Ten Network Holdings Limited (“TEN”) - Episode Three – Special Reserved Seats at the Table

The share price of TEN continues to decline.  The company announced its half-year results in April and since then the share price has gone from AUD0.44 to AUD0.21 – representing a fall of 52%.  In October 2016, just over six months ago, the share price was AUD1.47.

The financial viability of the company remains a major concern.  Arguably this is reflected in the downward trend in the share price.

By its own estimates, TEN is expected to continue to lose money with a projected EBITDA loss for the current financial year of AUD25 million to AUD30 million.  

Fortunately, the company has an existing bank loan that can be drawn upon as necessary to fund these losses.  But this is a short-term fix pending the resolution of a much bigger problem.  

The existing loan (provided by CBA) is guaranteed by some major shareholders.  And it is due for repayment in December 2017.

If TEN cannot repay the loan in full then the CBA will seek to recover the shortfall from the guarantors.  As guarantors, these shareholders are exposed to a significant financial risk.  And, of course, they are entitled to a fee for taking this risk.

Two obvious questions arise from this situation: 
- what will be the amount of the fee due to the guarantors; and,
- how will TEN pay this fee?

In the half year results, TEN disclosed the fee due to the guarantors was AUD29 million as at 28 February 2017 (the period end date for the first half financial year for TEN).  According to the TEN Directors’ Report, this amount had increased to AUD31 million as at 26 April 2017. The guarantee fee appears to be accruing at the rate of about AUD1 million per month and this infers a fee payable when due in December 2017 in the order of AUD39 million.

The guarantor fee and its terms were approved by TEN shareholders at its Annual General Meeting in December 2013.  The arrangements are complex and the details, including an expert opinion from Deloitte, were set out in the AGM explanatory notes for Resolution 4.  

In essence, the fee ranges from 3.0% to 5.4% per annum depending upon the financial health of TEN as measured by a prescribed Leverage Ratio.  Healthy EBITDA means a low Leverage Ratio and a low fee rate.  Given that TEN is projected to have negative EBITDA, it is reasonable to assume that the fee is currently at the top end of this range.  

The guarantors can elect, at their choice, to receive payment of the fee in cash or in TEN shares.  The TEN share issue price is referenced to the Volume Weighted Average Price (VWAP) of TEN shares and the calculation is performed for every six month period over the life of the guarantee.

It is difficult to precisely estimate the number of shares involved but if the TEN share price stays at around AUD0.25 for the remainder of the year the issue would be in the order of 50 million shares.  This represents about 15% of the current issued capital of the company and would result in a material dilution of other shareholders.  

Given the likely materiality of the potential issue, it would be helpful if TEN provided guidance for the number of shares that might be issued.

As much as the guarantors might prefer the fee in cash, the indications are that TEN will probably not have the financial resources to pay it.  In which case the guarantors will become creditors of TEN.

Interestingly, the guarantors also hold subrogated security rights over the major assets of TEN.  This is applicable if the guarantors are required to make payments to CBA.

As set out in the explanatory notes “If the security is enforced, whether by CBA or by the Shareholder Guarantors as a result of their subrogation rights, the enforcement may be by appointment of a receiver to sell the assets and undertakings of Ten and its subsidiaries. The Shareholder Guarantors may participate in any sales process and may potentially acquire assets under a sale process…”.

And then there is, of course, the vexed question of if and how will TEN refinance the loan in December.  

Whatever unfolds, it is clear that the guarantors will be well represented at negotiations.  What is less clear just now is in what capacity (shareholder or security holder or creditor or potential buyer or all of the above) will they be seated at the table.
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