By Tom Winnifrith | Monday 17 October 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
There is a philosophical game called the fishing village. And today we saw this played out in reality by Avanti Communications (AVN) as it struggles to avoid insolvency.
In the fishing village the fishermen are told that in order to stop stocks being wiped out all must cut their catch by 50%. If all do that then all will be able to eak out a meagre existence. If there is no quota cut the fish are wiped out and everyone starves. So collectively they are all best placed to agree to a quota cut.
But if one fisherman can cheat and land a full catch he will be minted. As long as no-one else knows then fish stocks will be preserved and he is a big winner. But if all fishermen start cheating then all are wiped out. What would you do as a fisherman?
So on 16 September Avanti told its bondholders that it would like to make interest payments due on 1st October a bit later and not by paying cash but by handing out even more debt. If bondholders did not agree then Avanti would be in a dire cash position within weeks and bond holders might risk immediate haircuts which might threaten year end bonuses.
Naturally bond holders did not want that to happen but equally they did not want to take on more debt which Avanti can't hope to service, let alone repay. Today we learned that 89.5% of bondholders, by value, had agreed to be good fishermen and take more bonds. 10.5% of bondholders, however, relied on the others being good fishermen and opted to take cash instead. They are the smart ones.
The net effect is that the cash cost of this interest payment has been slashed from $32.25 million to $3.39 million, for a total cash saving of approximately $28.00 million, net of the Consent Payment. Aha what is that? Er it is a fee equating to 2% interest on the loan notes who did not take cash so that would be another $5.6 million. So the cash saving is actually just $22.4 million but the cost is that there is an additional $28 million
of debt in issue.
This deal also means that Avanti now has until New Year''s eve to publish its accounts for the year to June 30th 2016 and its Q1 numbers. On the basis that it has not run out of cash by then, which is far from a given, those reports are unlikely to make pleasant reading for shareholders.
The shares are off a tad at 24.5p - 25p but in essence the equity is truly worthless, this company is "owned" by its bondholders. The shares remain a clear sell with a very plausible case for a target price of 0p.
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