Sunday, February 26, 2012

GTL debt restructuring analysis-investors still at risk

When the GTL debt restructuring was announced, the GTL stocks had rose around 20%-40% in anticipation of a sweetheart deal and some opportunity for equity holders to salvage something. But the debt restructuring details contained in the postal ballots(http://www.moneycontrol.com/livefeed_pdf/Feb2012/GTL_Ltd_160212.pdf and http://www.moneycontrol.com/livefeed_pdf/Feb2012/GTL_Infrastructure_Ltd_160212.pdf) do not inspire much confidence for equity investors to accumulate their position. My reasons for stating this are given below.
  1. GTL Infra has outstanding FCCBs of $228MM, redeemable @40% premium in Nov,2012. Though the company is in talks with the holders to restructure those FCCBs, the outcome would merely mean significant dilution given that the conversion price is far above the existing market price. Of course, since the banks have agreed to convert 25% of their debt into equity, the FCCB holders may follow suit but I would not bet on it. 
  2. The banks have a conversion option on their debt in case GTL Infra/GTL Limited default on the repayment as per CDR LoA. This increases dilution risk, and it is not very clear whether SEBI will allow favourable pricing to the banks in future. This would lower the potential upside for the stockholders, as banks would prefer conversion later on. We need more clarity on this.
  3. Dilution is significant under the CDR. I applied the pricing as per the SEBI ICDR Regulations 2009, and my estimate came to Rs 11.8 for GTL Infra, and Rs 53 for GTL Ltd taking the stated record date. I assumed that the conversion price would be same for the next two tranches BUT since that is taken on trailing six months basis as per SEBI norms, it may be higher(thus reducing dilution later). But banks seem to have wanted maximum conversion upfront under the existing lower prices. Interestingly, even the market seems to have converged to that price, but the shares increase alone will be around 70%-100% for both companies, diluting existing shareholders.
  4. GTL/GTL Infra have, in anticipation of the CDR, reversed certain interest expense and charges, thus making credit analysis tougher and complicated
  5. As if the holding structure was not tough already, the GTL promoter got back his shares from ICICI in return for some debt returning to CNIL's books. This really complicates further analysis till a balance sheet is available, which would take till June at the bare minimum. If only proforma balance sheets were mandated by SEBI!
Hence, due to the complexity of the whole deal and the limited upside(read my earlier posts on GTL group companies where I felt it was fairly valued), investors can seek better opportunities.

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