HYR.L Regulatory News (HYR)

21 October 2013

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE UNITED STATES, JAPAN, CANADA, AUSTRALIA OR THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A BREACH OF THE RELEVANT SECURITIES LAWS OF SUCH JURISDICTION.

Hydrodec Group plc

("Hydrodec", the "Company" or the "Group")

Proposed Placing and Open Offer of New Ordinary Shares

Repayment of Debt

and

Notice of General Meeting

The Board of Hydrodec Group plc, the cleantech industrial oil re-refining group (AIM: HYR), is pleased to announce that, following the successful completion of two major transactions in the US and the UK in the past six months, it has conditionally raised £20 million through the placing of new ordinary shares of 0.5p each ("Ordinary Shares") with institutional and other investors (the "Placing") and is seeking to raise up to a further £4 million through an open offer available to existing Shareholders (the "Open Offer"), in both cases at an issue price of 11.25p per Ordinary Share (the "Issue Price").

Summary:

· Placing to raise £20m to broaden the institutional shareholder base, strengthen the balance sheet and provide expansion capital

· Open Offer to raise up to £4m, allowing existing Shareholders to apply for 1 new Ordinary Share for every 12 existing Ordinary Shares held, with an opportunity to apply for further new Ordinary Shares under an excess application facility

· Repayment of £25.3m of debt (of which £12.5m will be repaid through the issue of Ordinary Shares at the Issue Price) leaving the parent Company debt free

· Additional proceeds for expansion capital for deployment on specific on-going growth and development initiatives

· Advanced discussions in UK and Australia with potential strategic partners

· Strong current trading with positive Group EBITDA run-rate for September

The Placing, the Open Offer and the debt repayment are conditional upon the passing of a resolution to be put to a general meeting of Shareholders (the "Resolution") and on admission of the new Ordinary Shares to trading on AIM ("Admission").

Commenting on the proposals, Ian Smale, Chief Executive of Hydrodec, said:

"This fundraising is a significant milestone for Hydrodec for a number of reasons. Firstly, it enables the Company to resolve issues relating to its balance sheet and positions it far more strongly - and sustainably - in terms of its financing.

Secondly, the support of Shareholders new and existing is a very real endorsement of the work undertaken this year in taking the business forward with two key transactions in the US and UK. Thirdly, it provides expansion capital that will enable us to take additional near term opportunities to develop Hydrodec and expand our international footprint further. Finally, it has introduced several high quality new institutional Shareholders to our register, whom we welcome.

We are very pleased with our strong current trading and excited about the potential of the business and we look forward to updating investors on progress soon."

Hydrodec Group plc

("Hydrodec", the "Company" or the "Group")

Proposed Placing and Open Offer of New Ordinary Shares

Repayment of Debt

and

Notice of General Meeting

The Board of Hydrodec Group plc, the cleantech industrial oil re-refining group (AIM: HYR), is pleased to announce that, following the successful completion of two major transactions in the US and the UK in the past six months, it has conditionally raised £20 million through the placing of new ordinary shares of 0.5p each ("Ordinary Shares") with institutional and other investors (the "Placing") and is seeking to raise up to a further £4 million through an open offer available to existing Shareholders (the "Open Offer"), in both cases at an issue price of 11.25p per Ordinary Share (the "Issue Price"), representing a discount of 9.1 per cent. to the closing mid-market price of 12.375p per share on 18 October 2013, the last trading day prior to this announcement.

The fundraising will strengthen the Company's balance sheet and financial position in two specific ways. Part of the net proceeds of the Placing (approximately £13.2 million) will be used to repay the Company's unsecured loan stock (the "ULS") and the accrued interest thereon, and the balance of approximately £6.3 million, together with the proceeds of the Open Offer, will primarily be utilised as expansion capital in a number of further developments for the Company, described below.

At the same time, the principal amount outstanding in relation to the Company's other debt instruments (a £7.5 million revolving credit facility (the "Facility") entered into in respect of the recent acquisition of the principal business and assets of the OSS Group Limited ("OSS") and £5 million of secured loan notes (the "Loan Notes")) will be repaid in full through the issue of additional new Ordinary Shares at the Issue Price (together, the "Debt Conversion").

The Placing, the Open Offer and the Debt Conversion are conditional upon the passing of a resolution to be put to a general meeting of Shareholders (the "Resolution") and on admission of the new Ordinary Shares to trading on AIM ("Admission").

