With every day that passes, the future of former market darling Afren (LSE: AFR) becomes more uncertain.
The company is technically in default on its debt after it delayed interest payments earlier this year. This means that bondholders are now in charge of the company.
Unfortunately, bondholders in general are not known for their lenient nature toward struggling companies. The pessimist would say that Afren is already done for.
But it doesnt make sense for Afrens bondholders to drive the company to the wall right now. Indeed, if bondholders were to take control of the company, they would look to sell assets straight away, in order to repay debt, but this would cause yet more problems.
Specifically, with the price of oil languishing at six-year lows, every oil company in the world is looking to sell assets. As a result, in this buyers market, asset prices are falling. Further, if potential buyers know Afren is desperate to sell its assets, theyre going to demand even greater discounts.
All in all, it doesnt make sense for bondholders to force Afren unto liquidation with the oil market where it is right now.
So the other option is to keep Afren alive, on life support, just long enough for asset prices to recover. This is likely to involve a restructuring of debt, which will undoubtedly be painful for bondholders but could yield better results over the long term than a fire-sale at rock-bottom prices.
Further, keeping Afren on life support will involve a rights issue, or placing to raise additional working capital. Afrens management has already warned that fundraising is on the cards. Management notified the market at the end of January that:
Assuming the companys current debt structure remains unchanged, there is an equity funding requirement which is likely to be significant and in excess of the companys current market capitalisation.
At the time, Afrens market cap was in the region of 200m. Now, the group is worth around 100m. This suggests that shareholders are facing a high level of dilution if bondholders decide to keep the company on life support.
Aside from these two main options, there are some other outcomes that could change Afrens future. For example, a knight in shining armour could appear and make an offer for the company, although this is unlikely due to the size of Afrens debt pile.
On the other hand, a saviour in the form of a lenient creditor could arrive to help Afren, offering cash to keep the lights on but demanding a large chunk of equity in return.
Overall, its impossible to say what will happen to Afren over the next few months, but with debt repayments looming one thing is clear: the companys running out of time.
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