"Death Spiral" Convertibles - ISR Capital --> Trade Carefully

Source: The Edge Markets (29 June 2016)
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MAS aware of ISR stake sale to Rigoll, says Value Capital Asset Management

By:
Leu Siew Ying

SINGAPORE (June 28): Value Capital Asset Management, the fund manager that placed a commanding stake in ISR Capital in the hands of David Rigoll, says that the Monetary Authority of Singapore (MAS) was aware of its transactions and the source of its funds.

“To reiterate, VCAM is a privately held fund management company registered with MAS and they are obligated to report to MAS on their investors and source of investment funds,” says spokeswoman Rosalina Soh, of Equitique Communications, in an email exchange with The Edge Singapore.

VCAM specialises in subscribing to redeemable convertible bonds issued by small cap companies. These instruments, sometimes known as “death spiral” convertibles, have the potential to cause massive dilution, and even place control of a company in new hands.

In November 2014, Cayman Islands-based Premier Equity Fund and VCAM entered into an agreement with ISR Capital to subscribe for $35 million worth of 2% redeemable convertible bonds. The bonds are being issued in seven tranches, each composed of five sub-tranches of $1 million.

ISR Capital is charged a 5% arranger’s fee by VCAM at the close of each sub-tranche. The conversion price of the first four tranches of bonds is set at 85% of the average of the volume weighted average price at which ISR Capital shares traded on any three consecutive trading days determined by the subscriber during the 30 trading days that immediately precede the closing date of the first sub-tranche of each tranche of the bonds.

So far, the fund managed by VCAM has subscribed to all five sub-tranches of the first tranche of bonds. The conversion price was just 0.4 cent per share. As at May 13, an aggregate amount of $950,000 of the fifth sub-tranche had been converted into shares, according to ISR Capital.

VCAM sold most of the shares it converted almost immediately, with much of it going to Rigoll. On May 9, Rigoll bought 265.4 million shares in ISR Capital at 0.5 cent apiece from VCAM’s Premier Equity Fund Sub Fund G. That gave Rigoll a 28.5% stake in ISR Capital based on the 931 million shares in issue at the time. By June 13, Rigoll held 426.7 million shares of ISR Capital, or 28.56% of the 1.49 billion shares in issue.

The 0.5 cent at which VCAM’s Premier Equity Fund Sub Fund G sold its ISR Capital shares is 25% more than the 0.4 cent at which the shares were issued. However, shares in ISR Capital have rocketed since Rigoll emerged as a major shareholder of the company. The stock is now trading at 9.5 cents, or 1,800% more than the 0.5 cent at which the VCAM fund had sold its shares.

How were VCAM and Rigoll introduced? Who are the investors behind Premier Equity Fund? Did VCAM have to consult these investors about the sale of ISR Capital shares to Rigoll? “Your questions are again suggestive and seeing this straightforward fund-raising exercise in a rather complex manner,” says Soh, in an email.

In fact, the background to ISR Capital’s recent announcements isn’t straightforward, according to The Edge Singapore’s cover story this week. The company appointed Rigoll a non-executive director on May 16, and an executive director on June 16. On May 20, it said it had signed a memorandum of understanding to look into the possibility of investing in a rare earths mining concession indirectly owned by Singapore-based REO Magnetic. On June 9, ISR Capital signed an agreement with REO Magnetic to buy a 19.9% stake in Tantalum Holding (Mauritius), which owns a company in Madagascar that holds a permit to explore and develop a rare earth concession.

However, according to The Edge Singapore, Tantalum Holding (Mauritius) was once 100% owned by a listed company in Germany called Tantalus Rare Earths. Rigoll is a substantial shareholder of Tantalus Rare Earths, and was a director until Dec 8. As it happened, Dec 8 was also the day that Tantalus Rare Earths signed a deal to sell Tantalum Holding (Mauritius) to a Singapore-based company called Apphia Minerals SOF. This company changed its name to REO Magnetic on May 20, the same day it signed the MOU with ISR Capital.

The largest shareholder of REO Magnetic is an individual named Jonathan Lim Keng Hock. The sole shareholder of VCAM is John Poon Seng Fatt.

In response to questions from The Edge Singapore about whether Singapore Exchange had given its approval for ISR Capital’s deals with Rigoll, the local bourse operator said that Singapore operates a disclosure-based regime, and that the market is best-placed to evaluate the commercial merits of companies and their business ventures.

“SGX’s oversight as front-line regulator is on companies’ continuous obligations including whether their disclosure of material information is timely and done in a manner which meets the standards required of listed companies. As such, SGX does not approve, nor pass judgement on the commercial merits of, the business transactions of companies.”

Potential Privatisation Candidates in the Property Sector (SGX, Singapore)

The Edge Singapore, in its June 20th 2016 issue, highlighted the following companies in the property sector as possible candidates for privatisation:

Company	Price to Book Value (Times) as at 14 June 2016
Bukit Sembawang Estates	0.94
GuocoLand	0.64
GL	0.99
Ho Bee Land	0.55
Hotel Properties	1.05
Metro Holdings	0.62
OUE	0.35
Perennial Real Estate Holdings	0.56
United Engineers	0.78
Wheelock Properties	0.57
Wing Tai Holdings	0.34

Source:  The Edge Singapore, 20 June 2016

Other companies also cited but with a lesser chance of privatisation included Capitaland, City Developments, Fraser Centrepoint Ltd, Global Logistics Properties, Hongkong Land, UOL Group, Yanlord Land Group and Ying Li Intl Real Estate.