Background to and reasons for the Proposals

In April 2013 the Company entered into a strategic partnership with G&S Technologies Group ("G&S") in order to grow its core transformer oil business and create the largest transformer oil re-refiner in the US. The commitment of feedstock from G&S to the new entity, Hydrodec of North America ("HoNA"), has already enabled greater utilisation of existing available capacity in the US. It also provides HoNA with increased security of feedstock supply to support the planned expansion of US plant capacity from 27 million litres per annum to 65 million litres per annum. Importantly, the proceeds of sale of the interest in HoNA to G&S are expected to be sufficient to meet the Company's share of the capital costs of this expansion. The transaction also establishes a new recurring royalty for the technology which the Company has licenced to HoNA.

The strategic partnership with G&S was followed in September 2013 by the acquisition of the principal assets and business of OSS. OSS is the UK's largest collector, consolidator and processor of used lubricant oil and the largest seller of processed fuel oil. Prior to the acquisition, OSS had suffered from a downturn in margins. The Board believes that if the OSS business is properly managed and financed it should be able to return to the levels of its 2010 and 2011 performance (which were significantly ahead of its results in 2012 and in 2013 to date). In addition, the application of Hydrodec's technology to the re-refining of used lubricants, the development of which is underway, provides the potential for materially greater margins and returns. Once the Hydrodec technology is deployed, the Company expects that its re-refining process will offer the potential for efficiency and quality benefits not available in existing lubricant recycling activity generally. The global market for lubricant oil is estimated to be in excess of US$30 billion per annum, materially larger than that for transformer oil (estimated at US$1.6 billion per annum).

The OSS transaction, and the existing low-grade recycling technology in the UK, make the domestic market a potential base for the further development and deployment of the Hydrodec technology into used lubricant oils. As such, the Company is in advanced discussions with a material UK business to partner in the development of the re-refining business in the UK with the potential for the contribution of land, infrastructure and capability. If progressed this could lead to the development of a UK transformer oil business by 2015 and a lubricant oil business by 2016. Similar strategic discussions are underway in Australia. If discussions are concluded, both of these potential transactions will be subject to board approvals by all relevant parties and announcements will be made at the appropriate time.

The G&S and OSS transactions have demonstrated the ability of the Company's management to continue to execute the Company's stated strategy and provide a platform and blueprint for future growth. In light of this, and the positive forward momentum provided by the Company's current trading, the Board has resolved to implement the proposals described in this announcement.

The Board has regularly stated in recent months that a priority for 2013 is to address the Company's balance sheet and in particular the repayment of the ULS which are due to be repaid by no later than 31 October 2014. Following Admission, the Company's balance sheet will be significantly strengthened as a result of the repayment of the ULS, the Loan Notes and the Facility (which together comprise £25.3 million in principal amounts) and the Company's cash reserves increased. This will improve the Company's standing and credibility with all stakeholders (including customers, suppliers and potential partners), eliminate the related debt financing costs and remove uncertainty over the Company's financial position in relation to the prospects for the repayment of the ULS in October 2014, as well as providing financing flexibility at the business, operating and asset level. The additional funds for expansion capital should enable the Company to further develop specific identified growth opportunities and to pursue new partnership or consolidation options in the UK and Europe.

The Board expects that the introduction of a number of new, supportive, long-term institutional Shareholders through the Placing will prove beneficial to the Company and Shareholders as a whole. However, the Board is mindful of the potential dilution to existing Shareholders' holdings and have therefore resolved to make the Open Offer to the maximum extent permitted by regulation without incurring the additional cost and time of a full prospectus which would otherwise be required.

Use of proceeds

The net proceeds of the Placing (approximately £19.5 million) and the Open Offer (up to £4 million) will be used for two primary purposes: the repayment of the ULS and the provision of additional expansion capital.

The ULS were originally issued in 2007 and raised £13.8 million of funding for, inter alia, the construction of the plant in Canton, Ohio. They were originally convertible into Ordinary Shares but since November 2012 the conversion rights have lapsed and the outstanding £12.79 million in nominal value is repayable by the Company by no later than 31 October 2014. The ULS have been viewed by certain potential investors as a significant barrier to investment in the Company for some time and the Board has made it clear that it has been considering a number of options for their repayment or refinancing. The Board is pleased that following Admission it will be in a position to repay the ULS in full approximately 12 months ahead of their final repayment date. Assuming the ULS are repaid on 14 November 2013, the accrued interest payable in addition to the nominal value is approximately £385,000.

The balance of the net proceeds of the Placing (approximately £6.3 million), and any proceeds from the Open Offer, will be utilised by the Company as expansion capital in a number of specific initiatives:

(a) expanding the UK operations, with an initial focus on establishing a transformer oil business in the UK;

(b) continuing the development and extension of the existing technology for use with used lubricant oil in order to access a market estimated to be more than 15 times larger globally than that of transformer oil;

(c) repositioning the technology and its development from Australia to the UK to better align with near term prospects in the UK and Europe; and

(d) additional growth projects in respect of licencing, partnership and acquisition opportunities in both the transformer oil and lubricant oil sectors.

