Debt-for-Equity / Restructuring - Value Question
Was looking at recent restructuring situation and am trying to get my head around whether you can imply a current valuation for a business pre-rights issue, in which part of the rights issue was done via a debt-for-equity swap. In this case, the total debt stack of the business consists of a $700m Senior Loan due in 2018 and a $300m Unsecured Bond due in Mar 2015.
The proposed "par" restructuring / refinancing proposal is as follows:
+ $200m rights issue (being subscribed to by existing bondholders and done at significant discount (i.e. 60% to current market value, which is lets say $0.05 share price (current NOSH is 200m)). The rights issue is envisioned to be completed with $50m cash (50% underwritten by existing bondholders) and a $150m unsecured bond debt-for-equity swap.
+ $100m bond issue due in 2020 paying 10% cash coupon
As part of the restructuring bondholders will therefore receive:
(1) $50m cash today (i.e. they essentially paid $25m cash for a $50m equity stake - unless I am thinking about this wrong)
(2) $100m new bond issue (i.e. partial refi)
(3) A large chunk of the equity in the business, which I calculated to be c.80%.
Now my question is that by getting 80% of the equity of the business post rights issue is there anyway we can calculate what this implies about where the value breaks today exactly. Unless I am overthinking this its not quite clear to me. If the Unsecured converted $150m of their debt (i.e. $300m - $50m cash - $100m bond) into lets say 60-70% of the equity of the business this seems to imply the total value of the business breaks in the Unsecured Bonds (i.e. but is there a definitive answer to where that value would be? $800m-$900m level?)
Obviously the 0.05 rights issue price is driving the conversion ratio, but is this more of a "the unsecured would go along with the deal if they got 80% of the post restructuring equity" or more of the "Value breaks at X and therefore the rights issue price is $0.05"?
Any help / corrections on this would be greatly appreciated. I feel like the answer is straightforward, so maybe I am overthinking this.
Thanks.
You're explanation isn't exactly 100% clear, but let me take a stab at what I think you're saying. First off, let's clarify that the bondholders won't get cash as part of the rights offering.
So we've established our pre-restructuring cap structure looks as follows: **$700m senior loan **$300m bond **de minimis equity value
Terms of restructuring as follows: **loan stays in place **bondholders receive $150m in equity value (translates to x% of total equity) **bondholders also receive right to contribute $25m in new equity (as you said the other $25m will be new outside capital) **point of the two bullets above is that there is going to be $200m of "equity capital", but only $50m is new cash coming in
So our post-restructuring cap structure looks as follows: **$700m senior loan **$150m bond (as per terms of exchange) **$200m of equity for 80% of business (I'm going to go with your 80% assumption here, which may or may not be accurate... I don't have enough information to determine that)
So what we end up with is $850m of total debt and an implied equity value of $250m ($200m equity "contribution" for 80% of business implies $250m of equity value, $200/80%). That translates to a $1.1 billion TEV ($850 total debt + $250 implied equity value).
Obvi the share value at which the $200m of equity is assumed to come in at totally affects the valuation, i.e. at $0.02/share they may own 95% of the biz, at $0.40/share they may own 35% implying a much higher TEV that investors may not be willing to transact at. Every bondholder will have a different opinion on valuation and the ultimate "implied value" will be a function of thousands of hours of work and negotiations. But the construct above is generally how one should think about the implied TEV.
Thanks really appreciate and you're right reading what I wrote again is a bit confusing.
To clarify the post restructuring balance sheet would be: **$700m senior loan **$100m bond
The tricky thing about how this rights issue as is described in the latest proposal (and it is really confusing) is the existing bondholders will get $50m cash Day 1 from the "cash portion" (i.e. portion of rights issue that is not the debt-for-equity swap) of rights issue, which they partially subscribed to themselves (i.e they are paying cash back to themselves and receiving cash from other major shareholders who subscribed - recycling their own cash back to themselves as a way to get an equity stake via the rights issue).
According to the proposal this is what the $300m unsecured bondholders are receiving Day 1 from the proposal: (1) $50m cash (from the "cash" portion of the right issue) (2) $100m bond (3) X% Equity
I calculated X% equity stake as follows: Current NOSH - N Current Share Price - x Current Market Value - Nx
Rights Issue Size - $200m Rights Offering - $0.05 Implied NOSH created - 4,000m
Post Rights Issue NOSH = N + 4,000 Post Rights Issue equity value = Nx + $200m Implied Post Rights Issue Share Price = (Nx + $200m) / (N + 4,000)
Implied X% equity by those who participated in rights offering = 4,000 / (N+4,000)
Does this make a bit more sense to what I previously wrote. Please correct if I am getting something wrong here.
btw this is a proposal on a Russian mining company with London-listed bonds as an fyi.
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