My biggest problem with the new deal is that, at 6%, the option will do nothing for capital preservation. These notes will drop like a stone, in price, in the short or medium term. Even in five years there is no guarantee of a exit - these notes will be an effective perpetual investment at a rate that does not fully compensate for the risks.
There is only one direction for the NZF shareprice up to conversion ... down. There will be some degree of dilution for holders because of this exercise. However, once the new shares are issued, there will be massive downwards pressure as disgruntled noteholders seek to exit an unwanted equity position in an illiquid market. Anticipating this rush to the exit - selling NZF now for buyback after the conversion would be the natural strategy.
Noteholders are also away of these dynamics - and most will probably suck it up and take up the new offer (a known and manageable effective capital loss is better than the unknown and unmanageable).
My personal view is that the finance sector will eventually recover. The shareprice will never see these current levels, again, if the recovery kicks in. So, now is the time to convert to an equity holding - if NZF can pass the fundamentals test at the likely conversion price. At 14.5cents, I am satisfied it does (but I full expect to covert at less than this).
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