Former market darlingAfren(LSE: AFR) has lost more than 90% of its value over the past six months, and the company is now struggling to remain solvent.
In a last-ditch-attempt to remain in business, the company announced a recapitalisation plan earlier this month. But this plan has already attracted plenty of criticism from shareholders.
Its easy to see why. In its current form, existing shareholders will be almost completely wiped out according to the proposals in their current form.
The question is, does Afren have any choice in the matter?
After therecapitalisation, shareholders will hold just 11% of the struggling company. Bondholders will own the rest of the company after the debt-for-equity swap.
The first part of the deal will see Afren issue$200m in the form of so-called super senior private placement notes.
The rest of the programme involves the issue of$321m of new high yield notes, providing $100m in cash to the company. Additionally, Afren will convert 25% of its debt falling due during 2016, 2019 and 2020 into equity, with the remaining debt being reinstated and extended to 2019 and 2020 at an annual coupon of 9.1%.
Whats more, the companys $300m Ebok credit facility will be extended to 2019, new shares will be issued to existing holders who subscribe to the newsenior private placement notes and there will be an equity offering of $75m.
There are many moving parts in this deal and when completed, it should give the company some financial flexibility, albeit at the expense of shareholders.
But is there a plan B?
When Afren failed to pay the $15m in interest due on its 2016 notes at the beginning of this month, the company effectively defaulted on its debt, leaving management with no choice but to engage with bondholders.
And this means that Afren is now at mercy of bondholders, who have a reputation forbeing aggressive and demanding when trying to reclaim cash owed.
Unfortunately, this means that Afrens options are limited as the bondholders are now in control. Many options that were previously available to Afren are now no longer possible.
For example, asset sales and a sale of the company to a larger peer are two options that have recently been proposed. However, these two options are likely to yield poor results for bondholders.
As the oil price languishes, the oil industry has become a buyers market. Companies are rushing to offload inefficientassets, pushing down asset values across the board.
So, Afren is stuck between a rock and a hard place. Shareholders are facing substantial dilution but if managements recapitalisation plan is blocked by shareholders then Afren could be forced to declare bankruptcy and let bondholders takeover.
Afren is running out of time and bondholders wont wait around forever for the companys recovery to take place.
Of course, if the price of oil recoversthen Afren will have other options available to it, but for the time being, Afren has no plan B.
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