At 3.8p, Afren (LSE: AFR) shares are down 97% over the past 12 months. That reflects the fact that the company is technically insolvent, has defaulted on some loan interest payments, and was on the verge of collapse. So now that there’s a rescue package on the table, all’s going to be well and the shares are worth picking up ready for the recovery that’s sure to come?
Oh no. I previously opined that you’d have been mad to buy Afren shares at 10p, and I still think you’d be mad to buy them today at 3.8p. Let me tell you why…
Massive dilution
The proposed rescue package announced on 13 March will lead to substantial dilution of the existing shareholders’ interests, and the share price duly fell on the news. But I don’t think the market has fully grasped the scale of the dilution. A large portion of Afren’s current debts will be converted into shares, and there will be a tranche of new bonds issued in order to raise more debt capital.
There will be more shares issued and offered to some bondholders too, and the overall result should be to save Afren from going bust. But the bailout will only reduce debt by a modest amount, and after the dilution, existing shareholders will be left with only 11% of the resulting equity in the company! And even then, it’s conditional on their taking up a new $75m equity offering!
You see, the new rescue package has to be massively attractive to new lenders in order for them to take part, and in effect they’ll be eventually getting their money back with high bond rates, and they’ll be getting to own a huge chunk of the company into the bargain.
New equity price?
And what about the pricing of new shares? Well, there’s some scary stuff there too.
Shares have what’s called a nominal value, which is usually considerably lower than their market price. In Afren’s case, there’s a nominal value of 1p per share. And get this — Afren plans to lower the nominal value to prevent the embarrassing possibility of issuing shares for less than that!
That’s a huge hint that we’ll see new equity priced at a substantial discount to the current share price and maybe even below one penny per share!
So why has the price not crashed further than it has? It’s possible that investors did not fully absorb the true reality of the situation when they read the news, and since then the price has slipped further as presumably people have had time to digest things — on the day we only saw a fall to 5p.
It’s also possible that shareholders might be aiming to withhold their approval of the plan in the hope of getting something more attractive. But Afren has already hinted that there’s no better alternative to come — and creditors could pull the plug today if they want.
The sad truth
Current shareholders need to accept the sad truth — you’ve lost your company to its creditors, and anything you’ll be left with will be practically worthless.