Linc Energy Ltd - Why the hurry in repaying bonds, without a shareholder vote?

9/2/2015 – Linc Energy Ltd says it has repaid US$50 mln worth of convertible notes on January 5, as per the amended terms.

The latest announcement follows the waiver by SGX on December 30 which allowed Linc Energy to not convene an extraordinary general meeting to seek its shareholders' approval before amending the terms of the notes.

In April 2013, Linc Energy raised US$200 mln through 7% convertible notes maturing in 2018.

According to the offer document at the time of the issue in 2013, the notes were made convertible into Linc Energy's shares at a price of A$3.40 (about S$3.69) per share.

However, at the time of Linc Energy's IPO on SGX in December 2013, the conversion price was reset to about S$2.13 per share.

Therefore, Linc Energy Ltd would have to issue up to of 56,220,519 new shares to the noteholders on conversion of US$200 mln worth of notes, including interest and arrears.

Apparently, the notes bear an interest of 7% per annum which is payable semi-annually in arrears on April 10 and October 10 each year.

At the time of the issue, the noteholders were granted a right to convert the notes into ordinary shares of Linc Energy at any time on or after May 21, 2013.

They were also granted a put option which allowed them to demand redemption of the notes on April 10, 2015, exactly three years before the maturity in 2018.

More than two years since the issue in April 2013, Linc Energy decided to amend the terms of the convertible notes.

On December 5, Linc Energy proposed six amendments to the terms of its convertible notes:

First, Linc Energy wanted to immediately redeem US$50 mln out of the US$200 mln worth of notes.

Second, the put option date of the notes was to be pushed back by one year to April 10, 2016.

Third, Linc Energy wanted a right to redeem "any and all" of the outstanding notes until April 10, 2016.

Fourth, the company proposed to raise the interest rate on the notes to 9% from April 10, 2015.

Fifth, the conversion price of the notes be reset to S$1.3411 instead of about S$2.13 earlier.

Lastly, on April 10 this year, the conversion price of the notes be reset to the lower of 115% of the average of 10 days stock price preceding April 10 or the existing conversion price (i.e. S$1.3411). However, the conversion price should not be less than S$0.77 per share.

At the time of proposing the above amendments to the terms of the convertible notes, Peter Bond – the Executive Chairman of Linc Energy – said:

"The Company is focused on deleveraging its balance sheet and we are delighted to reduce the size of the convertible notes by US$50 million and delay the noteholders put option to 10 April 2016. Importantly, the Company has negotiated a call option until the revised put date to give it the ability to repay the convertible notes at its discretion. This is beneficial given the previously announced discussions that the Company is having with a variety of parties with respect to the divestment of some of its non-core assets.", such as the Carmichael coal field [ed.]

On December 24, Linc Energy announced that more than 90% of the noteholders were in favour of the proposed amendments.

Finally, on December 30, SGX waived the requirement to convene an EGM of Linc Energy's shareholders before amending the terms of the convertible notes.

The SGX asked the company to disclose to its shareholders the reasons for seeking the waiver.

Linc Energy's management explained "While it is unclear and unknown whether any of the Note holders would look to exercise their Option on 10 April 2015, as reflected in the AR2014 (at page 64) and 1Q2014/15 Financial Statements (at page 4), the Company is required, under the Australian Accounting Standards and International Financial Reporting Standards, to record full liability to Note holders on the assumption that all Note holders will exercise their Option on 10 April 2015. As such, the Notes must be classified as a current liability and accordingly, the current liabilities of the Company have substantially increased by $171,002,000 predominately due to a reclassification of the Notes from non-current liabilities to current liabilities."

It added "The Amendments which have been agreed with Note holders will remove a large, near-term liability of the Company. It is the unanimous opinion of the Board that the Amendments are in the best interests of the Company and its Shareholders."

Explaining why it approached the SGX for a waiver to convene an EGM, the management said the amendments included a condition that Linc Energy shall redeem US$50 mln worth of notes (Partial Redemption) within three working days of December 30.

"Any requirement imposed on the Company to seek Shareholders' approval in connection with the Amendments would cause the Company to miss the timeline for the Partial Redemption and cause a significant delay in the completion of the agreement reached with Note holders in relation to the Amendments. Given the volatile global oil and gas market and the resulting instability affecting companies in the oil and gas industry, the Board was of the view that any such delay in meeting the timeline for the Partial Redemption or in concluding the agreement on the Amendments with Note holders might result in uncertainty and might cause some Note holders to seek to re-open negotiations on the Amendments. In this market, this would be detrimental to the interests of the Company and its Shareholders, and accordingly, it was essential that the waiver be sought", it argued.

However, after the amendments to the terms of the convertible notes, Linc Energy's shareholders appear to be losing on multiple fronts.

First, the shareholders' will witness a greater dilution as the noteholders will be issued more than twice the originally agreed shares in the event of conversion.

Second, the likelihood of noteholders exercising their conversion right has increased after the conversion price has been reduced to S$1.34 per share from S$2.13 earlier.

Third, the interest cost on the notes will increase by 2 percentage points from April 10.

Finally, the immediate cash outflow due to repayment of US$50 mln worth of notes in December doesn’t make sense to us, as the notes were not allowed to be redeemed before April 10 anyway, and the noteholders were not likely to exercise their conversion right as the market price of Linc Energy's stock was still much lower than the conversion price of the notes.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Was the impending put option date really a threat to its financial stability?

According to its Q1 FY15 earnings report (page 11), Linc Energy Ltd had A$72.9 mln in cash on September 30.

Subsequently, on October 13, the company received A$90 mln in cash from Adani Group as the first instalment for the sale of the Carmichael Royalty Deed for A$155 mln.

Adani Group will pay the remaining A$65 mln on October 9 this year.

Therefore, Linc Energy had a comfortable cash balance of about A$162.9 mln in October last year.

Now, according to the original terms of the 7% convertible notes, the noteholders only had the option to convert their notes into the shares of Linc Energy until the put option date of April 10, 2015.

Therefore, there wasn't an immediate threat to Linc Energy due to the redemption of the convertible notes.

Linc Energy's A$215.3 mln worth of current borrowings as on September 30 were entirely attributable to the convertible notes.

And the company's A$418.8 mln worth of non-current borrowings were entirely attributable to the senior secured notes maturing on October 31, 2017.

Apparently, Linc Energy could have very easily set aside a good part of its A$162.9 mln cash in October last year to create a reserve for the possible redemption of 7% convertible notes on or around April 10.

Any reasonable investor would wonder why Linc Energy decided to pay US$50 mln upfront to the note holders, increase the interest rate to 9% from 7% and reduce the conversion price to S$1.34 from S$2.13.

Question

2. Why did it raise the interest rate on the convertible notes?

If the upfront payment of US$50 mln along with a reset conversion price of S$1.34 from S$2.13 previously was not enough, Linc Energy's management also increased the interest rate on convertible notes to 9% from 7% with effect from April 10 this year.

In the absence of any explanation, we wonder what prompted such generosity from the management.
(Read the full story to get all 9 questions)

We have invited the company (linc@lincenergy.com, janelle.vandevelde@lincenergy.com) to an on-camera interview, and/or to reply to our questions in writing.

We also invited comments from SGX, but were unable to contact the relevant parties at Credit Suisse.

At the time of publication we have not received a reply from any of them (which is why you are seeing this message).

As always, we would only be too happy to hear from them to help clear up our questions.

We will update this report if we do.

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