Disclosure: The author has a short position in one or more of the shares mentioned. 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.
Having seen Cloudtag (CTAG) demonstrate one of the golden rules of share trading here is another: run for the hills when a company starts messing with its creditors. Step forward Avanti Communications (AVN).
Covenant breaches (IGas, Premier Oil) are bad enough but when you start missing payments it almost always signals the end of the road for shareholders. Afren, Petroceltic, Gulf Keystone and Excite Energy are all examples which I have highlighted this year.
Avanti did not miss its most recent interest payment but it managed to persuade bond holders to accept even more bonds that can never be repaid in lieu of cash. Clearly they were told "this is a crap deal but take it or we will go bust within days." Given that ultimatum it was not a hard call.
But the bottom line is that Avanti may pay its coupon in its own worthless paper but it is operating in an environment where prices for satellite capacity are rock bottom. It is thus burning cash as most other suppliers and staff want to be paid in real money.
At the start of September cash was $56 million but that was only because Avanti managed to postpone some (but far from all) of its capex from Q3 until shortly after Christmas. On that basis it is hard to see cash, as things stands, being that far above "trap door" levels and it is certainly insufficient to pay all its bills - including that deferred capex - much beyond Christmas.
There has been no news on a refinancing. That is no surprise. Given debt levels and cashburn the equity may trade at 24p but is worthless. And the answer to debt cannot be more debt.
Avanti's days are numbered and it remains a compelling short. Lucian is indeed short, Tom not.
This article first appeared in a shorter version on the Nifty Fifty website which Lucian Miers runs with Tom Winnifrith & Steve Moore. To access the website ahead of the next share tips (TWO OUT THIS FRIDAY - 18 Nov) from Tom & Steve and ahead of a new shorting idea from Lucian GO HERE
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