ENQUEST BOND ENQ1

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Comments

  • Enquest H1'16 results released today. Any thoughts/views/gossip?!
  • Production guidance down a bit. Profit up a bit. Kraken still due on time (and at slightly lower costs). Not much in it to me - bit of swings and roundabouts but I'm holding on for a while yet - if they can get through to getting Kraken up and running then all will be good.

    Share price down (but only a bit) but ENQ1 up a bit. Brent up too with US oil stocks apparently announced yesterday as lower than market thought they would be.
  • Launch of the proposed financing restructuring of EnQuest PLC

    http://otp.investis.com/clients/uk/enquest1/rns/regulatory-story.aspx?cid=201&newsid=806163

    "Bond Amendments: Amendments have also been made to the High Yield
    and Retail notes including amending the maturity dates to April 2022 and
    the addition of a condition to only pay interest in cash if the prevailing
    oil price for the six-month period prior is at least $65.00/bbl; otherwise
    interest payable is to be capitalized. EnQuest has also proposed to remove
    the financial covenants under the Retail Notes, add new cross-default
    provisions. Support for the restructuring has been received from ~61% of
    High Yield noteholders."

    Looks like there will be no cash interest payment in the foreseeable future?!
  • Maybe not all doom and gloom (but that's me reading the situation and am hoping someone will come along soon and give an expert view).

    As VSI says, likely no cash coming bond holders way for the foreeable unless oil price climbs above $65. But, assuming Enquest can stay the distance (April 2022) holders will then receive accumulated interest as a capital repayment. If Kraken delivers in reasonable time then bond price should gradually increase to take account of the increasing final payout. Bond holders will also have a new chunk of equity above them which might be of some comfort.

    My calculator/brain can't cope with exactly what annual rate of return would be assuming no payouts until 2022 and with current bond price of 54p but I think it's getting on for 20%. About to consult Excel manual to find out how to work out exact figure. If someone on here does know please post.

    Some hurdles to overcome first though - all the elements of the restructuring have to be agreed/passed for it to go through.

    Come on Oliver - your views would be much appreciated. Is this the first of the ORB's offerings to get into this kind of situation?

  • VSIVSI
    edited October 2016
    At 54p I get an IRR of about 17.4% - this assumes no cash interest payment whatsoever and the maturity is extended till Aug-2023 (closest proxy to Oct-2023 maturity extension option).

    While I agree additional equity cushion and liquidity is welcome, bond holders are basically getting squeezed between the RCF and equity - no pickup in interest payment, no stapled-equity, duration risk (not maturity) being extended massively due to non-cash payment... to name a few. Also - not to forget that we could have reinvested cash interest into buying bonds at a much lower prevailing price than par (as would now be the case per suggested restructuring).

    If, as bondholders are being asked to take a bet that this company is going to be fine till 2023, then there is better risk reward in ENQ equity I'd have thought.
  • Just a thought. As we were expecting a higher dividend rate (from the next payment onwards) does that mean we will still be receiving that, albeit in capital form or does the "EnQuest has also proposed to remove the financial covenants under the Retail Notes" bit from VSI's excellent precis mean that the higher 7% will revert to the 5.5%?
  • Retail bond interest will be reset at 7% permanently (that's the least they can do!).
  • Weak covenants the nub of the problem. May well be the case for some other retail bonds, too, as issuers have had the upper hand in this lengthy sellers' market and rating agency not involved. Cannot recall Oliver ever to say much about this. Buyer beware , easily forgotten when one wants the product. Worth doing some homework on your holdings, and possibly ditch your bond(s). Brexit fuelled inflation suggests that in any case.
  • I have several questions regarding the consequences of this restructuring.
    What does "capitalized" mean in practice? Will interest be paid on the withheld interest payments or will the cash be basically an interest free loan to Enquest or will it be reinvested in more bond units?
    What happens to the withheld interest if you sell or buy the bond?
    This will surely have income tax implications if 5 or 6 years interest is paid in one tax year?

  • Jerry - think of interest income as being "Paid in Kind".

    That is - assume you had £100 Face Value of bonds and annual interest income was £7 (on 7% coupon) - instead of giving you cash (or deferring all cash payments at a latter date), the company will "issue new bonds" (with exact terms as existing ones) for your £7 of interest income. So at the end of Y1, you will have £107 FV of bonds. Yr 2, your interest income will accrue on £107 now, and so on and so forth. So if you come to sell the bonds, you will have more of them to sell than you initially owned.

    Effect of this for the company is that its bond debt balance keeps compounding at 7% pa.

    Here in lies my beef - if we were getting cash interest, we would have repurchased bonds in the open market at price well below par price; now we are being forced to own more at a non-market price for our interest income. Assuming company is a going concern, seems like a wealth transfer from bond holders to bank and equity. Any thoughts??

