Firstly, following a strategic review implemented by new chief executive Andy Whelan, the company is reorganising its operational structure and buying out the minority interests in both Sancus Gibraltar, an offshore alternative secured lending business, and BMS Finance, a senior lending business focused on SMEs. GLI Finance is paying £23.5m consideration to buy the outstanding 84.71 per cent of the equity in Sancus Gibraltar by issuing £13.5m of new shares at 31.1p each to the vendors and by issuing a new £10m unsecured five-year bond at a coupon rate of 7 per cent per year. The company already owns 62.5 per cent of the equity of BMS Finance and is paying £5.1m in total to take 100 per cent control of which £3.45m of this sum will be settled by issuing new shares at 31.1p each.
It makes strategic sense to do so as the funding for the BMS loan portfolio is derived partly from its own balance sheet, partly from GLI Finance and through each of the British Business Bank and the Ireland Strategic Investment Fund (ISIF) under matched funding agreements. The ISIF mandate is a recent win for BMS and will allow the business to expand its operations in Ireland. In addition, GLI Finance holds £16m worth of 10-year interest-bearing loan notes issued by BMS which carry a coupon rate of 7 per cent to support BMS's growing loan book. The plan is to consolidate all the Sancus and BMS sub groups under one unified operating subsidiary in order to better position the company to expand its lending operations.
Also, as part of the reorganisation, GLI Finance will make an inter-company transfer of its 84 per cent equity shareholding and £5m of preference shares held in Platform Black to the newly rebranded Sancus BMS. Platform Black is an innovative online trading platform and lending business whose activities are complementary to those of both Sancus and BMS. Mr Whelan will become chief executive of the enlarged Sancus BMS business and forecasts that the unit will deliver pre-tax profits of £2.5m in the current year, rising to £4m in 2017 when loan books are fully deployed, the businesses are fully integrated and increasing levels of commercial, operating and financial savings are realised.
Strategically sensible
The restructuring not only improves the potential for the Sancus BMS in terms of generating free cash flow to service future dividend payments to GLI Finance's own shareholders, but importantly this free cash flow will be paid directly to the company.
Currently, GLI Finance has 230m shares in issue and will be issuing 54.5m new shares as consideration for the two acquisitions including 6.6m shares to itself in exchange for the 15.29 per cent stake in Sancus Gibraltar it already owns. GLI Finance will also own £1.5m of the bonds being issued as part of the Sancus Gibraltar acquisition.
This means about £1.2m of £4m of forecast pre-tax profit of BMS Sancus next year will be required to service the cash cost of the 2.5p a share annual dividend on the 47.9m new consideration shares being issued to the vendors of Sancus Gibraltar and BMS (after stripping out the 6.6m shares GLI Finance will own and which will be held in Treasury) and a further £595,000 is needed for the interest payments on £8.5m of the five-year bonds. This will leave a net £2.2m of profit before tax for the company to add to the annual dividend income of £2m it earns on the 25.3m shares held in Aim-traded investment firm GLI Alternative Finance (GLAF), and the substantial cash flow generated from its own loan book. To put this into perspective, the average annual interest rate charged on £56.2m-worth of loans GLI Finance has made to and through its lending platforms, an investment that accounts for 38 per cent of its £147m investment portfolio, is around 8 per cent.
Or put it another way, the buyout of BMS and Sancus Gibraltar have significantly improved the security of the 2.5p a share annual dividend.
In addition, the new bonds being issued to the vendors of Sancus Gibraltar will be listed on the Cayman Islands Stock Exchange and will also be tradeable on the platform of UK Bond Network, one of GLI Finance's platform investments. The company has the ability to further 'tap' this bond issue to fund further growth and that's what it's doing by issuing £4m of new bonds with the same coupon rate and term to eligible shareholders. If you are interested in participating in the £4m bond issue then you can register your interest at ukbondnetwork.com/GLIFinance. These 'tap' funds will be used to pay down part of a £14.8m outstanding syndicated loan which GLI Finance has and which carries an interest rate of 8.75 per cent, so reducing the company’s cost of capital further.
Please note that although the above transactions don't require shareholder approval, GLI Finance's board has convened an EGM on Monday, 6 June to seek shareholder approval for the acquisitions which are scheduled to complete on Thursday, 30 June. I would recommend voting in favour.
Impact on net asset value
At the end of December 2015, GLI Finance had a net asset value per share of 42.7p and the impact of the two transactions will be to reduce adjusted net asset value by 1.7p. However, the additional direct cashflow generated for GLI Finance means the cash cost of the dividend is far better aligned with the cash generation of the business, so it’s a price worth paying especially as it enhances the company's growth potential.
The bottom line is that with borrowings now under control and GLI Finance on a path to recovery, then the shares offer decent recovery prospects on a 27 per cent discount to adjusted book value post the aforementioned acquisitions and underpinned by a dividend yield of 8.3 per cent. I last rated the shares a buy a couple of months ago at 32.5p ('High yielding recovery buy', 30 March 2016) and have no reason to change that positive stance.
On a bid-offer spread of 29.25p to 30p, I rate the shares a buy and have an initial target price of 40.75p. Buy.
