Sdic Power Discussion Threads

[scburbs] 21/4/2010 17:16

Here is a more industry specific example with IERE using preference shares with warrants attached which have some similarities to convertible bonds.

"The Board believes that the Capital Raising balances appropriately the interests of existing Shareholders with those of new investors. The Board believes that the structure of the Offer and the nature of the New Securities are beneficial to existing Shareholders as the dilution to existing Shareholders will be less than if the Offer solely comprised the issue of New Ordinary Shares. The Board further believes that the issue of New Ordinary Shares at the Issue Price of 20p per New Ordinary Share and the issue of new Preference Shares at the Issue Price of £1 per Preference Share with a coupon of 9.0 per cent per annum (with a Warrant attached) represent an attractive investment opportunity to both existing Shareholders and new investors. In particular, it believes that there is the potential for capital appreciation as the Company's financial position is stabilised, that the right to the preferential dividend of the Preference Shares will appeal to certain investors and that there will be renewed appeal to the market as a result of the Company's stabilised structure and the potential for the resumption of dividend payments on the Ordinary Shares"

[scburbs] 21/4/2010 17:03

Who said it was an LTV breach? It is an interest expense cover breach that could potentially be cured by a bond issue which is used to reduce the interest expense in that tranche. Simples.

If you were an investor would you rather have:

i) a convertible bond;
ii) a share

As a convertible bond investor you get a decent coupon, you sit above the equity and you get a lot of the equity upside. You are thinking of the convertible bond provider as a debt provider when in reality they are a quasi equity provider, i.e. if the company stabilises then they will ultimately be equity rather than debt providers as they will convert.

If you make the assumption that the company will continue to produce zero operating cash flow forever then the whole thing is pointless (with the sole exception of disposing of all of the properties!).

Here is a company with massively negative cashflow who issued a convertible bond at 5.5% (9.75% including premium on maturity). Now don't get me wrong, I certainly wouldn't want to hold this bond, but they still managed to raise it.

[lagosboy] 21/4/2010 16:40

The covenant breach is not a LTV breach, it is as I understand it an interest expense cover breach specific to a particular loan tranche.

No company in a similar situation to SDIC ( no cash generation, covenant breach, share price collapse) would get a bon issue away. Might have to dig up Michael Milkin and Drexal Lambert for that challenge.

Your second paragraph worries me, even more than your first.

New debt providers help clear some senior debt whilst sitting below the senior debt providers and all at a company producing zero operating cash flow. Pure genius.

[scburbs] 21/4/2010 15:50

Remember I wasn't saying they should issue a bond, but there are many reasons why companies in similar situations might do so.

For instance if a bank said they would refinance the loan on favourable terms if you could pay down part of the loan. Alternatively, you might use the proceeds to pay down the loan within the existing terms to avoid a covenant breach (it improves both LTV and ICR/DSCR) and, therefore, keep the existing favourable terms.

[lagosboy] 21/4/2010 15:20

Capital raise would be via an Institutional Placing, quicker, cleaner and easier than selling properties.

My point was issuing a bond at higher rate than existing debt makes no sense, you caluculations are correct but your logic I don't follow.

On improving operating effeciencies across the board, I think we all agree...indeed all companies shoulde continually strive to do that.

Could not resist a small buy at 13.18 cents today.

[scburbs] 21/4/2010 13:24

Don't forget your comments about this company facing an equity raising! I agree that it couldn't get a bond issue away (until it has sorted itself out). However, it also could not get an equity issue away. It should be selling assets, sorting out its vacancy and renegotiating the management fees. Then it can go to the equity/bond market, but not before.

Thanks for inviting me to check my calculations. The effective interest rate that the company would pay across its total debt would be 4.85% as I said an increase of 0.15% across its entire debt.

[lagosboy] 21/4/2010 13:18

SDIC could not get a €100m bond away period and it could not get a bond away at 6.5%

I think you might want to check your calculations.( incresase is = €100m at 6.5 -4.7

Er indoors likes the indeed of swapping existing debt for more expensive debt and reducing the effective rate.....leaves er with more dosh to shop with!

[scburbs] 21/4/2010 12:56

LOL! No they should be selling assets. Any capital raising should be done once they have taking a number of steps towards sorting themselves out, to illustrate that it is worth investing capital.

However, the bond wouldn't have that big an impact as a small slice of the finance structure. To illustrate the impact of a €100m bond at 6.5% (upper end of the TAG range) I will do the calculation.

Current debt €1,172.2m at 4.7%

Revised debt €1,072.2m at 4.7% and €100m at 6.5% - effective rate 4.85%.

Clearly they need to sort out the vacancy and fees and get their cashflow sorted. However, I think a 0.15% increase is not unfeasible. The impact of refinancing the loans that are not at risk of covenant breach will be much more than 0.15%.

I do not support a convertible bond issue (as you know I support disposals, vacancy reduction and cost cutting), but it is clearly feasible if they can start to show some progress. It is also goes without saying that whilst the share price it at such a large discount it is streets (or continents) ahead of a capital raise.

[lagosboy] 21/4/2010 12:45

SDIC don't have any cash flow to support a bond issue and the bond would be priced at a rate higher than the debt the proceeds could be used to retire.

This company is facing a capital raise.

[scburbs] 21/4/2010 11:20

Annual report out for TAG today.



Current TAG NAV is €6.03 against share price of €4.26 so a discount of around 30%.

TAG also managed to buy properties by issuing shares to the seller at €5.50 (i.e. less than 10% discount).

