What Are HCG's Common Shares Really Worth....?
For those who are long, the question is not so much whether HCG can survive, but rather how much the common shares are really worth / will be worth.....
You could have a scenario where HCG survives, but the share price drops to $1 or $2 a share and stays there....I don't think current longs would exactly be jumping for joy if this occurred and would take small consolation in the fact that HCG would still be alive........
This is a key point to keep in mind IMO.....Debtors are not concerned about the equity holders - they are simply looking to get their principal back with interest.....As long as the company does not go into receivership and can pay its debts, debtholders are happy....I think that's why HOOPP was willing to provide the loan: In addition to the high interest they are receiving, the term is short (what is it: 1-2 years...?), so they must believe the probability of getting their money back along with most/all the interest (perhaps even in the event of insolvency) is a good bet, even if the equity is worth far less than $6 a share....
A few things are telling in my view:
Debt Financing:
The onerous terms of the HOOPP loan tell me the big banks / other lenders were either not interested in taking a chance on HCG or offered terms that were even more unappealing....
Fearing contagion, EQB was able to secure and announce a credit facility with very reasonable terms from a big bank syndicate within a matter days during the same time period of the HOOPP loan to HCG, and even announced the addition of more big banks a few days later.....
It is telling that, even at this date, HCG is unable to secure a credit facility with other financial institutions, even though they have already borrowed the majority of their HOOPP credit line and are paying through the nose in interest on the borrow (plus an ongoing interest rate on the remaining money they have yet to borrow).......
Takeover:
I think suitors would be willing to pick over HCG's assets and purchase those of quality, but I think it's highly doubtful that an entity would want to take the whole company off shareholders' hands....I think the mortgages are more risky / toxic than HCG is letting on - Perhaps the only way a takeover happens is if the government is willing to backstop the downside risk and/or cover the insurance on the insured loans that were issued with false income information....But again, even if this was the case, what would a company be willing to pay HCG common shareholders for the transaction....?......I suspect to date, it would be much less than the current market price ($14.25)....
Given the above, my guess is that, within 6 months, HCG will either be restructured with current common equity shares worth zero, or it will be trudging along in the $1 - $2 range....
Wild Card: If the housing market goes south, the risk in owning HCG common shares just increases all the more....