Saturday, May 9, 2015

My take on YFG's issuance of convertible debt

Here are my take on the redeemable convertible debt issued by YFG. One should read in detail the disclosure provided through Bursa. I should say this issuance is highly complex and one of the more complex notes (debts) that I have encountered. It is definitely issued and negotiated by people whom are experienced and knowledgeable on this topic.

As a start, let me go through the need for YFG to raise this. It definitely needs restructuring of its balance sheet as well as taking care of its growing debt. To go to the banks and get new loans, I think is almost very difficult given the scenario of its balance sheet. It will also face a lot of problem if it is going to the debt market - probably rated as junk.

But one of the reason which I took notice of this company is its ambition. YFG has faced countless challenges taking over a very difficult company. One does not discover just a single cockroach. If one cockroach is found, there are usually more.

With that I would say the RM100 million debt deal is a good option, although not fully ideal. This is because it can now fully concentrate on getting its business dealings moving forward rather than worry over the financing portion besides the very friendly interest rate of 2%. There is however no free lunch - do we think there really is one? Why?

The notes holder are given the option of converting the notes at a sweetheart deal i.e. 80% of the average closing price of the YFG share on any 3 consecutive market days during the 45 days prior to the conversion date - see below or a fixed option as below. (now you know why I said it is a mouthful to comprehend given the complexity and thoughts that are put into the deal). The conversion is however subject to approval from the company and/or shareholders depending on various situations.

Conversion terms of the notes
To control the conversion so that they are not at too low a price, there is a clause for redemption as below. Well you can do the calculation...

What other things to look at? Well, in the event the notes holders (and assuming that the notes are fully subscribed) are given the option to convert the shares and at 80% of its current market price, they would end up with a very significant stake of more than 70% in YFG.

My thoughts - the RM100 million approval needed for shareholders to make the decisions in a single general meeting is way too high as it does not need the amount now.  YFG also need to explain better why it needs shareholders to approve RM100 million. I would recommend to change it to approval for RM50 million with further option for  a further RM50 million in another session.

What are the risks and weaknesses in this deal to shareholders?

  • YFG could have raised additional funds but giving too much to the notes holders with an option of a cheap equity entry into the company;
  • 5% arranging fee is also quite high;
  • YFG is raising funds that it does not need and again giving away too much, hence too much dilution to YFG.
The benefits?

  • The 2% coupon rate is low and would not affect its financial cashflow as opposing to being financed through banks;
  • Deal would strengthen its balance sheet;
  • Funding is almost assured for the medium term.

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