In continuation of my previous blogpost :
DHT : Is Dilution Coming ? - Jowaniter
Now that DHT management has made the only right decision regarding the repayment of the $125 million convertible loan, it is helpful to investigate what could now happen.
Based on the TCE rates announced by DHT, they will achieve a net result of $ 124 million in the second quarter of 2020.
After the dividend payment for the first quarter and taking into account an unchanged working capital situation, the cash balance at the end of the second quarter will be + - $ 119 million (before payment of the dividend)
In the month and a half in the third quarter, about $ 10 million in cash will be added.
Available cash as of 08/15 will therefore be approximately $ 129 million.
In addition, DHT has an unused $ 45 million revolver.
1 ° DHT is committed to paying out 60% of the net result as dividend.
This amounts to $ 74.4 million.
2 ° DHT needs $ 125 million to repay the convertible loan, less the part that is converted into shares. Normally, DHT will only know after 08/15 how much of the loan will be converted, since the holders will still want to take the interest payment of 08/15.
3 ° DHT must maintain a cash balance of + - $ 36 million, as the covenant of the various outstanding loans.
This means that DHT needs $ 74.4 + $ 125 + $ 36 = $ 235.4 million in cash at worst versus a cash balance of $ 129 + $ 45 = $ 174 as of 15/08.
So there would be a theoretical deficit of + - $ 61 million. Add to this a $ 20 million safety cushion and DHT should therefore fill this gap.
This $ 81 million "gap" can be filled by:
1 ° Dividend reduction:
We consider this unlikely, because on the one hand there will be pressure from Maersk not to do this, and on the other hand it would appear negative in the market.
2 ° Re-taking of debt:
Now that DHT has prepaid the 2021 installments of 2 loans (totaling $ 59,178) in the second quarter, it is unlikely that they will draw on this again.
This repayment was in line with management's policy to have as few fixed commitments as possible in 2021 (a generally assumed less strong year for VLCC)
What is possible is that the revolver at ABN is increased to, for example, $ 80 million, without having to pay a fixed refund.
3 ° Some suggest an issue of preference shares. I think this is the worst possible (since the most expensive) solution
4 ° DHT can negotiate an extension of the convertible loan with certain bondholders, as they did in 2018 with the 2019 convertible bond.
In 2018, $ 73 million of the then-outstanding 2019 loan was extended for a 2-year period, but with a + - + 10% premium.
This is a possibility, but with an improvement in the conditions: we are thinking, for example, of a loan with an interest of 4% and a conversion premium of 25% on the current one.
(by comparison: one year ago, EGLE placed a 5-year 5% convertible loan at a 25% premium (albeit with stock borrowing facilities for the buyer)
5 ° Reduction in working capital: as of 03/31 the accounts receivable amounted to $ 86 million compared to $ 19.5 million accounts payable and there was a stock of bunkers amounting to more than $ 36 million.
Here ther is room to free cash (mainly because there are now about 10 time charters, where it is customary that the rent is paid in advance. This is not the case with voyage charters and it can take months before the ' demurrage fee' is paid)
I think DHT can easily free up $ 25 million here
Conclusion :
- Part of the convertible loan will undoubtedly be converted into shares:
This will most likely be done by holders who have previously hedged in whole or in part through a short position.
The total short position as of 29-06 was 13.2 million shares.
Upon conversion of 5 million shares, DHT must repay 5,000,000 * 5,347 = + - $ 26.7 million less.
If in addition to this conversion, a $ 75 million of the convertible loan could be prolonged, that would be great.
Total DHT debt would drop another $ 50 million , the stock dilution would be minimal and the cash balance would be high enough to coop with a bas market.
- The announcement of Q2 results as of 08/10 and especially the outlook for the third quarter will be crucial.
Most analysts are not so positive. We believe that the net result at current charter rates could still be close to $ 30 million with a low of $ 20 million if the market suddenly deteriorates.
If confirmed in the outlook, the stock may rise towards $ 5.50- $ 6 and there will undoubtedly be more conversion between 08/15 and 08/20.
In this case, the renewal of the convertible loan will be smaller (or even non-existent) but the total number of outstanding shares will increase sharply, but the total debt will also decrease sharply.
This is not an unpleasant prospect either.
So whatever the outcome is :
- Debt will be reduced
- Share count will increase but at $5.348 that is not a big problem