Petra Diamonds in crunch talks with bondholders as firm seeks R400m in liquidity

PETRA Diamonds is hoping to persuade bondholders to agree to a postponement of interest due to them so it can drawn down on R400m in new debt – a step that is crucial in keeping the company afloat.

In an update today, Petra Diamonds said its South African banks consisting of Absa, Nedbank and Rand Merchant Bank, had agreed the company could draw down on R400m of a R1bn revolving credit facility (RCF), with conditions.

The conditions demand a temporary halt to the repayment of a black economic empowerment scheme, which subsequently has won the support of Petra’s BEE partners, and secondly that Petra suspend this year’s first instalment of a semi-annual 7.25% interest payment on a $650m convertible loan note. Interest on the notes is payable today (May 1) and November 1.

In terms of the bond regulations, however, failing to pay interest after a 30-day grace period allowed (May 30) could see bondholders force the redemption of their bonds with interest provided such an action has the support of 25% of bondholders.

Petra said today it was holding discussions with about 50% of its bondholders which had retained financial and legal advisers on the matter.

Shares in the company fell under renewed selling pressure today: as of mid-morning, they were about 5% weaker at £2.02/share, but off the firm’s historic low of £1,08/share recorded on March 31.

Discussions with the bondholders’ advisers were “progressing well”, said Petra Diamonds. It added it was confident it could “… manage its near-term liquidity risks while continuing discussions with various stakeholders regarding strategic alternatives to improve the company’s long-term capital structure”.

Petra is fighting for its life. The company announced on April 9 that it had mothballed its Tanzanian mine, Williamson, whilst it plotted a way through the halt on diamond sales amid the COVID-19 pandemic. Having reached South Africa, the virus prompted the government to a largely pre-emptive five-week social distancing lockdown that ended today (May 1).

In terms of government regulations, firms operating underground mines were permitted to ramp up to a 50% staff complement after three weeks of the lockdown. Petra said this process was well underway in terms of Standard Operating Procedures (SOPs) that complied with the Mineral Council South Africa’s COVID-19 guidelines.

Petra had also made salary sacrifices in order to assist those worst affected by the COVID-19 crisis in terms of which Richard Duffy, CEO of Petra Diamonds, as well as his finance director, Jacques Breytenbach, will donate a third of their salaries for three months from April through to June.

In addition, the salaries of the company’s non-executive directors and other members of the executive committee (Exco) will be reduced by a quarter whilst senior managers reporting to the Exco members are able to participate in this initiative with a reduction of up to 20% of their salaries, at their discretion.

But it’s the liquidity crisis that is most pressing for Petra.

Winning the agreement with bondholders may require conditions of their own that could speak to Petra’s intention, announced on March 27, to assess its strategic options with the loan notes that fall due in May, 2022. Petra said at the time it had retained the services of Rothschild & Co and Ashurst as its financial and legal advisers respectively.

5 COMMENTS

  1. Bond holders are living in dream land! The will be lucky to get 10c on the Rand! The only wy out for them is to convert into equity and see if the company can survive.

    • Dear Peter Pan,

      I trust that you keeping safe and following WHO covid-19 protocols & lockdown rules.

      This is a classic distressed situation. It is worth examining factors at play by asking simple, yet material questions ?
      1. Is Petra diamonds Enterprise Value sufficient to withstand the turmoil ?
      2. if so, which component of the capital structure offers the highest risk/return?
      3. If not, who stands to emerge with the assets ? And at what value?
      4. Given all factors at play, what becomes of Petra post reorganisation ?

      As we debate , herewith is the facts ( undisputable bcs we can all read numbers) :
      1. Equity is dissipated at ± £1Bn
      2. The Capital structure is simple , with 1st lien being bank loans ( WC loan = R500m ; RCF= R1Billion ) , and subordinated notes = $650M 7,25% coupon expiring in 2022. The total debt ( dec 2019) amounted to $724M comprised mainly of the 2022 Notes aforementioned. Petra has subsequently drawn the R500M , thus now triggered the ratcheting covenants governing the bank loans.
      3. There is a coupon of ±$24M , that has fallen due , but currently in grace period of 30days.
      4. Petra has opened dialogue with the Banks group to extend the liquidity lines via accessing the R1Billion RCF , given that its now low on Cash.

