Petrofac Share Discussion Threads

[jaknife] 29/4/2024 22:20

kipper62,

"Having trouble getting my head round the short position. If the company delists/ceases trading/goes into adm'n. then the shares become worthless or maybe untradeable."

In such circumstances there comes a point in time when the prime brokers all agree that the shares are worthless, the share price is marked at zero and shorts gets paid out the maximum.

The normal for administration is that, within a month of administrators being appointed, the administrators will publish a "Statement of administrator's proposal". This will set out a summary of the position, the events leading up to the administration, what the administrator proposes to do, what sorts of recovery they anticipate, etc. Occasionally some prime brokers/spread bet providers will read this report and agree that it's hopeless and immediately mark the shares to zero. This is rare but it did happen with Cineworld, for example.

About seven months after the administrators are appointed the administrators will publish an "Administrator's progress report" which will provide significantly more detail. This will be prepared to a date that is six months from the date that the administrators were appointed. In about 50% of cases this report will contain a statement that shareholders are not expected to receive any distribution or enough information such that it's obvious that shareholders won't receive a distribution. This will normally then be enough for most prime brokers/spread bet firms to mark the positions to zero and hence shorts get paid out at that time.

After that the administrators publish a new "Administrator's progress report" every six months and the prime brokers/spread bet providers will need to read each six monthly report to judge the information in that report and make a decision as to whether they can safely settle shorts (and longs) at zero and have no risk that they might have to change that at a later date.

So, by way of example, here are the Companies House filings for 4D Pharma plc:



They appointed administrators on 24 June 2022 and, 22 months later, shorts still haven't been paid out in full. You can see all the various reports that have been filed but none of them make it clear enough for IG to mark the underlying shares at zero. And hence shorts are stuck paying 3% borrow fees, which isn't too big a burden but is annoying.

But note that buying back the shares just before administration would have meant paying about 17p and so what a short is waiting 22 months for is the last 17p per share. Personally, I think that it's worthwhile waiting.

Finally though, the issue with Petrofac that shorts have to be cognisant of is that the borrow cost is currently about 115% per annum and hence, if the shares are suspended for a long period, then any short profits could be completely lost. Eg 11 months of borrow would be 11 / 12 x 115% = 105.4% and a shorter would have paid more borrow fees than even the maximum profit that they might make!

Each and every short needs to weigh up the risk/reward and make up their own mind on whether they accept the risk!

JakNife

[tahmina1] 29/4/2024 21:35

kipper my thoughts too. But a different angle, how will they balance financing their shorts for a month against any additional gain that may accrue if the shares open after a month at an unknown price post restructure? risk attached to that. If i was short i would close tomorrow but Im unclear, too on the mechanics of it

[kipper62] 29/4/2024 21:32

Tried to get some feedback with this on another BB without success.....here's hoping for some sensible input here...........

Having trouble getting my head round the short position. If the company delists/ceases trading/goes into adm'n. then the shares become worthless or maybe untradeable. Then there is no loss to the shorters. If they really are the guys in the know that have massively shorted PFC and feel the end is nigh, surely they would have to massively buy before the bell tomorrow if they are to make any gain from their positions, if they had'nt already bought along the way, reducing their short for some profit. Head spinning with the logic. Come on you wizards, help de-fog my brain.

[investtofly] 29/4/2024 21:08

Where does this leave Asfari?

[tahmina1] 29/4/2024 19:31

Again I think the missing ingredient in this discussion is the possibility of a third party eg ADNOC deciding that it might be a good idea to have complete control of an important service provider and agree to put in a bid for all or part of the business. Also we dont know what assets may be sold to reduce the debt burden. I think what was really disappointing is the time its taken them to get to this stage, no progress in 6 months has probably made potential investors feel there is no interest. Also lack of progress on the Thai contract which appears to have been a total disaster commercially

Several ingredients at play. But I accept that as things stand outwith some real interest from a third party, Jaknife is right to say that the banks and bondholders are in a strong position

[tahmina1] 29/4/2024 19:31

Again I think the missing ingredient in this discussion is the possibility of a third party eg ADNOC deciding that it might be a good idea to have complete control of an important service provider and agree to put in a bid for all or part of the business. Also we dont know what assets may be sold to reduce the debt burden. I think what was really disappointing is the time its taken them to get to this stage, no progress in 6 months has probably made potential investors feel there is no interest. Also lack of progress on the Thai contract which appears to have been a total disaster commercially

Several ingredients at play. But I accept that as things stand outwith some real interest from a third party, Jaknife is right to say that the banks and bondholders are in a strong position

[terminator101] 29/4/2024 18:29

Market cap of £76 million for this debt ridden worthless car crash. It's got a lot further to fall. And can people please stop gerbil baiting. It's not fair.

[jaknife] 29/4/2024 17:57

dealy,

You haven't got a clue what you're talking about. Let me give you an example, Interserve:

Interserve goes into administration after rescue deal rejected


A particularly stroppy and aggressive US hedge was long of Interserve equity and pushed the banks/bondholders to the limit on negotiations. The banks/bondholders agreed to give shareholders £23m of value on a pre-money basis but the hedge fund pushed for more and voted down the deal, thinking that they were calling the lenders' bluff.

