On June 13th file, SAExploration (NASDAQ:SAEX) filed a form 8-k, the Security Exchange Commission's (SEC) form for material corporate events, with the SEC to disclose an agreement between the company and the holders of its debt. The agreement calls for these note holders to tender their notes for new notes with half of the notes' original face value and, additionally, to fund a $30M term loan facility. In exchange for this term loan facility and for the note holders reducing debt owed them, the note holders will receive newly issued common shares in the company.
If all note holders tender their notes, it will reduce SAExploration's debt by 50% from around $140M to $70M. This will substantially reduce the company's debt burden... but substantially increase the number of shares outstanding.
SAExploration currently has 17,400,000 shares outstanding, the company will issue approximately 380,000,000 shares to the note holders for funding the $30M term loan facility and will issue an additional 870,000,000 shares to the note holders in exchange for those note holders accepting new notes with half of the original face value. The outstanding shares will increase from 17,400,000 shares to a total of 1,340,000,000 shares. Current shareholders will experience substantial dilution as their 100% stake of the equity will be reduced sharply to 1.32% of the equity. The company also announced a 1-for-135 reverse split but the calculations in this article are being done under the pre-reverse-split prices.
Below is a synopsis of the percentage of shares before and after the restructuring:
Total: 100% (17,400,000) existing shareholders.
- 1.32%, approx. 17,400,000 original shares
- 28.20%, approx. 380,000,000 in exchange for the $30M term loan facility
- 64.48%, approx. 870,000,000 in exchange for debt reduction
- 6.00%, approx. 80,000 for Management Incentive Program
Total: 100%... subject to an additional 4%, or 54,000,000 share, dilution for continuation of the Management Incentive Program.
The company's shares dropped from $0.46 to $0.22 on the day of the 8-k filing.
Even though the market capitalization of the company is only about $4 million and the note holders are taking up to a $70M haircut on their $140M worth of notes, the note holders would likely view this restructuring as a slight positive. Likely, most of the company's earnings would have gone to pay for interest on those notes anyway so by taking on equity, the note holders have a chance of getting returns above what the company could pay in interest.
For the current holders of common shares, the story is quite different in that they maintain their shares but will be substantially diluted. Offsetting the dilution somewhat is that the restructuring will reverse the shareholders' deficit into positive shareholders' equity and that shareholders will receive warrants to buy additional shares.
Discussing the mechanics and not delving into the motivation, SAExploration carved out 1.32% of the final structure for equity and an additional 4.5% for warrants which existing shareholders will receive. The company is reserving around 60M shares for these warrants - 30M for warrant exercises at a market cap of $112M, or around $0.08/share and another 30M at a market cap of $140M or about $0.10/share. These warrants are five year warrants and can only be exercised during the last thirty days of the five year term. Additionally, the warrants can only be exercised if the company receives at least $25M in Alaska Tax Credit Certificates.
So what are the common shares currently worth?? On the whole, the $8M market cap prior to the filing strongly indicates that the company would be unable to continue to service its $140M worth of debt. There was a shareholders deficit and the company had liquidity issues. The shares traded at $0.46 likely as investors played the odds of a turn around, not as much for the fundamental value of the company. Reducing the debt by $70M certainly doesn't mean the market cap should be increased by $70M - the stock was trading more like an out-of-the-money call option than it was like a fundamentally sound stock.
My opinion only would be that reducing the debt by $70M probably should increase the market cap from the previous $8M to maybe around $40M... although that $40M is against a much larger outstanding share count. A $40M market cap would equate to about $0.03/share. My estimate is that shareholders will get about 3.4 warrants per share and at that $0.03 share price, 3.4 warrants exercisable at $0.08 and $0.10, with exercise restricted based on the status of Alaskan Tax Credits, might be worth an additional $0.025 in total. I believe shares are probably worth $0.05 to $0.06 with the warrants attached at this point... or maybe $7.00 to $8.00 for the shares plus warrants after executing the 1-for-135 reverse split announced by the company. After the warrants separate maybe around $4.00/share. The caveat to my guess is that there are very few shares available currently, and this could make the shares extremely volatile.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SAEX over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: While I am not long nor short SAExploration nor do I intend to initiate any position, I reserve the right to take any position at any time.