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Interserve – rescue bailout announced, sort of

By Nigel Somerville | Thursday 22 March 2018

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.

Shares in fully listed Interserve (IRV) have shot up on the almost after-hours announcement last night of some scant details of a rescue refinancing. The good news is that someone is putting up the bunce (subject to credit approvals), but at what cost?

We are told:

The additional facilities comprise cash facilities of £196.6m plus bonding facilities of up to £95m. These new facilities will mature in September 2021.  Existing debt and private placement loan notes will be amended to be co-terminous with the new facilities. Borrowings made under the incremental short-term facilities agreed in December 2017 and which now expire on 30 April 2018 (under which the Company has drawn £45m of the revolving credit facility) will be repaid out of the new facilities, once these are in place. In total, this means that the company will have cash borrowing facilities of £834m immediately following the refinancing completion and through to September 2021, subject to certain step-downs in the new facilities over the period.

Er, so that’s a debt facility of £834 million all told – a lot of money! – but note the subject to certain step-downs…over the period. So an unquantified amount has to be repaid before September 2021.

We are not (yet) told of the pricing, although we are told the total interest expense for 2018 will be approximately £56 million. That works out, on the face of it, at a bargain rate of 6.7% but given that the additional borrowing is for £196.6 million and bonding facilities of up to £95 million and we are already at the end of March and the cash hasn’t come in yet, I’d take that 6.7% figure with a pinch of salt. And does the interest rate change next year, is it inflation-linked or tied to interest rates (which we expect will rise)? Again, we are not told.

And now for the cost…

Additionally, as part of the proposed deal terms, the company anticipates that it will issue warrants to the providers of the new cash and bonding facilities to buy shares at 10 pence per share (the nominal price of each share). If exercised, this would provide the warrant holders with an interest of up to 20% of the post-issue share capital.

Right, so warrants go to the lenders worth 20% of the enlarged capital, exercisable at just 10p. That immediately means they are getting 25% of the company as it is now for peanuts.

As for:

We have, as part of this process, engaged extensively with the Trustee of the Interserve section of the Interserve Pension Scheme with respect to the new refinanced structure and their security protection. This has been agreed with them, subject to the finalisation of the required documentation.

Does that mean that Interserve is on the hook there in a greater way than before? What is the cost of that?

Shares in Interserve shot out of the traps this morning, peaking at a lofty 115.5p. They are now back to 98p – presumably as the significant dilution has been considered.

But this all still means that Interserve will be saddled with £834 million of debt (up from FY17 expected debt of £513 million) which looks to have to be paid off in stages before September 2021. That is an increase of more than half of a figure which was already too high. That £834 million is also about half of the revenue reported at the half-way point of 2017, and almost six times the market capitalisation. It rather looks as though the company is still going to be run for the lenders, then!

As for the warrants for 25% of the company (as it is now) at just 10p, what do you think the lenders will do with them, with the shares at around £1 a pop? Lenders don’t want shares….

I wish Deborah White the very best of luck – she seems to have inherited one almighty mess on taking up the role of CEO – but whilst the first big tick seems to have been (almost) achieved, there is a very long way to go. Not one for me, I’m afraid! I still reckon it is a sell.

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