NZF Group (NZF and NZF010)

[getontoit99]

I'm new at this so any comments or corrections will be appreciated.

If 1/3rd of Capital Notes become shares, and the share price through the 20 business days to 15 March stays at 14.5c:

1. 10,000 notes plus accrued interest = $10,244 (approx.)
   
2. This buys 74,230 shares at 13.8c which is 95% of 14.5c.
   
3. 6.6m Notes converting will create about 47.8 million new shares bringing the total on issue to about 125m.
   
4. Dividing the current market capitalisation by 125m gives a new nominal price of 8.9c.

Does this make sense?

Thanks
Scott

[FXTrader]

The "management" email is more than somewhat misleading regarding the quality of the 6% rate offer for the 5 year investment, as the levels of the resprective OCRs at the time are irrelevant. These are 5 year investments, not 90 day ones. Back in 2006 the 5 years swap was around 7% and the bond yeild at that time was around 3% over that. Today the 5 year swap is above 5%, and the 6% offered rate is less than 1%....frankly it should be above the previous 3% based upon the change in associated credit risk.

Truth is,. he's right, they can't pay that much, but to justify it with references to the irrelevant OCR is near criminal.....I'd much prefer the company was just plain honest and admit we're stuck and they'll pay whatever they think they can get away with.

[QOH]

I own some of these capital notes, my position is slighlty different in that I bought them at a discount, so if I went with the extension, my yield would be closer to 8%. I was going to accept that however after reading this thread I'm having second thoughts. Would you still go for the shares in my situation?

[Enumerate]

Does this make sense?

Couple of points:

1) I don't believe that the interest payment is included in the conversion. (Need to read the Trust Deed to confirm this ... but would be surprised if it was "capitalised"

2) If $6.6m of Notes are converted to shares - this amount is deleted as a liability and turned into that other type of liability - equity. Hence the new nominal price would be somewhere between 13.8cents and 14.5cents (as the new shares introduce new equity at 13.8cents).

[Enumerate]

Paying a margin over OCR is a reasonable way of assessing risk. At the moment with OCR at 3%, it is at an historical low. However, the margin I would want in order to own NZF010's would be north of 6% (and not the 3% offered). The reasons for this are the degree of subordination of the debt and the perception of the market (that demands 9.5% for secured NZF debt over a shorter term).

Make no mistake, converting the NZF010 to the new instrument (NZF020?) will see an immediate discount applied on the secondary market (75cents on the dollar, as a guess).

If you convert to equity (by failing to elect conversion to the new deal) your situation will be:

- No prospect of a short or medium term dividend; and
- A likely "squeeze" on the price of the equity instrument (NZF) and very thin liquidity

Long term, I would suggest that it is likely you will get an exit opportunity at a price closer to $1 face. There is also the possibility that if faced with dilution of "death spiral" proportions, the company will act and exercise its right to pay cash to those holders queued for conversion. This, however, is not a certainty.

I think it was Dirac who said: "You cannot tell the future except as a superposition of relative probabilities".

Those electing not to take the new instrument will end up with a probability of a cash payout but with the more probable ownership of equity at a range of probable prices .... Not a good choice if you are depending on income. Not a good choice if you put capital preservation at the highest imperative. A very good choice, however, if you can deal with the variability and uncertainty of the situation and want to choose the option with the best outcome, on average, over all the likely states.

[Enumerate]

Final point ...

This new deal, in which it is clear a third party is doing due diligence on all or part of NZF, will clearly be material to the decision Noteholders need to make.

The full scope of the election process has not been put to Noteholders - there has been no mention of the full process including the potential for the company to payout cash to those expecting to get equity.

The point is:

Why is the Trustee not making some inquiries of the company to make a statement to Noteholders?

Would it be unkind to observe that the Trustee is apparently incompetent? Is it more a case of laziness than incompetence?

[getontoit99]

Couple of points:

1) I don't believe that the interest payment is included in the conversion. (Need to read the Trust Deed to confirm this ... but would be surprised if it was "capitalised"

2) If $6.6m of Notes are converted to shares - this amount is deleted as a liability and turned into that other type of liability - equity. Hence the new nominal price would be somewhere between 13.8cents and 14.5cents (as the new shares introduce new equity at 13.8cents).

Thanks for this. The final interest is included according to the investment statement.

[getontoit99]

Final point ...

The full scope of the election process has not been put to Noteholders - there has been no mention of the full process including the potential for the company to payout cash to those expecting to get equity.

Thanks for your analysis and comments which are very helpful

However I don't follow your thinking above; I must be missing something.

The investment statement is quite clear. The company has elected to not redeem Notes for cash. Are you suggesting they might change their mind if Noteholders who convert to shares dump them and push the share price way down? Surely this was always a prospect in a situation such as this. Also, there would be howls of "unfair" from Noteholders who chose to hang on to their Notes.

[Enumerate]

The investment statement is quite clear. The company has elected to not redeem Notes for cash. Are you suggesting they might change their mind if Noteholders who convert to shares dump them and push the share price way down? Surely this was always a prospect in a situation such as this. Also, there would be howls of "unfair" from Noteholders who chose to hang on to their Notes.

In the Trust Deed under a section entitled "Election Process" the company can overturn the de facto choice made by those who will convert to redeem their Notes in cash.

The Trust Deed is here:

http://www.business.govt.nz/companie...0621FD46EF9B85

The Prospectus is here:

http://www.business.govt.nz/companie...9BB29CF38FF780

[minimoke]

2) If $6.6m of Notes are converted to shares - this amount is deleted as a liability and turned into that other type of liability - equity. Hence the new nominal price would be somewhere between 13.8cents and 14.5cents (as the new shares introduce new equity at 13.8cents).

If the market currently values NZF at $11m (or 14.5c) then what is there about this transaction that changes that value - the equity and liability are on the same side of the ledger. Aren't we then going to see the $11m split amongst 125m shares giving a price of 8.8c?