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By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 14 November 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.
This morning AIM-listed Solo Oil plc (SOLO) announced a $5 million death spiral facility with institutional investors and arranged by Riverfort. It is a convertible facility with 8% interest, and an option to repay in cash (with a small penalty). Beaufort Securities (house broker) issued a note this morning. It is utter horseshit – shame on you.
As per this morning’s RNS, we are told:
Each tranche ("Advance") will have a 12 month term with and initial 3 month repayment holiday and will bear an 8 percent per annum interest rate. During the term of the Agreement the Company may elect to make repayments of principal and accrued interest in shares or in cash. Shares used to pay principal and interest will be issued at the lower of (a) 145% of the closing share price of the Company on the date of the drawdown ("Fixed Conversion Price"), or (b) 95% of the lowest daily VWAP over the 10 trading days immediately prior to a notice of conversion. Should the Company elect to make a repayment of principal and interest in cash, a redemption fee of 5% is also payable.
Right, so it is a death spiral. The loan can be converted at 145% of the share price at date of drawdown (red herring) or 95% of the lowest daily volume weighted average price over the ten days prior to notice of conversion.
There are also warrants over 15% of each tranche at the Fixed Conversion Price of each tranche with a three year term – ie at 145% of the share price at date of drawdown – and the company has already drawn $1.5 million.
Now let us read what Beaufort has to say on the matter:
Solo has entered into a $5m convertible loan facility of which it has drawn the first $1.5m….
So far, so good…
The terms appear very reasonable and include an 8% coupon (payable in shares)…
It is still a death spiral though…
and a conversion price 45% above the share price - based on Solo's current 5p share price we assume the first $1.5m would convert at 7.25p….
No! That is an option only – what about the 95% of VWAP option?
Or (if the share price goes up sufficiently) a 5% discount to the price before the notice of conversion.…
So where is the “if the share price goes up sufficiently” condition in the RNS? It is not there and thus the note from Beaufort this morning is utter horseshit, misrepresentative and just plain wrong. This is a death spiral and in the absence of the shares roofing it for some reason, it will be the 95% of VWAP we shall see.
The concern with death spirals is that the conversion shares can be forward sold before the conversion has been RNS-ed, and thus the lender cashes in on the 5% discount (or better, because the shares may have improved a tad). And, of course, a long standing and persistent seller will have a certain gravitational effect on the share price, all other things being equal.
As such it is hard to work out Beaufort’s Speculative Buy rating – other than it is house broker and does not want to lose its job.
We are told that the RiverFort Investors covenant that they and their affiliates and insiders will hold no net short position in the Company but that isn’t quite the same as we won’t forward-sell the conversion stock is it? That said, I have seen far worse death spirals than this one.
But it is a death spiral so Solo has just put itself on my bargepole list and Beaufort really has blotted its copy book for this morning’s horseshit.
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