TD Lowers Target price to .40 Event
Bellatrix announces recapitalization transaction.
Impact: MIXED; dilution offset by debt reduction and term-out
Recapitalization features the exchange of a portion of senior notes and
all convertible debentures for shares. The company announced a proposed
transaction which includes the exchange of all currently outstanding senior notes
due in May 2020 (US$145.8mm) for US$50mm of new second lien notes and US
$50mm of new third lien notes (both due late in 2023) and 51% of pro forma
shares outstanding following the transaction (equating to 250mm shares on a total of
490mm pro forma). In addition, the company will exchange all currently outstanding
convertible debentures (C$50mm) for 32.5% (159mm shares) of pro forma shares
outstanding.
Although the transaction buys the company a much needed term on the
remaining notes, and will result in interest savings, the implied share issue
price is below the previous trading value. Bellatrix will save an estimated ~
$12mm/year in interest and our 2019E pro forma net debt falls by 25%. That said,
the implied combined price of the shares to be issued under the proposal equates
to $0.27/share.
Overall, the discounted implied share issue price is indicative of the cost to
buy the company an additional three years to deal with the debt overhang.
In our view, options were becoming limited as 2020 is fast approaching and this
essentially provides the company with time and an option to wait for regional gas
prices to recover.
Completion of the transaction is conditional upon several key assumptions,
which include the extension of the company's current credit facility by one
year (it was expected to mature in November 2019).
Bellatrix has also entered into support agreements with 90% of the current
senior note holders and 50% of the convertible debenture holders, while the
transaction is expected to close by the end of May 2019 (pending approval).
TD Investment Conclusion
We believe that with options dwindling, the recapitalization is prudent and the costs
to do so are within reason. That said, we have reduced our CFPS and NAV estimates
as a result of the share dilution required, and as such, we have reduced our target
price to $0.40 (from $0.75 previously), and we remain HOLD-rated