Following the completion of the Debt Conversion and the repayment of the ULS, the parent Company will be debt free.

Operational update

The Company's existing transformer oil business in the US and Australia has performed strongly in 2013. The half yearly results for the six months to 30 June 2013 demonstrated record half-year revenues and sales volumes, and improved margins over those for 2012. This resulted in a significantly improved underlying operating EBITDA (before growth costs and share based payments) of a US$0.2 million loss, compared to a US$1.1 million loss for the same period in 2012.

The Board is pleased to confirm that these performance trends have continued into the third quarter, even before the impact of the OSS acquisition, with revenues, volumes and utilisation improving still further. In addition the Board is encouraged by September's performance from the OSS business which exceeded management's base case assumptions. Importantly, management's target of achieving a positive EBITDA run-rate (after growth costs and share based payments and before the positive impact of the OSS business) before the end of the year has been met for the month of September. This is a significant milestone in the Company's history.

The Placing and the Debt Conversion

The Company has entered into a placing agreement with Peel Hunt LLP ("Peel Hunt") on customary terms and conditions pursuant to which Peel Hunt has conditionally agreed to use its reasonable endeavours to procure placees for new Ordinary Shares at the Issue Price (the "Placing Shares"). The Company has received firm commitments from placees for approximately 178 million Placing Shares in the Placing representing £20 million (before expenses), conditional, inter alia, on the passing of the Resolution and Admission.

Application will be made for the Placing Shares to be admitted to trading on AIM. It is expected that Admission of the Placing Shares will become effective and that dealings will commence in the Placing Shares at 8.00 a.m. on 8 November 2013.

The Company has entered into conditional repayment letters with the holders of the Loan Notes and the provider of the Facility. Under the terms of the Debt Conversion, each of those persons will receive new Ordinary Shares, issued at the Issue Price, in repayment of the principal amounts outstanding under those debt facilities. The interest accrued on the Loan Notes and the Facility up to and including the day prior to Admission will be paid in cash.

Directors' participation in the Placing and the Debt Conversion

Lord Moynihan, Alan Carruthers and Chris Ellis, all directors of the Company, are participating in the Placing for an aggregate of 4 million Placing Shares (with an aggregate value of £450,000 at the Issue Price). Andrew Black, a director and a substantial shareholder of the Company, is a holder of £2.6 million in nominal value of the Loan Notes and the provider of the Facility, aggregating to £10.1 million in total. Lord Moynihan is a holder of £300,000 in nominal value of the Loan Notes. As such, Andrew Black and Lord Moynihan are acquiring additional Ordinary Shares with an aggregate value of £10.1 million and £300,000 through the Debt Conversion respectively. These arrangements constitute a related party transaction under the AIM Rules.

The Directors, with the exception of Lord Moynihan and Mr Black, consider, having consulted with the Company's Nominated Adviser, Peel Hunt LLP, that the terms of the Debt Conversion are fair and reasonable insofar as Shareholders are concerned.

The Directors, with the exception of Lord Moynihan, Mr Carruthers and Mr Ellis, consider, having consulted with the Company's Nominated Adviser, Peel Hunt LLP, that the participation of Lord Moynihan, Mr Carruthers and Mr Ellis in the Placing is fair and reasonable insofar as Shareholders are concerned.

*assuming the Open Offer is fully subscribed

The Open Offer

The Open Offer is for up to approximately 35 million new Ordinary Shares ("Open Offer Shares") at the Issue Price to raise up to approximately £4 million.

Qualifying Shareholders are being given the opportunity to apply for Open Offer Shares at a price of 11.25 pence per Open Offer Share on the basis of:

1 Open Offer Share for every 12 existing Ordinary Shares

registered in the name of each qualifying Shareholder on 17 October 2013 and so in proportion for any other number of Ordinary Shares then held.

Qualifying Shareholders may apply for more or less Open Offer Shares than they are entitled to under the Open Offer and applications in excess of the Open Offer entitlements will be dealt with under an excess application facility. If applications under the excess application facility are received for more than the total number of Open Offer Shares available following take-up of Open Offer entitlements, such applications will be scaled back pro rata to the number of excess Ordinary Shares applied for by qualifying Shareholders under the excess application facility.

The Board has asked qualifying Shareholders who are participating in the Placing to undertake not take up their rights in the Open Offer to allow other qualifying Shareholders to apply for additional new Ordinary Shares under the excess application facility. In addition, Andrew Black has undertaken not to take up his Open Offer entitlement. In total, this means approximately 17.5 million new Ordinary Shares will be available under the excess application facility.

