By Tom Winnifrith, The Sheriff of AIM | Wednesday 22 February 2017
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.
I have noted before that some death spirals are in fact a decent way for companies to raise cash, cheaper and less share price destructive than a bucket shop placing. But the Bracknor deal announced today by Advanced Oncotherapy (AVO), which had promised non dilutive funding but clearly does not mean a word it says, as I explained here earlier, is a total rotter. It will crater the share price as Bracknor makes a killing. Let me explain why.
Advanced has the right to draw down a minimum of £13 million in ten equal monthly tranches. It can draw down up to £26 million but won't as by the time it has secured £13 million its share price will have been so obliterated that it will be hard to go on. So the £26 million figure is a red herring. Its main purpose is to double the amount of shares issued as a 3% arrangement fee. Bracknor will now get £780,000 of shares before the party starts. That is clearly a slight of hand.
And it gets another 3% of the nominal value of each tranche of loan notes as it converts ( call that £39,000) in cash or shares. When each £1.3 million nominal value loan note is drawn down by Advanced, Bracknor in fact only pays over 95% of its nominal value in cash - £1.235 million.
Loan notes are convertible at a price that shall be equal to the lowest daily VWAP (Volume Weighted Average Price) during the fifteen trading days preceding issuance by Bracknor of a notice to convert (Conversion Notice).
So let us assume that Advanced draws down tranche 1 and received a net £1.235 million in cash from Bracknor. At that point Bracknor is sitting on shares worth £780,000 which it starts to sell over a period of, shall we say, 15 days. As soon as that stock is dumped plus another £1.3 million worth of shares, it elects to convert loan note 1. Given the volumes in Advanced such a dump of stock will see the share price decline meaningfully and a careless last dump to crash the stock as Bracknor sells out the last of its £2.1 million of stock will see it converting with a VWAP at way less than it has sold the original £780,000 of shares or the bulk of the £1.3 million of shares that it now receives as part of that conversion
So it is likely to book a gain of 10-15% on those shares ( call that £300,000) which means that when it then converts that first loan note into shares ( which it can then use to settle the stock it forward sold) it has already banked the £780,000 arrangement fee plus £39,000 conversion fee plus a £300,000 trading profit + the 5% discount to nominal = £1,185,000 but has had to shell out £1.235 million in cash. So its net capital exposure next time a loan note is drawn down is just £50,000 as it has already made a total profit from this deal of £1.185 million.
Bracknor will not have to wait long until Advanced draws down its second loan note (given its cash burn it really will not be long). At that point it starts to forward sell £1.3 million of shares aggressively. But the time the selling crescendo peaks and the last stock is dumped the shares will have lost at least another 10-15% so meaning that Bracknor can then force conversion so getting it another gain of £130,000 - £200,000 on its trading book plus a conversion bonus in cash of £39,000 plus the 5% discount to par.
At this point Bracknor has made a total cash gain from this deal of £1.42 million to £1.49 million. So when Advanced draws down tranche three and gets a net £1.235 million that cash all comes from profits already made by Bracknor on the deal. Better still it can now start forward selling another £1.3 million of shares once again. Of course the share price will crater once more but what does Bracknor care. Keep driving the VWAP lower and lower during the process and its profits from the forward selling at the start of the process get bigger and bigger.
Oh and Bracknor also gets warrants. These are exrcisable at a premium to VWAP but that is just a smokescreen. The shares will head only one way (down) and Bracknor will make a killing without excerising any of them. The warrants are part of a pretence that the shares might rise,
Bracknor cannot fail to make money from this deal even as the shares tank. Huge amounts. But the other certainty is that the company that promised non dilutive funding will see its share price diluted to oblivion - its share price will crash. This is an utterly terrible death spiral for Advanced and that is why the shares, now 60.5p are a 100% racing cert to collapse.
Keep selling, Bracknor will be.
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