Afren shareholders to face wipe out?
by Was Shakoor
I am a bondholder in Afren (AFR), having bought in size in recent days as the company has revealed its cash flow problems. I haven’t bought very well, I’m afraid, paying far too much early last week at 41c, although I did add significantly at 34c, without paying accrued interest into the bargain. That means that, in the unlikely event that the coupon due on 31st January 2015 is paid within the 30 day “grace period”, I’ll have bought at the equivalent of about 28c.
The bonds have moved up a bit this morning, but not much, and can now be bought for about 37c, again without paying any accrued interest, which is worth nearly 6c in itself.
Bond holders are smart and they have to be.
These bonds can only be bought in minimum clips of $200,000 and so they are only generally traded by institutions. At the current price, bondholders clearly don’t feel they will get their money back or their coupons paid so they are selling to guys like me, who are willing to hold in the hope of getting upside through a debt/equity swap.
This brings me to the shares, which are up 80% on the day as I speak. This is due to the entirely predictable RNS on Friday, which stated that Afren had obtained a waiver on its $50 million amortisation payment that was due but the waiver is only until 27th February 2015. This is to enable the company to negotiate a deal with Seplat, which is currently the only bidder in town. I predicted this last week on Twitter (@WShak1), as I warned anyone reading that it’d be best to go short after this announcement was made, as it probably would be, and the shares subsequently spiked higher on irrational sentiment.
The spike has arrived, but the buyers today are uninformed.
There is no reason at all for bondholders like me to accept that shareholders will be due anything after re-structuring debt – why would we? The coupon payment due on 31st January 2015 can only be deferred for 30 days, which I note is after the extension supplied by those due their amortisation payment of $50 million. Unless that gets paid first, I’m not getting paid. If I don’t get paid, the company is in default and shareholders no longer have a say on anything as we debt holders will carve up what’s left between us in administration. At that point, the directors are duty bound to protect creditor’s positions and they effectively work for us.
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That process starts on 27th February 2015, unless someone supplies Afren with a lot of cash very quickly. Now, it’s possible that Seplat will make an offer for the company but, if it were going to attribute any value to the shares at all, why would the debt be trading at 37c? What is the incentive to give shareholders any value at all, when all of the assets can be bought in less than a month by coming to a deal with bondholders? If bondholders are willing to fund any shortfall in cash until the oil price recovers, we might well tell Seplat to piss off and keep all of the assets for ourselves via a debt/equity swap but it means we have to put up some fresh capital, which I can assure you won’t be to the benefit of shareholders.
I’ll be delighted if Seplat makes an offer for Afren which offers some value for shareholders as it’ll mean that I make three times my money on my bonds but I’m a realist. The price I’m able to buy bonds at suggests to me that Seplat want me to take a haircut in order for them to supply fresh funds, and that leaves shareholders holding worthless bits of paper.
I had shorted Afren at 20p last week as a hedge against my bonds but foolishly closed at 9p.
Today, I’ve opened a far larger short position at prices ranging from 7.5p to 9.7p as it’s clear to me that shareholders will face wipe-out very shortly. This is primarily to act as a hedge against my bond position but, even if I didn’t hold a position there, I’d be going short now. I’m sorry if this isn’t what you hoped to hear if you’ve bought the shares, but please don’t shoot the messenger.
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