NZF Group (NZF and NZF010)

[minimoke]

How are we looking now Enumerate. Todays trades having a bit of an impact.

If we take your $12m converting to shares I'm now getting noteholders with 154m shares against current shares of 76.6m. This suggests existing shareholders loose control of their company.

Taking the new VWAP into account I get a new SP of $0.027.
Alternatively if I add the $12m back in the SP lifts to $0.08.

If we take NZF's announced 29.8% note renewal rate I get;
- a new SP of $0.024
- or with the $14m added back in $0.08.

I'm not sure the Directors were expecting a dropping SP / VWAP over the 28 day period. So hows your Death Spiral looking?

Been out of the loop on this for the past week and not sure if I have all the data but now looking at 81.6% rolling over their notes.

I get a new VWAP of $0.0685
or an SP of $0.029 or with the $3.68m conversion adding back in, an SP of $0.056.

The directors strategy has seen them loose around half the value of their company in the pasty month or so and noteholders who convert to shares will be looking for a spot on the board given they will now be around 42% of the total shareholding.

[minimoke]

I created a Google Docs spreadsheet last year when I looked at NZF010 in the expectation that they would be converted to shares.

By my calculations noteholders should end up with ~65% of the company if none decide to renew.

I have set it so that anyone can view and edit it. So feel free to play around with different share prices or estimate figures or even improve the model. It factors in the 5% discount.

https://spreadsheets.google.com/ccc?...thkey=CN2h8PkC

Disc: I didn't end up buying any

So, if existing shareholders want to retain control of their company (assuming they aren't already bond holders) we are going to have to see the SP move to $0.30. So buying now at $0.18 could be worth a punt. Even buying discounted bonds and ordinary shares now might be worth a punt. Trouble is owning x % of not very much may not be a good move.

[Enumerate]

So, if existing shareholders want to retain control of their company (assuming they aren't already bond holders) we are going to have to see the SP move to $0.30. So buying now at $0.18 could be worth a punt. Even buying discounted bonds and ordinary shares now might be worth a punt. Trouble is owning x % of not very much may not be a good move.

The other scenario is:

Those that don't elect to take up the new deal will simply be paid out in cash (if the company decides it does not want the dilution and acts before the 1st of March to pay those who have not elected to proceed with the new deal).

[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]

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]

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]

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.

1) It seems to me the company has no cash so the noteholders won't get cash.
2) Noteholders who convert won't be able to dump - to do that requires buyers and there are none. At best there are a couple of current bids at 4.5 / 4.6 for a grand total of approx $11,000


I'm with Enumerate on the Trustees - why do bondholders not have more information upon which to make a decision. It seems we now have an unknown game, with unknown players and unknown rules. It also looks like the coaches are keeping their game plan to themselves - and thats not a winning strategy. As the Pakistanis know, the only winners are the bookmakers.

[Enumerate]

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).