Those Directors who are not participating in the Placing or Debt Conversion intend to apply for Ordinary Shares pursuant to the Open Offer, including potentially applying for additional Ordinary Shares in the excess application facility.

Application will be made for the Open Offer Shares to be admitted to trading on AIM. It is expected that Admission of the Open Offer Shares will become effective and that dealings will commence in the Open Offer Shares at 8.00 a.m. on 8 November 2013.

For existing Shareholders who do not participate in the Open Offer, this will result in a dilution of approximately 43.4 per cent in their proportionate share of the enlarged issued voting share capital following the issue of the Placing Shares, the Open Offer Shares and the shares issued pursuant to the Debt Conversion (assuming the Open Offer is fully subscribed). For existing Shareholders who take up their Open Offer entitlements in full and/or apply for and are issued additional new Ordinary Shares in the excess application facility, this will result in a lower dilution dependent on the exact number of Ordinary Shares acquired.

Circular

The Company will shortly be posting to Shareholders a Circular attaching a notice convening the General Meeting, which will also be available on the Company's website at www.hydrodec.com. Qualifying Shareholders will also receive an Open Offer application form.

Notes to Editors:

Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process initially targeted at the multi-billion US$ market for transformer oil used by the world's electricity industry. Spent oil is currently processed at two commercial plants with distinct competitive advantage delivered through very high recoveries (near 100%), producing 'as new' high quality oils at competitive cost and without environmentally harmful emissions. The process also completely eliminates PCBs, a toxic additive banned under international regulations. Hydrodec's plants are located at Canton, Ohio, US and Young, New South Wales, Australia. Hydrodec recently acquired the business and assets of OSS Group, the UK's largest collector, consolidator and processor of used lubricant oil and seller of processed fuel oil, with a national network of oil storage and transfer stations, currently serviced by a fleet of more than 90 trucks which collect used oil and other garage workshop waste from over 30,000 customers. Used oil is converted into processed fuel oil at OSS's plant at Stourport and principally sold on to the UK quarry and power industry.

Hydrodec's shares are listed on the AIM Market of the London Stock Exchange. For further information, please visit www.hydrodec.com 

Important notice

This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any new Ordinary Shares, nor shall it (or any part of it), or the fact of its distribution, form the basis of, or be relied on in connection with or act as any inducement to enter into, any contract or commitment whatsoever with respect to the proposed Placing, Open Offer, Debt Conversion or otherwise. This announcement is not a prospectus and investors should not subscribe for or purchase any new Ordinary Shares referred to in this announcement. Any offer to acquire new Ordinary Shares referred to in this announcement will be made, and any investor should make his investment, solely on the basis of information in the Circular expected to be published and made generally available in the United Kingdom today.

The distribution of this announcement and/or the transfer of the new Ordinary Shares in or into jurisdictions other than the United Kingdom may be restricted by law and therefore persons into whose possession this announcement comes should inform themselves about and observe such restrictions. Any failure to comply with such restrictions may constitute a violation of the securities laws of any such jurisdiction. In particular, this announcement should not be distributed, forwarded to, or transmitted in or into the United States, Canada, Japan, Australia or the Republic of South Africa.

The new Ordinary Shares referred to in this announcement will not be offered in or into any jurisdiction unless such an offer can be made without contravention of any unfulfilled registration or other legal or regulatory requirements. The new Ordinary Shares have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction in the United States and may not be offered or sold in the United States absent registration or an exemption from registration. The new Ordinary Shares have not been approved or disapproved by the US Securities and Exchange Commission, any state securities commission or other regulatory authority, nor have the foregoing authorities passed upon or endorsed the merits of the Placing and Open Offer or the accuracy or adequacy of the information contained in this announcement or any other document. Any representation to the contrary is unlawful and is a criminal offence in the United States.

Peel Hunt LLP, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for the Company and no one else in connection with the Placing and Open Offer and will not regard any other person (whether or not a recipient of the Circular) as its client in relation to the Placing, Open Offer or Debt Conversion and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in connection with the Placing, Open Offer or Debt Conversion or any other matter referred to herein.

Cautionary note regarding forward looking statements

This announcement includes certain ''forward-looking statements'' with respect to the business, strategy and plans of the Company and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the Company's or the Directors' and/or management's beliefs and expectations are forward looking statements. Words such as ''believes'', ''anticipates'', ''estimates'', ''expects'', ''intends'', ''aims'', ''potential'', ''will'', ''would'', ''could'', ''considered'', ''likely'', ''estimate'' and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. A number of important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements. These factors include, but are not limited to, those discussed in the Circular. Neither the Company nor any member of its group undertake any obligation publicly to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, save in respect of any requirement under applicable laws, the AIM Rules and other applicable regulations.