Author Topic: Convertible Bond Yielding > 20%  (Read 9000 times)


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Re: Convertible Bond Yielding > 20%
« Reply #30 on: November 22, 2016, 09:38:56 AM »
agree!  the tax losses have a lot of value to an acquirer - more so to someone who bought the entire Zargon C-corp, less so if the assets are sold off piecemeal

tax losses at Canadian E&Ps come in about 4 or 5 different flavors.  long story short, past M&A suggests these are worth between 5-12 cents on the dollar (of losses) depending on type.  Taking the low-end, Zargon's should be worth at least $21M ... pretty significant in relation to anything else at this company


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Re: Convertible Bond Yielding > 20%
« Reply #31 on: January 07, 2017, 12:19:43 PM »
Thoughts on Zargon's debenture restructuring proposal?

-extending the maturity date of the Debentures from June 30, 2017 to December 31, 2019
- increasing the interest rate of the Debentures from 6.0% per annum to 8.0% per annum
- reducing the conversion price in effect for each common share of Zargon to be issued upon the conversion of the Debentures from $18.80 to $1.25
- providing debenture holders a “put right” to redeem up to $19 million of Debentures at a cash price set by a “Dutch auction” with minimum and maximum prices of $890 and $1,000 per Debenture.

I guess this first question is will it be approved? Should it be approved it seems to reduce equity upside to around $1.25 for the short term but dramatically reduces debt and buys the company another 3 years to get things together or sell itself.


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Re: Convertible Bond Yielding > 20%
« Reply #32 on: January 07, 2017, 11:26:18 PM »
They currently have $57.5m of debentures outstanding (at face value) and are paying $3.45m/year in interest. If this gets approved and they redeem $19m at $1000 per, they will have $38.5m of debt remaining and will be paying $3.08m/year in interest (could be slightly lower if they redeem at a lower price). So, they push the debt out 2.5 years and yearly interest payments are reduced somewhat.

What's the cost to this? Above $1.25, the holders of the debentures would be able to convert their debentures into 32.4m ($38.5/$1.19) shares. Once again, this could be slightly lower if the redemption is at a price lower than $1000. Currently we've got 30.6m shares outstanding so current shareholders would be left with roughly half of the company at that point. So, the upside north of $1.25 is cut in half but the risk of even bigger dilution is pushed out 2.5 years. At a share price of $0.80, even after buying back $20m of debt, about 47m shares would have to be issued if this deal does not go through and they can't come up with the money through asset sales/refinancing. 

Overall, I think it's a fair deal although I don't particularly like it. Debt holders get a higher interest rate, equity upside north of $1.25 (which I think is worth a lot), protection from early redemption, and the ones that don't like it can put most of their debt back to the company at or near par. On the last point, I'm assuming that most of the debenture holders that vote for the deal (it needs a vote of 66 2/3% to pass) will want to keep their bonds so the remaining ones who voted no have the option of getting out. This might not be a good assumption. Equity holders, on the other hand,  give up half the equity north of $1.25 but in return get 2.5 more years to let things play out and hopefully for value to be realized.

As a shareholder, I'm not particularly fond of the deal. I would have preferred a sale of the entire company but they hinted fairly strongly that this is the course they were going to take so can't say it was unexpected. If the deal goes through, my estimate of fair value for the shares will go from $2/share to ~$1.50. If it doesn't go through, I hope they have something else lined up. I'm wondering if the reason they haven't decided to sell the company is because they are not getting offers/getting lowball offers or if it is because management is intent on riding this out and thinks oil will rebound strongly.


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Re: Convertible Bond Yielding > 20%
« Reply #33 on: January 08, 2017, 04:52:43 AM »
Assuming the price of oil goes to $65 by mid 2017 I don't think it is a stretch to assume Zargon can increase their cap ex somewhat to be producing 3,000 boed mostly oil by 2nd half 2017.

At that point I would think the Company would be worth mininum $60,000 per flowing barrel or $180 million total enterprise value - this would place a value on the shares of $3 and $240 per $100 ($100/$1.25 times $3) face value of debenture.

This is a win win situation for both shareholders and debenture holders.


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Re: Convertible Bond Yielding > 20%
« Reply #34 on: January 08, 2017, 09:14:27 PM »

Revisiting Zargon after the debenture amendment

by Lsigurd on January 8, 2017

I wrote about my position in Zargon in my September update.  I bought the stock because, after a large asset sale of their Saskatchewan properties at a favorable price, the company seemed poised to recover with an uptick in the price of oil.