They have also recently annouced a convertible bond issue. The convertible bond converts at €5.47, again less than 10% discount to NAV.



If SDIC could resolve its financing and get the share price up to a reasonable level (c.40% discount to NAV) then a convertible bond might become a viable route.

[envirovision] 20/4/2010 21:45

Yes it would be nice. I think the whole problem is the population. SDIC's only hope long term is that stock v replacement costs converge. That in itself was a failed business plan from inception. This is never going to happen in a stagnant population its simply impossible. Infact some of the extreme are talking about 12 Million population loss over 50 years.



I think if Germany were to want to grow its population, then Gordon Brown and his merry men could certainly teach them a leason or two. Look what they did to the UK. I should think if they did it to Germany with a bit of planning, Brown and his crew could probably get half of Asia in there in the blink of an eye.

[lagosboy] 20/4/2010 20:08

Much nicer pictures than the SDIC accounts, y/e 2008 so little out of date but what strikes me apart from the far superior numbers is teh professional approach.

Surely this lot or A N Other in the sector could buy out SDIC and turn it around.

[lagosboy] 19/4/2010 19:54

I have recently started buying the UK housebuiders, TW, Bovis, Persimmon, Barratts.....some will clearly perform better than others and that is why I am hedging that risk with a basket.

I agree with Jeffian on inflation and see this as way to play that scenario along with commodity stocks..

SDIC has alaredy hedged the low interest enviroment via its interest rate swaps, but got that horribly wrong.

I seem to recall JM warning of future hyper-inflation, wonder if he still has that view. To date I am half way through his book aptly titled Wake Up.

Another question for him.

PS If you are reading JM that wil be a monkey for the book promo.

[scburbs] 19/4/2010 18:26

I think that SDIC would perform very well if there is a bit of inflation, particularly if they have refinanced and rehedged for a number of years into the future. Property values should increase and debt would remain unchanged. This would help LTV ratios and if interest is swapped to fixed rates then interest cover ratios should improve as well as rents increase.

It is worth bearing in mind that Germans are massive net savers and if there is one asset class that dreads inflation it is cash savers (although clearly they will get a higher return if interest rates increase).

"Yields for rented apartments are expected to increase by about 40 basis points to 6.3%. Inflation is also predicted to have an affect. "Due to inflation fears, there is a big demand for [for-sale] apartments in some markets that were not affected by a housing bubble [e.g. Germany]," said one interviewee."

[lagosboy] 19/4/2010 17:58

jeffian

The way I see it, (and I fully agree that hyper inflation is every Germans nightmare)is that the Germans will want interest rates (ECB Base rate) to rise at the slightest sign of inflationary pressures. The loans are, I believe, variable rate linked to Euribor ( I apprececiate there is hedging in place to fix) which could mean the interest expense rising sharply whilst property prices, particularly rental property with the help of domestic policy may not match the general rate of inflation.

I am not saying this will happen but I see it as another potential risk down the line for SDIC as it is so highly operationally geared. Another factor that might support a Placing/capital raise.

I also agree that their will a temptation for UK to inflate itself out of debt,it has done it before and that is why I have a core holding of commodity stocks.

It is however not without huge risks of putting the economy back into recession, ....interesting times to come.

[jeffian] 19/4/2010 15:27

lagosboy,

Never mind the banks, the German experience with hyper-inflation between the wars makes them determined not to repeat that little episode. I'm not sure it isn't even written into their constitution; it was certainly a guiding principle of the Bundesbank which is why most Germans were so loathe to give up the Mark in favour of the Euro and now fear their worst nightmares are coming true with the Greeks and the rest of the PIGS hot on their heels. I am suspicious that it is Gordon Brown's unstated plan to try to inflate his way out of our debts (what else is 'Quantative Easing' all about) and I expect the £ to run into all sorts of problems if the rest of 'em catch on what we are up to, but I can't see the Germans doing it - it's not in their psyche - and we are talking about German property here.

[littleweed] 19/4/2010 12:34

Hey lagosboy you've gone quiet on BILL. JM not working his magic on that either?.

[jeffian] 19/4/2010 12:31

I don't think the Germans 'do' inflation, do they? First sniff of that and they'll be out of the Euro quicker than you can say 'Drachma' IMHO.

[lagosboy] 19/4/2010 12:24

For those attending the conference, it might be worthwhile asking JM on the prospects for SDIC should we enter an inflationary cycle say 12 to 18 months from now.

[sleepy] 18/4/2010 18:44

Am stuck in U.S. so don't have access to papers but from memory the original IPO was at £1 per share and the dividend referred to as 6p p.a. equivalent then to about 8.5 cents p.a.

[lagosboy] 17/4/2010 16:38

schrubs

Afternoon to you, fingers crossed for the blues later !

I agree, positive cash generation is the key and I think all the areas where it is lacking have been well highlighted by you.

I would take issue on the managers fees being based upon the NAV. Under that system the fees payable would still have over compensated the manager for the performance of SDIC over the last few years in my view.It has failed to get anywhere near meeting the original objectives you have set out. That is reqarding failure far too highly in my mind.

It is also possible that under that arrangement, substantial fees could still be payable despite no positive cash generation.

I would rather see a much clearer performance related fee system i.e. one based on(1)free cash generation (2) profit (3) profit share after dividends or some combination of the three.

I would also consider a secondary fee structure based upon annual uplift in NAV as an add on to the above with target limits set annually.

That way it is not a given that every year that the manager will get any NAV related fee if the company performs as badly as it has been.