    I am no accountant, but I wonder if ultimately (if you get repaid your due) this will just result in capital gains and no interest income tax???

  • You may also want to know how U.S. bond holders are treated by comparison, Remember Enquest issued at the same time a somewhat more attractive 7% 2022 in USD, which was not disclosed to potential U.K. bond investors at the time, but lead to immediate fall in price of the GBP issue. Institutional investors would have never allowed for this to happen and would have demanded cancellation or coupon reset of the GBP version,
  • VSI - Thank you for your answers. So, it will work as a dividend reinvestment scheme but at par, not market rates! This seems very unfair to bond holders, especially those who rely on the interest for living expenses. Currently the £7 coupon could be reinvested on the open market to purchase between 12 to 13 units. You imply the interest rate remain at 7%, is that correct?

    Regards, Jerry
  • A write up from Oliver would be much appreciated. The bondholders don't have to accept the change, the alternative would be to put the company into administration or a debt for equity swap, neither of which will generate much cash for the bondholders. The accepted wisdom is that we will get more cash back if we keep the company alive as a going concern as opposed to a fire sale.
  • Both ENQ1 and USD bond have risen, so I guess the market thinks a restructure is improving the prospects for the bonds even (given that they are trading at a 'distressed' level). Certainly the risk of a liquidity induced default is vastly lower with the proposed restructure.
  • VSI - Are you sure about the unpaid interest being converted into bonds? I have just had notice from Selftrade about the proposed changes and they use the expression "the amended notes will accrue a fixed coupon......" which suggests to me that the unpaid interest will just be held by the company until maturity and then (hopefully) paid out in total.
  • VSIVSI
    edited October 2016
    Geoff - following is the restructuring document language I based my interpretation on:


    The Amended Retail Notes will:
    (i) accrue a fixed coupon of 7 per cent. per annum payable semi-annually in arrear. Interest under the Amended Retail Notes will only be payable in cash on an interest payment date if the Cash Payment Condition (as described in paragraph 7.1(b)) is satisfied. As with the High Yield Notes, if the Cash Payment Condition is not satisfied in respect of an interest payment date interest will not be paid in cash on that interest payment date and will be capitalised and satisfied by the issue of additional Amended Retail Notes to holders of the Amended Retail Notes outstanding at such time. The Cash Payment Condition in the Amended Retail Notes will cease to apply (and thereafter all payments of interest will be made in cash) upon the earlier of: (A) the repayment in full of the Existing RCF from cash generated from assets of the Group; or (B) the repayment or refinancing in full of the Existing RCF on terms that enable the disapplication of the Cash Payment Condition and future interest on the New High Yield Notes and the Amended Retail Notes to be paid in cash. Interest on the Amended Retail Notes will continue to accrue from the immediately preceding interest payment date of 15 August 2016 and be paid on the next interest payment date of 15 February 2017 in cash (subject to the Cash Payment Condition being satisfied) or be capitalised;



    And for completeness, following is the language for the High Yield Notes.
    The New High Yield Notes will:
    (i) accrue a fixed coupon of 7 per cent. per annum payable semi-annually in arrear. Interest under the New High Yield Notes will only be payable in cash on an interest payment date if: (A) over the six months immediately preceding the day which is one month prior to the relevant interest payment date under the New High Yield Notes, the average end of the day Dated Brent Future (as published by Platts) (or such equivalent price that may replace the dated Brent price from time to time) is equal to or above US$65.00 per barrel; and (B) no payment event of default is continuing under the Existing RCF (which shall include any such event of default arising as a result of the aggregate amount of the loans and letters of credit outstanding under the Existing RCF exceeding the aggregate commitments applicable at such time) (collectively, the "Cash Payment Condition"). If the Cash Payment Condition is not satisfied in respect of an interest payment date, interest will not be paid in cash on that interest payment date and will be capitalised and satisfied by the issue of additional New High Yield Notes to holders of the New High Yield Notes outstanding at such time. The Cash Payment Condition in the New High Yield Notes will cease to apply (and thereafter all payments of interest will be made in cash) upon the earlier of: (A) the repayment in full of the Existing RCF from cash generated from assets of the Group; or (B) the repayment or refinancing in full of the Existing RCF on terms that enable the disapplication of the Cash Payment Condition and future interest on the New High Yield Notes and the Amended Retail Notes to be paid in cash. Any interest due but not paid on the High Yield Notes prior to the effective date of the Restructuring will be capitalised and added to the principal amount of the New High Yield Notes to be issued pursuant to the Scheme;
  • VSI - Thanks very much for that. I agree with your interpretation of a note that I hadn't read in as detailed a manner as you had! I suppose the positive take on it is that at least we will thus get interest on the withheld interest whereas by simply accruing the unpaid amounts we wouldn't have. I know some comments have been a bit negative but, personally, I do feel that the company have tried to minimise the effects of a difficult situation even if they haven't necessarily been totally even-handed in their dealings with all their invetors.
  • Well this is all very interesting.