      Peter, surely you will acknowledge that all distressed situations are opportunities for some AND its always about liquidity ….Frequently so!

      Distressed Investing 101 teaches us …ITS ALL ABOUT COLLATERAL VALUE UNDERLYING THE DEBT!…The more valuable/reliable the collateral ( asset value) , the less messy the resolution given the capital structure overlying it!

      THATS THEORY …WHAT NOW ?

      Well , the only thing ahead of the notes holders is the 1st-lien Bank loans …NOT other secured notes. The same 1st lien Banks are contemplating extending liquidity lines to Petra… UNQUESTIONABLY, that implies that collateral is “good as cash” . I agree with the Banks on this , given that Petra has invested ± $1Billion in assets which have NOT suffered write-offs therefore LoMs economics are holding up ! Petra Diamonds’ Invested Capital = approx $1800M ( FY2019)

      A quick search on bond values indicate that Petra’s 7,25% Notes 2022 are trading at 30-40c / $ … thus implying recoverable value = $250M , which is significantly lower than the book net asset value of $1700M ( $1800( EV) – $107 (available Bank loans) , of which only $36M is drawn. Mr Market is saying …Petra’s EV = $250 + $36 + $24 = $310M …ABSOLUTELY SILLY !

      FACT : ABSA et al will NEVER EVER permit Petra to go through liquidation given the resultant value erosion.

      Therefore , this is a woefully disconnect that is begging to be exploited ….I SAY BUY THE NOTES ( min denomination = $200k per note) TOGETHER WITH EQUITY …..BECAUSE COLLATERAL FOR THE BANK LOANS IS SOLID! …Management will resolve this very simple situation , in my opinion. So far , they have done it impeccably. If the note holders convert , which is normally done according to book values , but making them whole ( Notes + coupons to maturity) , they will end-up with 50-70% ($850M) of BV Equity. Petra will then have a mere $110M bank debt ( RCF + WC loan) …. For LTM EBITDA = $150M ! THAT IS DEEP VALUE! Therefore valuation of MCap = $600M – $900M , based on 4-6x EBITDA , with the Capex = $50/yr going forward bcs Petra is ex-Capex now.

      YOU MAY ASK : GS , HOW THE HELL DID WE GET HERE ?
      Answer : ITS THE CONSEQUENCES OF NOT ACHIEVING PLAN/CALL ( non-miners = PRODUCTION TARGETS) !

      On its Indenture for the $650M 7,25% 2022 notes , Petra had forecasted Production = 5,3Mcts for 2019 at ±$110/ct (Actual = 3,9Mcts @ $124/ct) ….Simple arithmetic , is that had they achieved their targets for 2019 , Petra would have had EBITDA = >$350M ( not $153 achieved) and obviously , there would NOT be a need for all this “corporate finance gymnastics” associated with the WC & RCF ! …Such are Value destructive!

      Pls be free to comment should you seek more clarity.

      Yours truly,
      GS

    • Hi Anonymous,

      It all depends on the agreed Enterprise Value (EV) .Normally such an agreement is seriously contested …its bare knuckled squabble, to put it mildly. Such an agreement will be reached when the Bank group allow for the RCF to be accessed , because thats a sure sign that there is material ( > R1Billion ) equity in the business. Otherwise, Bank group will NOT allow access to the RCF , to pay the coupon , because such will erode their collateral value.

      My estimate is that the noteholders are well advised to get onboard with Bank group demands given the point in the cycle. The diamond market outlook is hazy , but over the horizon there is some hope. My estimate is that Petra’s EV = $1200 M – $1500M , just to entice the Bank group. It is a major discount to my true estimate of >$1800M. The noteholders will emerge with 50-70% , with the shareholder remaining with 30 -50%.

      Remember , the ONLY game in town is to get the Bank group comfy to avail the R1Billion so that there is a business going forward. That depends on the assessed & agreed EV that comfortably exceeds the >$750M noteholders claim.

      I trust that answers your query.

      Yours Truly,
      GS

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