The possible reasons for privatisation included the following:

• Change of major shareholder
• Tight float
• Deep discount to book value

With privatisation and a buyout offer, shareholders often stand to gain handsome profits.  The companies bear some watching out for sudden price and volume movements.   One does have to be patient though.   A little bit of luck in picking the right counter also helps.

Singapore stocks that should be traded carefully due to convertibles

The Business Times carried an article on Friday 10 June 2016 that highlighted a Singapore-based firm that has started a fund to buy "death spiral" convertibles.

See attached link for the article:

Death Spiral Convertibles
or attached file:   Death Spiral Convertibles


These convertible notes have gained a negative name because of the dilutive impact on the underlying shares of a company.   The notes set the conversion discount and not the price.   This could result in some notes having the potential to create a negative impact on a company's stock due to increasing dilutions to the company's stock with each round of conversion taking place.

According to the Business Times article, the firm has previously made such deals with Attilan Group (the former Asiasons Capital), Elektromotive Group, Yuuzoo Corp, Cacola Furniture International and OLS Enterprise.  

Another firm that is active in such bonds has deals with Annica Holdings, ISR Capital, Magnus Energy Group and LionGold Corp.

Trade these stocks with some care if such convertible notes are still outstanding.

Noble Group Rights Issue - SGX's MTP Rule will leave a bitter aftertaste

Company Background

Noble Group manages a portfolio of global supply chains covering a range of industrial and energy products. Operating from over 60 locations and employing more than 40 nationalities, Noble facilitates the marketing, processing, financing and transportation of essential raw materials. Sourcing bulk commodities from low cost regions such as South America, South Africa, Australia and Indonesia, the Group supplies high growth demand markets, particularly in Asia and the Middle East.

See company website for more info:
http://www.thisisnoble.com/


Rights Issue

Noble has proposed renounceable underwritten rights issue  of 6,535,409,562 new ordinary shares of HK$0.25 each in the capital of the Company at an issue price of S$0.11 for each Rights Share on the basis of one (1) Rights Share for every one (1) existing ordinary share of HK$0.25.

Details of the issue are in the document below:
Noble Rights Issue


SGX's MTP Rule to affect Noble's Rights Issue?

SGX's Minimum Trading Price (MTP) rule is expected to have a negative impact on Noble's right issue and future share price movements.

When the rights issue was announced, Noble's share price stood at 30 cents.   I would speculate that the rights price was partly fixed with the MTP in mind.   At 11 cents for the rights offer, the theoretical ex-rights price for Noble would have been (30+11)/2 = 20.5 cents.   This would have kept Noble above the 20 cent requirement level.

However, the rights issue announcement was not too positively taken and the price dropped last Friday (3 June 2016) to 26 cents.   Theoretical ex-rights price is now (26+11)/2 = 18.5 cents, which puts Noble into MTP-territory.    Unless the share price moves back up above 20 cents, we are looking at an eventual share consolidation.

Share consolidation would be a further dose of bad news.  Imagine having forked out money for a rights issue and getting more shares and then having it reduced back to fewer shares again!   I am certainly no big fan of the MTP - to me it has destroyed a lot of value for our companies and therefore shareholders and investors on the SGX.   More often than not, the share price after consolidation drops significantly again after the exercise and shareholders are far worse-off.

I believe that Noble's share price has further to fall prior to the rights issue.   The rights issue effect has probably not sunk into all investors' minds yet and not all have reacted to Friday's share price post announcement.    We are probably looking at another 4-cent drop to about 22 cents prior to the rights issue.

To me, MTP-related share consolidation for Noble seems almost certain to happen post-rights and investors should consider their options carefully regarding the rights issue.

I have about 200 shares in Noble left over from many years ago when I elected for scrip dividend.  Time now to ponder on how to react to the rights issue.

Starburst Holdings Limited (SGX, Singapore) - Rights and Expected Warrant Pricing

Company Background

Starburst Holdings Limited (Starburst) specialises in the design and engineering of firearms-training facilities and the design, fabrication, installation and maintenance of anti-ricochet ballistic protection systems for firearm shooting ranges and tactical training mock-ups for law enforcement, military and security agencies as well as civil authorities in Southeast Asia and the Middle East.

   See company website link for more information:
   http://www.starburst.net.sg/








The company recently offered a rights issue of 1 warrant for every 4 ordinary shares held for an issue price of 1 cent ($0.01), with the exercise price set at 25 cents ($0.25).

Starburst's rights price ended trading yesterday (2 June 2016) at 4.8 cents.   It was the last day of trading for the rights.  

With a subscription price of 1 cent, it means that investors who bought the rights would have paid a total of 4.8 cents + 1 cent = 5.8 cents to get hold of the warrants.

Starburst's mother shares are trading today (3 June 2016) at 25 cents, which therefore gives a theoretical price of zero for the warrant.

Given the recent indications on the trading price of the rights , one would expect a premium to be attached to the soon-to-be-listed warrants of about 6 cents.

Hence, expected opening price for warrants is estimated at between 5 to 7 cents, giving a premium of about 20% to 28%.   This is a little expensive but still considered acceptable for a warrant with a expiry period of 5 years.

Important dates and times to the rights issue:

1..  Last date and time for acceptance and payment of warrants:  
      Wed 8 June 2016 at 5 pm (9.30 pm for electronic applications)
2.   Expected date for crediting of warrants:   Wed 15 June 2016
3.   Expected date for issuance of warrants :   Thu 16 June 2016
4.   Expected date for commencement of trading of warrants:  Fri 17 June 2016