The result of the vote was announced via RNS at 12:33 on 15 March 2019:



[Click on "RNS" to find historic RNSs.]

90 minutes later the company was put into administration and by 6pm the entire business had been sold ...

"to a newly incorporated company to be controlled by the Group's lenders" [see the RNS timed at 17:56.]

Shareholders lost everything whilst the lenders ended up owning everything.

Because that's how a pre-pack administration works - the business is sold as a going concern! No contracts are cancelled, every project carries on as it was before, nothing material happens that affects the day to day operations. All that changes is the names of the shareholders and the financing structure for the business.

JakNife

[dealy] 29/4/2024 17:03

The company will be telling Bondholders now to back the restructuring or they will call in the administrators. The combination of a) having to amortise part or all of the financing facilities and b) get performance guarantees in place is putting the company under immense pressure. These are effectively bread and butter events in the field of engineering projects, but the company seems to have forgotten to schedule them in the calendar.Any delay now and it will be plug pulling time.

[geckotheglorious] 29/4/2024 16:41

tahmina

They wont get nothing though, just very very little.
And the company has warned of such.

The only question for Equity shareholders now is what is the price at which the Debt for Equity will take place. 20p, 15p, 10p, or 5p.

Profit warning, significant Debt for Equity swap, and suspension for a month...

Wont be much, but wont be nothing.

[tahmina1] 29/4/2024 16:31

I may be wrong, but in the past companies that were in this situation specifically warned that the outcome of restructuring could be that the shareholders would get nothing, if that was a possibility. I dont think PFC has said this at any point, just significant dilution?

[tahmina1] 29/4/2024 16:17

shorts will close, IMO , but the thing that could cause a price dive would be the major holders selling tomorrow.

Risk is both ways, a white knight comes in, or , D4E at an unknown price

[kirk 6] 29/4/2024 15:47

Surely got to crash below 10p tomorrow with suspension on Wednesday

[blackhorse23] 29/4/2024 15:45

Last day trading is tomorrow

[hades1] 29/4/2024 15:37

A dangerous hold when suspended.
What price does it re-open?
5p?

[kirk 6] 29/4/2024 15:32

Suspension on Wednesday then

[jaknife] 29/4/2024 14:35

tahmina1,

You're confusing two things.

1. Margin is the amount of collateral that you need to put up to keep a position open. So if margin is 50% and you want to short £10,000 worth then you need to put up 50% margin. Margin is remeasured on a daily basis and if you don't have enough margin in your account then "margin call"!

2. Borrow charge is the daily fee that you have to pay to whomever is lending out the stock. So if the borrow rate is 100% (and it is close to that at the moment) then every day you have to pay a fee of:

£10,000 x 100% x 1 / 365 = £27.40

Obviously when the borrow charge is this high (the usual charge would be 3%) then you can't keep a position open for a long time.

JakNife

[tahmina1] 29/4/2024 14:09

Here was the post....


JakNife - 24 Apr 2024 - 12:13:33 - 40004 of 40096 Petrofac - PFC
Miena,

"@JakNife & the other thing that I picked up from that RNS was their closing statement:

The discussions with lenders and other stakeholders continue at pace and further announcements will be made as appropriate.

Make of it what you will...

I'm not sure what you think that this means other than what the words plainly say? Negotiating a debt for equity swap at the same time as also negotiating a fresh equity raise at the same time as also negotiating the disposal of non-core assets is not a simple task!


"Shorts are reducing and the share price has for the 3rd day in a row followed the same pattern, which suggests to me that Shorts aren't finished yet...
Why would they reduce if a D4E was inevitable?? Good Risk Management??"

The available borrow for Petrofac has dried up in recent weeks and many shorts have had their positions recalled because the borrow is no longer available. This happens because the longs on the other side of the trade have decided to sell their positions and hence, quite simply, the borrow is no longer there!


"If I was Short I would have never reduced knowing a D4 E was inevitable..."

I would bet that you've never shorted anything? Lot's of retail punters are long only and don't actually understand what they're talking about when it comes to shorting.

At the start of the week the overnight borrow for Petrofac, on the Interactive Broker platform, hit 350%. Are you certain that you'd still keep your short open if you had to pay a 350% borrow charge?

JakNife

[jaknife] 29/4/2024 13:59

tahmina1,

"If IG are charging 350% margin to short , does that mean that if you shorted when the margin was 50% ..."

Where on earth did you get 350% from? It's still at a max of 50%:



[You might need to click on "Product details" to reveal the "margin requirements".]

It's possible (probable even) that they (and SpreadEx) will move it to 100% when the shares are suspended but I've never seen either IG or SpreadEx impose margin of greater than 100%. If they do then it will be 100% for everyone regardless of what the margin was when they opened the position.

JakNife

[tahmina1] 29/4/2024 13:42

Guys forgive my ignorance but i dont short or spread bet....

If IG are charging 350% margin to short , does that mean that if you shorted when the margin was 50% you then have to find the additional margin to hold the position? in which case, any shorter holding over May would have to tie up excess capital on the gamble that the D4E is indeed at a very low price