Happy Halloween Afren Holders.

I wasn’t going to say much about Afren, but it was a really interesting set of events this morning from a market psychological point of view.

Let’s get things straight, Afren had a silly leak. It happened outside of working hours. It happens and lots of different companies fall for it. Indeed you can download software which will search a website for any files that do not have permissions and simply haven’t been linked to yet. It is not illegal to go to a publically accessible website and look at a file which isn’t linked to yet is accessible to the public. So a bit of a mistake but nothing too bad.

Now on to the actual news event..The RNS!

In light of the Company's current liquidity position and in order to preserve cash while the review of the Company's capital structure and funding alternatives is completed, the Board has decided, at the expiration of the 30 day grace period, not to pay US$15m of interest which was due on 1 February 2015 under its 2016 Notes.  While such non-payment will result in a default under the 2016 Notes, this will not result in an immediate obligation to repay such 2016 Notes or any cross-default under its 2019 Notes or 2020 Notes or its other debt facilities.

This makes two important points. The board has decided to default on its bond. This is not good news. However this could be for several reasons. It could be that the RCF deferral was dependent on stopping bond payments. It could be the company has simply decided to call the bluff of the bondholders and are saying, so what if I default. IMHO this reduces the pressure of the bond holders as it shows their scare stories of administration and calling in collateral are simply not going to happen at least in the short term.

For me the last sentence is the most important…A default in the 2016 bonds, does not trigger any kind of automatic default or consequences elsewhere in the business or its debt profile. This leaves the 2016 bond holders rather toothless.

The Company has received assurances from the ad hoc committee (which members hold in aggregate approximately 55% of the principal face amount of the 2016 Notes and 44% of the total principal face amount of the 2016 Notes, 2019 Notes and 2020 Notes) that the committee has no current intention to take enforcement action with respect to the 2016 Notes held by its members as a result of the failure to make payment of interest due under the 2016 Notes, in the hope and expectation that agreement can shortly be reached with the Company and its key stakeholders on the terms of a consensual restructuring that would preserve the Group and its business as a going concern for the benefit of all stakeholders.

The bond committee is not made up of the majority of  2019 and 2020 note holders….this is important. Any deal will pay off the 2016 bond holders and the RCF. Even then the adhoc committee is barely 50% of all the holders. This again weakens the hand of the bondholders.

Again of most importance is the last part of the sentence where the bondholders have no intention of enforcement actions because it hopes a deal can be made for the benefit of ALL stakeholders. This indicates that there will be a benefit to Share Holders as they are a major stakeholder. This is NOT what the bondholders have been saying up to this point. It now becomes very very unlikely that shareholders will be “wiped out” to quote a certain news article.

The Company is continuing constructive discussions with the advisers to, and members of, the ad hoc committee of its largest bond holders, the coordinating committee of the lenders under its US$300m Ebok debt facility and its other lenders regarding the immediate liquidity and funding needs of the business.  It is expected that any agreement with the Company's bond holders and debt providers regarding the provision of interim and longer term funding and a broader consensual restructuring is likely to result in economic terms associated with the new funding and/or the issue of new equity which will substantially dilute the interests of the Company's current shareholders.  

So there will be substantial dilution….Yes we have always known that. Nobody invests $300-500m in a company with a Market Cap of less than £100m without there being substantial dilution. The substantial dilution was always the reason why the Share Price fell from 100p to the sub 10p. The question is how much dilution is going to happen? For Afren to maintain its stock market listing 25% of the company must be in public hands. So a realistic assumption is that we will end up with 75% of the company in the hands of the a third party and 25% with the current shareholders….

Given this the real question is what is an Afren, with no debt due before 2019, with 40-50K BOPD output and with a capital injection of $300-500m for 75% of the company actually worth….

Personally I would put a minimum price of 1bn on the above, this would give the current shareholders a share worth approx. 250m or 20p or so a share. Of course the dilution could be lower than this and a firm case could be made for the company being worth considerably more….But this is far above the current trading price.

While the Company is also having discussions with its other stakeholders and third party investors regarding interim funding and recapitalising the Company, the Board believes that an agreement between the Company's creditors presents the most likely solution to the immediate issues facing the business.  There can be no certainty that an agreement will be reached.

Code for any third party investors need to get their act together and put in a firm bid pronto.!

For investors the RNS doesn’t make particularly good reading, particularly for those people who have had their heads in the sand with talk of £1 a share. However in reality it actually reduces the risk of a total wipe out of shareholder value and anybody below 20p is likely to see a profit if they hold over the short term and probably a much better profit longer term.

Dilution was always going to happen.

For those that believed the vultures and scum who came on the board at 7.00am until 8.00am talking about 2p, sell straight away etc and sold for sub 6p only to see the SP rise above 7p 30 mins later, then I hope you learnt an important lesson.

Do your research, stick to your plans unless something material happens and remember share trading is unfortunately dominated by crooks, greedy liars and people you would never listen to if they came knocking at your door, so don’t listen to them they are simply dressed up to scare you!