As an aside, what a long post that update was!  I really was cramming a lot of information into the monthly updates I used to focus on.  Hopefully having the updates dispersed into smaller chunks will make for easier reading.

On Friday Zargon announced that their 6.00% convertible unsecured subordinated debentures due June 30, 2017 would be amended, pending approval of holders. The amendments are as follows:


When I looked at Zargon in the fall I did so with the assumption that they would have to dilute to raise capital to pay back the debentures.  I was optimistically thinking that would happen at around a 80c share price.

With this deal Zargon is using the cash it has available to pay what of the debenture it can, and then, rather than issuing equity at the current level, its saying give us 3 years and we will issue equity at a 50% premium.

So its much less dilutive than I had been anticipating.

I took a look at what Zargon would look like if the debentures are converted.  This happens at a stock price of $1.25, so I took a look at the company at $1.30.  That implies over 50% appreciation from the current level.  What I’m doing here is asking the question “is this is a reasonable valuation for this company?” – if it is, then there is a lot of upside in the stock.

If I assume that Zargon uses the $19 million to purchase the  debentures at par (as opposed to 89% of par), which would be the worst case outcome of the put option, they end up diluting 31 million shares with the rest of the debentures (at $1.30 the debentures would be in the money).  The capitalization and metrics look something like this:

incomestatement(Note that my $52 scenario assumes a 1.28 CAD/USD exchange whereas my $45 scenario assumes 1.33 exchange.  I am trying to be conservative by using an $18 differential between WTI and what Zargon realized.  This differential was $10/bbl in the third quarter)

Total market capitalization is still only $80 million.  There is no debt.  And you have a company with a best in class decline rate of ~10%, producing 2,500boepd that is 75% oil.

On traditional metrics it looks reasonable.  Even after the large price appreciation the company would still be trading at $31,000 per flowing boe and at a little under 8x EV/EBITDA, which is in-line with peers once you account for the fact that the resulting company has no debt.  At $52 oil ($66 Canadian), they can keep production steady with capital expenditures of $6.3 million (in the recent corporate presentation they breakdown the $7.8 million of capital expenditures they expect to incur in 2017 and $1.5 million of it is for land retention).  This leaves around $4 million of discretionary cash flow for growth.

I think Zargon could turn out to be a good idea in a rising oil price environment.  It wasn’t, and isn’t a great company at $40 oil.  Its barely treading water.  At $50 it gets its head above.  In the high $50’s there is real value there.  I thought we were moving into a rising price environment in September and I am more convinced of that now.  So I think there is more chance Zargon moves higher than lower.


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Re: Convertible Bond Yielding > 20%
« Reply #35 on: January 09, 2017, 06:41:04 AM »
While I own both the stock and the debentures, I have no idea why they felt they had to bend over so badly to get the debentureholders to sign off on this? The conversion price of $1.25 which is my main disappointment is way too low in my opinion as I was expecting something closer to $2.

If you take a look at what Entrec Corporation did offer to its debentureholders, and got approved, you see right away that the terms here are too generous. Zargon was in a much better financial shape than Entrec with no other debt, currently generating positive cash flow and could easily sell more assets. If you compare with Colabor Group's debentures deal it is even worst.

So this deal takes away upside from my stock but, gives it to the debentures which I was not expecting. However, overall I think it means less potential so I am not thrilled at all by this offer.



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Re: Convertible Bond Yielding > 20%
« Reply #36 on: January 13, 2017, 02:48:41 AM »
As a debenture holder, I can see why they offered as much as they did. With no bank debt here, its not a bad result for me to get stock for my debentures at would surely be a price much lower than this. Deb holders would end up with substantially more than half the company (which is what the result basically is of full conversion above $1.25).

ZAR has less leverage on the deb holders than if there was a bunch of bank debt, like in the TBE.DB case.

Speaking of which, there seems to be a constructive resolution for the TBE.DB, but not sure exactly what it looks like.


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Re: Convertible Bond Yielding > 20%
« Reply #37 on: January 13, 2017, 12:27:48 PM »
I'm a debenture holder, and would absolutely have voted against anything less generous. At 90, the YTM is 20% plus, and if they don't pay out the debentures get control of a debt free company at a great price.

The new YTM is way lower, so without a better stick I don't see why anyone would take it. Repricing the option is the very minimum. I still might vote no if I can do that and tender.