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Avanti debt for equity swap - a near total wipe-out for shareholders

By Tom Winnifrith | Wednesday 13 December 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.

Avanti Communications (AVN) the drowning in debt satellite operator, has today admitted that if it does not restructure its borrowings it would be unable to service them. Hence there is a shareholder near wipe-out debt for equity swap planned.

The deal is that owners of the $557 million of 12%/17.5% Senior Secured Notes due 2023 will swap those notes for 2 billion new shares in Avanti giving them 92.5% of the enlarged equity.

In addition Avanti will amends certain terms of the 10%/15% Senior Secured Notes due 2021, notably to extend the final maturity date of the 2021 Notes from 2021 to 2022, to permit the issue of up to $30 million of additional 2021 Notes, tweak certain covenant tests and change the interest rate payable on the 2021 Notes for all remaining interest periods commencing 1 October 2017 from 10% cash interest and 15% payment in kind (PIK) interest to 9% cash interest and 9% PIK interest.

Clearly this means massive cost savings in terms of interest. But in the last results released ( 6 months to 31 December 2016) Avanti reported a negative EBITDA and burned $117 million of cash excluding interest! It will still have $100 million of debt post this deal from the 2021 bonds and potentially another $30 million on top of that although some of that additional sum (needed to keep the lights on) may be raised in equity.

The shares have bounced on a relief rally today to 7.5p mid. That values the equity as is at £11 million so is on a pro-forma basis valuing the company post D4E at c£150 million with up to $130 million of debt on top - call it an EV of £250 million.

Given the failure of Avanti to generate cash ( even before interest payments) and the averse macro headwinds on satellite rental rates, I cannot see tremendous value here for the longs. But Avanti does have assets and sales and maybe the jam so oft promised by disgraced ex CEO David "The Bombast" Williams might arrive. That is my way of saying it is probably not worth shorting but I would also, not be buying.

One to watch from the sidelines.

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