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By Tom Winnifrith, The Sheriff of AIM | Saturday 12 August 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.
There comes a moment in every Agatha Christie novel when Poirot scolds himself for being so blind to the obvious. I just wonder if for myself and Telit (TCM) that moment was late last night. That the CEO was a fraudster fugitive from justice when he floated Telit is one matter, the crminal investigations in Italy are another but the heart of the issue is the dire financials & possible behaviour of the Norfolk variety. In case you missed it, I refer you to note 5.2 of the most recent interims published August 7.
But first, I rewind to October 2016 when Telit announced that it had a brand new $110 million banking faclity with HSBC. Natch there were covenants but Telit foresaw no problems. On March 13 this year when publishing calendar 2016 numbers there were also no problems. Oozi oozed:
"The directors consider the uncertainty over (a) the level of demand for the Group's products which may also affect the possibility of utilizing some of these facilities since they depend upon the level of sales in specific markets and in some instances to specific customers; (b) the exchange rate between Euro and US dollars and thus the consequence for the cost of the Group's raw materials; (c) compliance with the Financial Covenants, as a condition to the continued availability of the Credit Facilities in the foreseeable future; (d) the continuity of supply from key suppliers; and (e) the forecasts in current market environments.
The Group's forecasts and projections, taking into account the Group's history of successfully renewing its facilities in the past; the group's expected continued compliance with the Financial Covenants and the fact that there are actions available to the Group to address these risks, show that the Group should be able to operate within the level of its current facilities."
All well and good then.
Wind forward to August 2017 and publication of half calendar year numbers and there, lurking in the short term liabilities, was a long term loan of $19 million from HSBC. WTF! Has this just been put in the wrong place? No it has not. I refer you to Note 5.2 and the underline is mine
Representing long term loans from HSBC in the amount of $19.1 million with interest at a rate of Libor plus 2.7% and is being repaid in 7 half year instalments that will commence in October 2018 and long term loans from banks in Italy- (i) for $5.3 million with interest at a rate of Euribor 3 months plus 3.25% and is being repaid in 20 quarterly instalments that commenced in September 2013, and (ii) $2.7 million with an interest rate of Euribor 6 months plus + 5.5% and is repayable in 6 semi-annual instalments that will commence in December 2020. An amount of $19.1 million was classified in the balance sheet as short term debt, as a result of the Group not meeting one of the covenants imposed on it by one of its banks, at 30 June 2017. As at the date of this report, the relevant bank has waived the covenant and the Group is no longer in breach. These covenants are tested on a quarterly basis.
Hang on Henry, I mean Uzi, I mean Oozi. Did you say covenant breach? Yes he did. Breach a covenant ( a test of financial performance) on a long term loan and it becomes repayable on demand. It is very serious indeed. Why on earth did Telit not fess up to the covenant breach on June 30th as it is clearly a material financial piece of information? Ok, it has got HSBC to waive it, but that is not the point, investors should have been informed.
But it could be far worse than just a breach of AIM Rules on disclosure.
Telit says that the bank tests the covenants on a quarterly basis so in 2017 will have tested on March 31 and on June 30. But any company with a big loan outstanding will be monitoring its compliance with covenants at least weekly and, if it is sailing close to the wind, on a daily basis. So, since Telit did not bother telling us about the June 30 breach the obvious question is did it breach the covenant on March 31 as well?
If it did and then failed to mention it in the April 25 (bullish) trading statement ahead of the May 5 placing at 340p[ ( and may 25 CEO £24 million share dump at 340p) then that is a clear case of securities fraud. I hope that new Nomad FinnCap has made sure that there was no March 31 breach because if there was it needs to a) resign and b) call in the SFO ASAP.
But let us hope that there was no March 31 test fail. That does not end this particular reading of Evil Under The Sun. The question Finn Cap needs to establish ASAP is when did Telit become aware that it was likely to go into breach? I put it to you that it would be well before it did go into breach on June 30.
Now if it was before either of the upbeat trading statement (March 25) and the placing May 5 that is wholesale corporate securities fraud. If however it was after May 5 but before May 24 then Telit PLC is off the hook but Uzi Katz, oops sorry Oozi Cats, is well and truly in the merde.
I shall be passing this article on to someone with honour within FinnCap in the hope that we get full answers to this ASAP. That a company can breach banking covenants within eight months of taking out a new loan is, on its own a mega red flag, but what we now need to know and soon is when that breach happened first and when Telit knew it was going to happen.
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