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Igas – more details on proposed refinancing, but has the company got enough bondholder support?

By Nigel Somerville, the Deputy Sheriff of AIM | Friday 10 March 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.

Having (quite correctly) been an out-and-out bear of AIM-listed and overindebted Igas Energy (IGAS) ever since we exposed the dealings of former trougher-in-chief Andrew “Piggy” Austin (before he was shown to the edge of the plank) the potential demise of the company has been on the radar. Here are ShareProphets we have flagged up the eventual destination of massive dilution for shareholders or just a round of toast and the company duly served up proposals for a refinancing at 4.5p. I’m still not completely convinced the board will pull off this deal but despite the dilution the terms proposed look to be a remarkable achievement by the new board – IF it can get it over the line.

This morning more details of the proposed deal were announced. There is to be an open offer to shareholders at 4.5p to raise up to about $5 million, a placing at 4.5p to pull in up to another $30 million, a subscription by Kerogen at 4.5p to bring in $35 million and the board is proposing to pony up a further $0.9 million. That should see the company pull in up to about $71 million of new money.

And then there are those pesky bondholders (both secured and unsecured) whom are to be offered terms involving a combination of debt-for-equity, cash and new longer maturity paper.

For the unsecured paper the offer is a straightforward debt-for-equity swap with new shares issued at 4.5p in return for the bonds at 62.5% of par value. In other words the unsecured bonds get a haircut of 37.5%. Given that those bonds have been sitting at just 23.5c in the $ this looks like quite an escape on offer. Indeed, with the shares last seen sitting at about 6p the haircut on offer could be wiped out if those unsecured bondholders are able to sell out their 4.5p shares at a small premium to that current 6p. So they have the prospect of getting their cash back – and have had the benefit of 10% interest a year since issue.

It seems a little odd, then, that Igas has announced that it has procured the support of just 40% of unsecured holders, but it sounds as though the company hasn’t got very far down the list of holders yet, so perhaps there is rather greater support waiting in the wings.

Meanwhile the secured bondholders have a more complex package to consider. There is to be a partial debt-for-equity swap whereby they get new shares at 4.5p in exchange for secured bonds at their par value – ie no haircut – and a cash offer (again, at par so no haircut) for a further tranche of the paper, with the remainder of the secured stock exchanged for new paper due June 2021 with reduced interest payments of 8% a year.

The company says that the package will reduce net debt from approximately $120 million to just $20 million, and it looks to me as though the cash coffers will be substantially replenished in the process.

As far as shareholders are concerned, if it all goes through then the company will survive and they no longer will face the possibility of a wipe-out. Indeed, given the predicament of the company before this proposed deal was announced, the refinancing price at 4.5p per share looks to be quite an achievement by the board. One could quite easily have seen a deal struck at 1p. There will be those smarting from the heady days of well over £1 a share, however.

Meanwhile the secured stock looks to do very well, with some bond redeemed at par, some redeemed as part of a debt-for-equity at par with new confetti issued at 4.5p as against the current 6p in the market so they could make a useful gain on that, and the remainder of the paper still bringing in 8% a year on extended terms.

As for the unsecured, they may well breathe a bit of a sigh of relief too as they, like the secured stock, get discounted new equity but in exchange for a 37.5% haircut on the par value of the bonds.

What’s not to like?

All of the above seems to be co-dependent on shareholder approvals, secured and unsecured bondholder approvals and, of course, final agreements being reached with Kerogen. If one piece of the jigsaw fails to fit then the whole thing could just come crashing down. With covenant defaults queueing up, there may then be no time to re-cast a rescue.

So what could go wrong?

The shareholders will surely agree the terms, for it seems to me to be suicide to vote otherwise since bond covenant defaults could see the secured bonds snaffle all the assets for themselves.

The company says that all of the bondholders it has spoken to have indicated support for the proposals. But one would imagine that by now the company has a pretty good idea of which bondholders would be onside (and therefore worth speaking to) and which are not.

We are told that required bondholder votes need 2/3 support from votes cast. So reporting just 40% indicative support from the unsecured debt holders might be a bit of a worry. I would, however, have thought that the terms being offered to the unsecured debt are good enough to get the required support, since the alternative could – as with the equity – mean a wipe-out.

It is the secured debt which I wonder about.

This may just be the words of an uber-cynic, but there are holes in what the company has told us this morning.

We know that KKR-backed Trans European holds a large tranche of the secured bonds and we were previously told that it was proposing that the company sell its producing assets to solve its debt problems. Has it got enough of the secured bonds to block the deal?

We are told that the company has received indicative support from approximately two thirds of the secured bondholders (my emphasis). Is that indicative approximate support just over or just under the two thirds mark? If it is just under, is that because KKR-backed Trans European has not been formally canvassed and it has enough of a holding to block the deal?

Does that two thirds include the secured bonds held in treasury? The reason for asking is that we are later told that the company won’t be voting those treasury bonds. One would assume not, but this is AIM….

It seems to me that the support or otherwise of Trans European is key here, and shareholders might want to tread carefully unless and until the company can confirm indicative support which would see the proposals passed by bondholders – both secured and unsecured.

If the board can get the deal over the line I will doff my cap as I think it would be a mightily impressive achievement – especially in the face of the litany of oil disasters of late.

But my suspicion is that bondholder support is very much in the balance and could go either way.

As such, as per my previous piece, I would not be short of the stock – but I certainly would not be buying at least until clarity is achieved over secured bondholder support.

A miscalculation by the board could still see a shareholder wipe-out, and that fudge in the wording of this morning’s RNS suggests that nothing is certain just yet.

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