The Afren Shareholder Opposition Group (Asog) has taken offence at the deal, agreed at the end of April when Afren was on the brink of bankruptcy.
The company, active mainly in Nigeria, was a rising star of the equity and bond markets until last year, when after a scandal involving unauthorised payments the CEO and COO left, and then the oil price collapsed. Afren quickly began to struggle with its debt, now $1.793bn on a net basis.
After months of wrangling, a deal was finally struck on April 30, in which the company's high yield bond investors agreed to put in up to $255m of fresh capital, in return for 86%-89% of Afren's equity.
The deal does not need shareholders' consent, except for the part that involves them being diluted. This will be voted on at an extraordinary general meeting, expected to be held in late June.
Afren’s management and creditors are desperate for shareholders to vote in favour of the dilution, as they believe the consequences of a No vote would be dire. The restructuring agreement was the result of a long battle to keep the company alive, and failure to gain shareholder support could lead to the company being dismantled.
Yet Asog, which claims to represent 530 dissenting retail shareholders, intends to fight the restructuring at the EGM, GlobalCapital can reveal. The group believes it can defeat the motion.
“What we’re trying to achieve is a fairer outcome for shareholders,” said Peter Brailey, a small business owner and Afren shareholder, who is acting as spokesperson for Asog. “We see an unfair situation and we don’t want to put up with that. We’re prepared to stand up and be counted.”
Asog informed Afren on Wednesday May 20 that shareholders registered with the group held just over 10% of the firm’s share capital.
That claim cannot be independently verified. But if it is true, and Asog can control votes from all those shareholders, it would have considerable clout in a general meeting — more than the biggest shareholder, the Nigerian oil and gas firm South Atlantic Petroleum, which has a little over 7%.
To pass the dilution resolution at the EGM, Afren will need to obtain 75% of the votes cast.
That means that, if all shareholders take part in the vote, Asog holds less than half of the 25% needed to defeat the motion. But since voting turnout at previous general meetings of Afren has been closer to 70%, Asog believes it may need only about 17.5% to block the dilution.
Afren appears to be taking the threat of a shareholder revolt seriously. The firm’s new CEO, Alan Linn, met representatives of Asog on May 5, within days of his appointment. Afren is also understood to be facilitating a first meeting between Asog and the bondholders who are injecting new money into the company as part of the restructuring.
Drastic dilution
Long-standing shareholders have already lost the vast majority of their original investments in Afren. The company’s stock has fallen 98% since the end of July, from £1.49 to 3p.
As it stands, the restructuring would squeeze shareholders even further.
The restructuring, approved by all Afren’s creditors, has gained the firm a $200m interim credit facility from the high yield investors, which should be followed by a $974m recapitalisation, which Afren intends to complete by the end of July.
According to some observers, it was unavoidable that shareholders would be all but wiped out, and they should be content with the vestigial stake they have been allowed to keep after the restructuring. In some other restructurings, the dilution has been even heavier.
Richard Segal, emerging market credit strategist at Jefferies, said of the shareholders: “They’ve been offered 11% of the company, which I think most would agree is pretty generous, given the circumstances. Obviously we don’t know what will happen in the next month, but they must be basically quite pleased to have anything in the double digits.”
Rebecca Jarvis, the Linklaters partner who is advising the reserve-based lenders to Afren on the restructuring, said: “They have obviously tried to set up the restructuring such that people vote in favour of the partial equitisation.”
But some shareholders are far from satisfied. Brailey said: “As shareholders, we need to think of a lower level of dilution — the dilution is very extreme relative to the funding being put in — but secondly it needs to be a viable growing company if the share price is going to show any chance of recovery.”
Asog believes the funding offered by the bondholders is a “bare minimum”, rather than an amount that would enable Afren to develop.
‘Self-destruct button’
Afren is adamant it is in the shareholders’ best interests to comply.
In a statement on March 13, when Afren’s restructuring plans were first revealed, the firm wrote: “If shareholders do not approve the Recapitalisation, it is expected that the amended economic terms of the New Senior Notes, and the amendment and reinstatement of the Existing Notes, together with the requirement to initiate a sale of the Group’s business, will mean that existing shareholders would be unlikely to see any return on their current investment.”
