Monday, November 1, 2010

Gulf Finance House - Draft Terms on New Sukuk = 23% Annual Return

 Choose Your Door Carefully.  Some Deals are Better than Others.

As you recall, GFH announced with great fanfare its plan to raise up to US$500 million in new capital.  If you don't, here's an earlier post.

I've just gotten a copy of the draft term sheet for the Sukuk from a reliable source.

First, a recitation of the terms:
  1. Type - Convertible Murabaha Facility
  2. Status - Senior Unsecured Debt
  3. Maturity - 3.5 years
  4. Profit Payment (aka Interest Rate) - Indicative 12% per annum!
  5. Conversion Price - US$0.31 per share
  6. Incentive Structure - If conversion election made before 31 December 2010, last 2.5 years Profit Payment in shares at US$0.31 conversion price.
Before the commentary, two very important caveats:
  1. GFH's shareholders have not approved the issuance.  GFH's first OGM and EGM failed for lack of a quorum.  
  2. The terms sheet is marked "indicative" meaning it's not binding, but rather serves as a basis for discussion/negotiation with potential investors. 
  3. Nonetheless, these terms provide a window into what GFH's board and management believe will be necessary to secure investor interest.  In that regard, I'd note that the accompanying investor presentation (a future post will comment on that) states:  "Some commitments already received from Chairman, strategic investors, and related parties".  So you can be pretty sure that GFH has drawn on these disinterested parties to set market-based terms.
Now to the commentary.
  1. Assuming a take and hold investor who does not elect conversion until after 31 December 2010, the promised return (IRR basis) is roughly 23% per annum. 
  2. 12% of that return composed of cash (the "interest payments").   It's hard to see GFH earning sufficient returns to have much left for shareholders after the interest payment is made.
  3. 11% of that from the discount on the shares (assuming the shareholders approve the 1:4  reverse split and GFH trades at 4 times its current US$0.125 per share.  A rather substantial dilution of existing shareholders.
  4. The total promised return reflects the weak financial condition of the company when it has to offer essentially private equity like returns for its debt.  Of course, the actual return will depend on GFH's performance which may indicate a market judgment on the probability of such performance.
  5. It also establishes what might be considered an "unfortunate" benchmark for GFH's debt issues. Particularly, when one considers this is apparently an early offer to potential investors.  And as we all know the first price in the suq is not the last.

4 comments:

Anonymous said...

Excellent analysis!

Abu 'Arqala said...

Anonymous

It's pretty clear to me that you're an intelligent discerning individual.

I'll now break to pat myself vigorously on the back.

Anonymous said...

"the Ordinary and Extraordinary General Meeting of Gulf Finance House BSC (“GFH”) to be held on Sunday, 31 October 2010 at 09.00am in Al Areen Resort & Palace, Kingdom of Bahrain, to discuss and approve the following agenda. If the required legal quorum is not available,a second meeting will be held on 7 November 2010 at the same time and place, whereby the provisions of Article 57 of the Articles of Association of the Bank will apply. If the required legal quorum is not available at such second meeting, a third meeting will be held on 14 November 2010 at the same time
and place, whereby the provisions of Article 57 of the Articles of Association of the Bank will apply."

There was no quorum on 31 October or the 7 November .

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