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Eqtec – dodgy Bercheva death spiral ended, now welcome to the world of structured finance!

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 5 July 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.

AIM-listed Eqtec (EQT) has announced a funding package this morning. The good news is that short-seller Bercheva - run by a convicted crook -  has been given the heave-ho from the death spiral facility, but the replacing loan deal seems to offer great terms to the lender and the accompanying placing is at a 35% discount. So what’s the upside for shareholders?

The loan, up to $3.2 million, carries an interest rate of 10%. But then we are told that the first tranche, of $1.6 million is not worth $1.6 million at all (to Eqtec). Indeed we are given two different figures for that! Is it:

a)      The first instalment of the loan facility (net amount of approximately US$1.48 million)


b)      The Company will receive net approximately US$1.3 million after expenses from the first instalment.

So which is it, or is Nomad Northland hiding a monstrous fee of $180,000 (to itself?) in that?

By my maths, even at the higher number, that means an immediate gain for the lenders of $120,000 on a loan of $1.48 million – 8.1%. Add on 10% interest a year (on $1.6 million) and we are up to $1.76 million for $1.48 million of funding. That is effectively a cost of 18.9%.

But since it seems that Eqtec only gets $1.3 million of cash from the first $1.6 million tranche of loan finance and it is paying $0.46 million after a year, the cost to Eqtec is around 35.5%. Who needs to be a death spiral financier when you can make cash loans like that!

The happy news is that there is no mention of the loan facility being convertible so at least it is not a death spiral. But it does mean that the money needs to be paid back over the coming 12 months – and here is the kicker which might perhaps change your view on the whole transaction.

Attached to the package come a stack of warrants. Some are priced at 0.75p, others will see the exercise price determined by the prevailing share price. The idea here is that the loan can be paid off from the exercise of warrants.

My understanding is that the deal has been constructed to see the company financed for a year (hence the placing) without returning to the market – and board changes are afoot, alongside the formulation and approval of a “growth optimisation plan”.

What this all adds up to is that the lenders have a real interest in the company succeeding and its share price heading north - and that is very good news for shareholders who stand to benefit if the lenders benefit. It makes quite a refreshing change from the sort of death spiral we have seen whereby the lender can force the shares lower and then book a wall of equity for itself, thus diluting shareholders to oblivion.

It does mean that the lenders are taking a risk: if it all goes pear-shaped then there will be no warrants (in the money) to exercise and there would then be heavy questions as to whether they will get paid back at all. That perhaps explains the cost of the finance sitting at some 35.5% - bang in line with the discount on the attached placing. Effectively, whilst the loan is a loan, there is an equity-type return if all goes well – for everyone. I wish that other AIM companies would follow this model where death spiral funding seems the only option. It shows some considerable imagination and everyone knows where they stand.

So whilst my initial reaction was not entirely favourable, I think on balance this deal really makes sense for Eqtec – especially when the alternative was a death finance deal with someone who was happy to sell short and settle that from conversion!

What shareholders will hope for now is that the boardroom really delivers over the next twelve months.

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