If the shareholders vote down the dilution resolution, the terms of the restructuring would automatically be altered, to compensate bondholders. These changes would be bruising to Afren, potentially even endangering its existence.
They include more debt, higher interest rates, and, most controversially to Asog, the right for new bondholders to appoint a majority of the company’s board, “with control over the process for the sale of the business”.
Brailey said Afren’s rhetoric was designed to convince shareholders that voting No would equate to pressing “a self-destruct button”. In his view, that was incorrect.
“Under a No vote, our expectation is that assets would be sold,” Brailey said. “Now, because of the level of dilution [under the Yes vote], if only 10% [of the current equity value] is returned from the asset sale, then from a shareholder point of view, we’re no worse off than if we vote Yes to dilution. It would be a calculated risk. The vast majority of private investors are used to taking calculated risks. A No vote is not the self-destruct button Afren is indicating."
A risk worth taking
In the event of a No vote, a sale of assets would appear unavoidable, since the restructuring agreement says the bondholders would steer the sale in that case.
As Segal, the analyst, put it: “We would have to think of dismantling the company.”
Asked whether shareholders could hope for something back after the proceeds of asset sales had been used to reimburse creditors, Segal said: “I suppose that is always a possibility, but in a fire sale situation in a country such as Nigeria, I wouldn’t be optimistic about the outcome for shareholders.”
Afren's bonds are trading well below par, which suggests bondholders do not expect to recover all their money.
Brailey agreed that voting No would be a huge gamble, though he said it might lead to the sale of some assets rather than all of them. If Yes meant a dilution of 86% or more, it was a risk worth taking, he said.
“Accountants tend to be cautious,” Brailey said. “Some producing assets have been written down to zero but do still have value. So the carrying balance sheet value of the assets of Afren we think is an understatement of what they would be worth in terms of their sale value.
“There are so many unknowns, the main one being what would the assets sell for, compared to the balance sheet valuations. Neither we nor Afren know the answer to that question, the only ones who do are the buyers.”
The firm’s assets consist of oil fields, primarily in Nigeria, but with some also in the Ivory Coast, Ghana, Congo, South Africa, Kenya, Tanzania, the Seychelles, Madagascar, Ethiopia and Iraqi Kurdistan. Afren said in its 2014 results, released on April 30, that Nigeria now made up all of the firm’s production.
Uncertain outcome
One senior banker at a lender to Afren was unsure which way the shareholders would vote. He was not confident the answer would be Yes and said negotiations between shareholders and bondholders might be needed.
“The question is, to what extent the shareholders will agree to be diluted,” the banker said. “In my view, the key decision will centre around that. If you’re a shareholder, what do you expect? Yes, you the bondholders have come to help, you’ve come to give me a lifeline, but that doesn’t mean you will get me completely. Will there be a dilution? My own, simple prognosis is yes. But to what extent, I can’t determine.”
He added: “There could be a few outliers, but I think they will come to a compromise. Reason will prevail on both sides, that’s my view.”
Brailey accepts there should be a dilution, but said the one proposed was far too large. “We don’t want to vote No, because it destroys Afren in effect. But we’ve been put in a financial situation, as shareholders, where a No vote looks a lot more attractive than a Yes vote.”
There has been no sign yet that the bondholders, which include Pimco and Ashmore, will compromise. For them, a negotiation with shareholders would follow an already painful, and largely unsuccessful, negotiation with Afren’s Nigerian lenders.
“The bondholders went out of their way to increase their exposure in a company that potentially is dying,” the banker said. “They gave the business a lifeline, so there has to be some consideration for them doing it.”
Meanwhile, Asog said it was making every effort to recruit more shareholders to its cause. Asog started recording shareholder registrations in late March. The number has risen by 80% over the past month, Asog said.
Members of the group have been communicating largely on a bulletin board hosted by London South East, a portal for UK private investors. Four small shareholders, Tony Harding, Ainsley Smith, Fraser Stock and Peter Brailey, are co-ordinating the group’s efforts.
Ashmore declined to comment. Pimco did not respond to a request for comment.
A spokesperson for Afren said: “We are communicating with all shareholders, large and small, to illustrate why this proposal is the only proposal that will ensure future equity value for shareholders. Unfortunately a No vote will put the future of the business at risk.”