If youre an Afren (LSE: AFR) shareholder, youre perhaps not at your happiest right now, and that would be entirely understandable.
The oil price collapse hurt many explorers, but those reliant on debt funding felt it the most. Africa-based Afren was shouldering almost $1.2bn in net debt at the end of its first quarter in March, and thats a lot for a company with a market capitalisation of under 30m.
Default
Afren has also been technically defaulting on interest payments, with the latest announced on 10 June, although that has been with the tacit agreement of the firms lenders who are in the process of implementing a financial recovery package the company would have been bust by now had lenders not been amenable to such a thing.
In many cases a successful recapitalisation package would have a companys owners whooping for joy. But the Afren plan is likely to leave current shareholders with an almost total loss of their company at 2.5p per share today, theyre already facing a 98.5% loss since early 2014. If the intended recapitalisation is completed by the end of July as planned, shareholders would be squeezed out further with new financiers taking up to 89% of the equity.
A better way?
Is there any alternative? The Afren Shareholder Opposition Group (Asog) seems to think so, and is trying to put a stop to the bailout package at the companys upcoming EGM by campaigning for a No vote against the proposed dilution of equity. Afren would need to achieve a 75% Yes vote to go ahead with the dilution, and Asog says its membership already extends to 10% of the firms ownership.
But should Asog swing the vote, would a rejection of the proposed terms really be in their best interest?
In March, when the Afren board published the preliminary details of the scheme, we were warned that If shareholders do not approve the recapitalisation, it is expected that the amended economic terms of the new senior notes, and the amendment and reinstatement of the existing notes, together with the requirement to initiate a sale of the groups business, will mean that existing shareholders would be unlikely to see any return on their current investment.
Fire sale
Kicking out the deal thats on the table would almost certainly end up with a sale of Afrens assets, and the question is whether there would be anything left for shareholders after debts had been paid off. The below-par value of Afrens bonds on the open market suggests a sale might not even raise enough to cover debts and were certainly not in a sellers market now for oil assets, with the stuff only fetching around $65 a barrel.
I really want Afrens shareholders to get as good a result as they can, but I fear the 11% of their company theyd be left with under the current plan is probably the best they can realistically hope for but I do hope Im wrong, and I wish them the best.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.