If you’re an Afren (LSE: AFR) shareholder, you’re perhaps not at your happiest right now, and that would be entirely understandable.
The oil price collapse hurt many explorers, but those reliant on debt funding felt it the most. Africa-based Afren was shouldering almost $1.2bn in net debt at the end of its first quarter in March, and that’s a lot for a company with a market capitalisation of under £30m.
Default
Afren has also been technically defaulting on interest payments, with the latest announced on 10 June, although that has been with the tacit agreement of the firm’s lenders who are in the process of implementing a financial recovery package — the company would have been bust by now had lenders not been amenable to such a thing.
In many cases a successful recapitalisation package would have a company’s owners whooping for joy. But the Afren plan is likely to leave current shareholders with an almost total loss of their company — at 2.5p per share today, they’re already facing a 98.5% loss since early 2014. If the intended recapitalisation is completed by the end of July as planned, shareholders would be squeezed out further with new financiers taking up to 89% of the equity.
A better way?
Is there any alternative? The Afren Shareholder Opposition Group (Asog) seems to think so, and is trying to put a stop to the bailout package at the company’s upcoming EGM by campaigning for a No vote against the proposed dilution of equity. Afren would need to achieve a 75% Yes vote to go ahead with the dilution, and Asog says its membership already extends to 10% of the firm’s ownership.
But should Asog swing the vote, would a rejection of the proposed terms really be in their best interest?
In March, when the Afren board published the preliminary details of the scheme, we were warned that “If shareholders do not approve the recapitalisation, it is expected that the amended economic terms of the new senior notes, and the amendment and reinstatement of the existing notes, together with the requirement to initiate a sale of the group’s business, will mean that existing shareholders would be unlikely to see any return on their current investment“.
Fire sale
Kicking out the deal that’s on the table would almost certainly end up with a sale of Afren’s assets, and the question is whether there would be anything left for shareholders after debts had been paid off. The below-par value of Afren’s bonds on the open market suggests a sale might not even raise enough to cover debts — and we’re certainly not in a sellers’ market now for oil assets, with the stuff only fetching around $65 a barrel.
I really want Afren’s shareholders to get as good a result as they can, but I fear the 11% of their company they’d be left with under the current plan is probably the best they can realistically hope for — but I do hope I’m wrong, and I wish them the best.