Interactive Investor

Petropavlovsk rights issue inevitable

16th September 2014 12:40

Lee Wild from interactive investor

Hard-up gold-miner Petropavlovsk has admitted that falling gold prices and war in Ukraine might make it impossible to achieve full repayment of expensive bonds for cash at par value upon maturity. That means a rights issue is almost inevitable, but with detail thin on the ground, investors are taking no chance and bailing out.

Petropavlovsk has little choice. It must get debt - $924 million (£570.81 million) net at the end of June - under control, part of which will be a refinancing of its 4% convertible bonds due 2015 of which there is still $310.5 million outstanding.

Management wants to issue new convertible bonds plus some cash to holders of the existing bonds, but senior lenders - Sberbank and VTB - have insisted that any cash payment is funded by a rights issue. Both want a deal on refinancing struck "as soon as possible", but one has warned it may demand a partial repayment of its existing facilities. Clearly, the size of the cash call will depend on demand.

Petropavlovsk is currently gauging interest. There has already been some show of support from existing shareholders and from third-party underwriters, but chairman Peter Hambro has pleaded for more. "(I) hope that others who are authorised to do so may also come forward and make contact with Bank of America Merrill Lynch," he said Tuesday.

Currently, owners of 18% of the principal amount outstanding on the convertibles have indicated a willingness to support a transaction on the following terms: October 2019 maturity, 7.5% coupon, 60-65p conversion price, and size of $310.5 million less net rights issue proceeds.

"As expected the company looks like it will have to resort to a rights issue to solve the convertible bond problem," says Rob Broke at Westhouse Securities. "Despite this update there remains a lack of clarity about the scale of any such issue, and so we continue to keep our recommendation under review."

Understandably, investors are heading for the hills. And it's unlikely they'll return any time soon, certainly not until we have further detail on the refinancing and rights issue.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Related Categories