The last time that I wrote about Afren (LSE: AFR), the shares were trading at just over 10 pence. As I type today, the mid-price is 3.8 pence — that’s a significant fall in a few short weeks.
So What Has Happened?
In my previous article, I wrote: “I think that it is clear that the bondholders have the upper hand here and are in control. Any equity holders will be heavily diluted at best.”
This sentence related to my belief that the bondholders were now running the show and that existing shareholders would be left high and dry with their holding heavily diluted. I didn’t realise it at the time but the proposals, together with the 2015 outlook, doesn’t look good to me.
Perhaps it was an appropriate day to release bad news, but on the morning of Friday 13th March, Afren announced the proposals for its interim funding and refinancing structure, together with an operational update. There were several items in the update that worried me.
In addition to the recapitalisation, there were several ‘additional disclosures’ relating to cash outflows for various items relating to recapitalisation costs, payments to partners, deferred acquisition costs and the termination of contracts. In addition, there have also been claims received relating to breaches of contracts with certain partners. All of these outflows total in excess of US$300 million.
What Will Happen?
In effect, between now and June, the company will convert some of its debt into equity, agree new debt, bearing different different levels of interest payments and allow existing and new shareholders to take part in a rights issue, which is not underwritten. The result of which leaves anyone currently holding the shares at risk of serious dilution. Indeed, the update stated:
“Following completion of the Recapitalisation and assuming that the Open Offer is subscribed in full by existing shareholders only, existing shareholders will hold up to approximately 11% of the fully diluted share capital of the Company (assuming the Open Offer is made at a 40% discount to the theoretical ex-rights price of the ordinary shares).”
To me, it seems that the bondholders have the whip hand and current shareholders have little choice but to vote in favour or face a total wipeout.
Where Do We Go From Here?
In essence, Afren has avoided insolvency by doing a deal with its creditors (the bondholders), the result of which will give the bondholders the overwhelming majority of equity in the refinanced company. In addition, it still has a mountain of debt. For now, the immediate cash crisis has been dealt with. Shareholders have no choice but to approve the deal, in practice. Should they refuse, they will be left with nothing.
Personally, I have no idea at what price the swap will take place. The fall in the share price, however, gives a good indication that it will likely be south of where we are currently. Personally, I’d be inclined to exit now given the numerous risks going forward. Indeed, I suspect the company may need to call on shareholders for more cash going forward, should the oil price remain at these levels.