027 (when all the pre-set time passed), if the SM shares are still on market, they will enjoy the high price of all the shares they once swapped. They have just "shorted"part of their own SM shares for a short period of times (from a few months up to 4 years); but would still own and long the shares over 100 years if they wish.

Simpl, equity swaps often made in a series of tranches with different dates.
At the time the contract is made, it must not be obvious which party in these swaps (of the cashflows) will gain in the end. Both parties would know if the share price increase, the positive cashflow from shares would be higher than the interest (i.e., the cashflow from the other party's investment product). However, if the share price drops to below the price at the contract on the pre-set date, the share owner (citi) would get the spread plus the interest, i.e., the other party would get the negative return from the shares.

The party swapped with Citi is the same as us who expect/bet stage 2 would succeed, and the cashflow from the shares would be positive.

For Citi, they have a lot of stake in SM (i.e., shares and CBs in the long position); the swapped shares are just a hedge for the worst case scenarios (unlike us would loose all if the share goes to zero, Citi would still get all the principal back).

Simpl, to my understanding all the shares used in the Equity Swap are in short position from the share owner point of view. Equity swap for II shareholders is a hedging tool (short-term short, but long-term long ).

In general, if a share is in upper trend, its return would be higher than the return (i.e., interest) from saving (fixed or flexible income). When Citi did the swap, they must expect that the earning from the shares could be less than the earning from the interest (at certain percentage) of the principal (the number of the shares x the price at the swap), of course, the other party may believe the opposite (the same as that in each stock transaction, the party who sells believes that the price may drop; while the party buy believes that it may rise).

Equity Swap -- a great hedging tool for Citi:

When the SP goes down, Citi will get all the return as they would get in shorting (they will give the other party a Negative Return from the swapped shares (in effect getting the money)) plus an interest income from the notional principal (the amount of shares at the price when the contract was made) ;

When the SP goes up, Citi will still get the interest from the principal; they just give up the positive return from the shares to the the other party;

Citi will keep the long term potential of the shares (that used in equity swap) by maintaining the ownership of these shares. After reaching the set dates on each tranche of the swap and they will get the return (positive or negative) from the shares. They get back (the return of) all these (swapped) shares in 2027. They will start to collect the interests of the exchangeable bonds, if the the senior debt event happened, if not the money kept in escrow will be return to them.
We have learnt a lot from Capital, Citi, and JPM on how to investment in risk ones safely; but unfortunately we have no power to play with a combination of those financial tools. We have made a one or nothing bet in one direction - just hope its a promising bet.

share holding decreased slightly (from 35.4m to 6.2m);
however, shares lend to other increased (from 8.7m to 14m, i.e., more share just lend out);
particularly important to note that Equity Swap after 3 September (i.e., after potential $500m bond issuance) decreased (i.e., short bet on stage 2 decreased)!
while the Exchangeable Bond (i.e., long bet on the stage 2 increased (203.8m to 226m)!

It is interesting to note that both Equity Swap and Exchangeable Bond can be changed easily,
particularly, the change on the Exchangeable Bond. It seems that the Exchangeable Bond might not be the new CB, or the new CB (while in escrow) could also be exchanged??

Roobans, thanks! I get it, this is very helpful.

casa, Capital has always a quite sizable lending to other to short and Capital collects a loan fee.
Equity swap seems a bit more complicated than simple lending. Do you know if there is a leverage involved in such kind of derivatives? If so, what is a normal percentage?

There are still no news articles and/or analyst comments on the Citi RNS. This is a bit strange, possibly due to the complicity of the Equity Swap involved. It is obviously positive for public to know that Citi had about 3% of SM equity in new CB; about 0.5% in shares; and that Citi's total stake is around 5% (one of the largest SM investor so far).

The SP went up after the RNS, and then gave away many of the gains, partly due to a short increase (mainly from BackRock's 0.56% new position) and partly due to the fact that people/market start to understand what the Equity Swap means to SM. Unlike the long from the shares and CB, the Equity Swap is on short side. It is an hedge to counter the down side risk, in a way similar to use CFD as hedge. For hedging purposes, people may open up a short CFD of the equivalent amount (or the number of shares they want to hedge) of the shares they own. If the share price goes up, the gain from the shares are canceled by the lost from the CFD contract; While if the share price goes down, the loss from the share is compensated by the gain from the CFD. Equity Swap seems to be a better hedging tool than CFD, as when share price, the loss of the Equity Swap is compensated from the gain in the number of shares swapped (i.e., the gain from other shares is not cancel); while when the share price goes down, the gain from the Equity Swap (the swapped shares) will compensate of the loss from other normal shares. CFD is tool anyone may try (due to its high leverage (20% money to get 100% equivalent number of shares), it is quite dangerous tool). Equity Swap seems to be a tool used by the financial experts.

Please note that among of shares swapped by Citi was quite low; however, from the information we got, I am not sure what percentage of leverage was used by the contract. Still learning ...