    Having followed the discussions above, the eventual reward seems attractive. The work that EQ has done to cut costs and the significant equity injection offered as part of this deal both make me really want to stay the course. Obviously the loss of cashflow will hurt, but playing the long game. it looks fair to me.

    What I would really like to see is some sort of analysis of what oil price EQ now needs to make this plan work and redeem in 2023 with the capitalised interest. Let's assume they can deliver Kraken at the opex levels they are claiming is feasible.

    Does anyone have any intel on this? Would it work if the POO flatlines, or do we need it to go up?
  • Does anyone have any idea what is behind the recent price moves?
  • If you mean the bonds then I guess it's becasue bond holders and potential bond holders feel that the restructuring gives the bonds more security. To me, at least, I'm happy having a chunk more equity standing above me, more money in the bank to, hopefully, allow Kraken to get on stream and start earning. As long as the oil price stays at the current kind of level, or higher, then, personally, I feel safer and am happy to continue holding the bonds. But that's me in my situation and I can appreciate that it's not suitable for everyone.
  • In case it's of interest, ENQ1 currently trading at 74.75p - up 2% today.
    Share price up almost 6% today.
    Brent Crude looking fairly strong at US$58.
    Kraken vessel making good progress from Singapore - now approaching English Channel.

    I'm feeling increasingly relaxed (but bear in mind I know nothing).




  • I agree with your optimism Laughton - Brent today at $58+ and 6mth future has just broken $60.

    I have tried to buy these bonds recently (post restructuring) but for whatever reason HL does not provide an online trading option.
  • Probably me just showing my conspiracy theorist credentials - but I believe it's so you have to buy over the phone (with increased trading costs). Does HL make a charge just for holding bonds in your account?
  • Hi folks, just registered to be able to participate in discussion. I bought these notes at the start and have bought on other occasions so that now I'm showing a capital gain apart from the income received., although that could change tomorrow with Brent down sharply this pm. I use HL also and although the notes can't be traded on line I was told only "on line charges" would be applied to any deals done on the phone. As far as I know HL don't make any particular charge for holding the notes in an account.
    As for dealing in these I was told they can only be traded without any accrued income which if I understood correctly is consequently forfeited. Does anyone else know anything on this?

    With regard to "income" my understanding is that at the current oil price, holders will receive additional Notes in lieu based on 7%. So if you hold say 10,000 (currently valued at approx. £7,300) you will receive in February and August an additional 350 Notes (approx. value today £255). Can anyone confirm this please? And next year am I right in thinking the same will apply-ie the calculation will still be based on the original 10,000 rather than the 10,700 you will then own?

    Based on the Armada Kraken's fairly imminent contribution to Enquest's operations I am also feeling confident in the future both for the notes and the ordinary shares of which I hold a few-assuming OPEC et al play ball of course.

    Happy and prosperous New Year to you all.

    Keith
  • edited January 2017
    You might be right Keith - but my understanding is that in February you would receive 350 extra bonds (10,000 x 7% x 50%) and then in August you would receive 362 extra bonds (10,350 x 7% x 50%) and so on until they either start paying the coupon in cash or they mature, on whatever date that should happen.

    But now you've got me thinking so I guess I'll have to go back and read the terms of the restructuring again. Why can't life just be simple??

  • Bear in mind that there is no accrued to pay in addition to the current price (just under 79p to buy). Extra bonds to be allocated Feb 15th so have bitten the bullet and purchased a few more today.

    Not recommending - just saying.
  • I rang the company yesterday to get an answer from the horses mouth, so to speak, but they haven't returned my call yet. I think it's a bit naughty what they're doing re the "income", but nothing to be done about it. I suppose if you want to buy, the best time is shortly before the next allocation date, as you've done, Laughton and if you want to sell it's just after an allocation.
  • That would be a massive arbitrage Keith - hard to imagine it works that way.

    In the instance of Pay-In-Kind (PIK) bonds, the price actually includes the accrued coupon payment - hence the price quoted for PIK bonds is called "dirty"; for cash-pay bonds, the price quoted is "clean" as it does not incorporate the accrued interest and is paid/earned separately upon purchase/sale.

    For ENQ, my guess would be: much like PIK bonds, the Enquest bond price appreciates fractionally daily (at a rate of 1/360 * 7%) and incorporates up to a maximum of 3.5pts (half of the coupon for semi-annual interest) between two coupon payments. The price then resets/decreases by 3.5pts the day after "interest payment" AND your holdings are adjusted by 3.5pts worth of new bonds (assumed to have been purchased at par).

    Not sure if I explained myself clearly enough!
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