The company is aiming to raise £40m in zero dividend preference (ZDP) shares paying a gross annual return of 7.5 per cent over their five-year life, a premium to GLI's existing ZDP shares which offer an annual return of 6.5 per cent and mature in 2019. Half the issue is being offered to existing ordinary shareholders and the 2019 ZDP shareholders on the basis of 0.08498 2020 ZDP shares for each ordinary share and/or 2019 ZDP share held. The ZDP shares will be listed on the London Stock Exchange. If the full sum is raised then the net proceeds of £38.8m from the fundraise will first be used to pay down an existing high interest loan of £23m on which GLI Finance pays an interest rate of 11 per cent with the additional capital raised being used to expand its loan portfolio which is mainly sourced through the family of platforms in which GLI has taken equity stakes.
This is a sensible strategy to adopt as it aligns the £64.7m of investments GLI has made directly in its platform companies and from which it is not currently generating an income with a liability on which interest rolls up and becomes payable on maturity. The current 2019 ZDP shares have a market value of £21.8m, so if the full £40m is raised from the 2020 ZDP issue then the assets are matched with a corresponding liability.
It also enables these investments time to mature and realise the capital upside that GLI's board believe they will generate over time and which has to exceed a hurdle rate of 7.5 per cent. That should be possible given that the company's primary objective has always been to achieve a return on equity of 10 to 15 per cent per annum through the provision of finance to SMEs. The strategy for achieving this has evolved over time with a move from the provision of SME lending primarily through US middle market lending, directly and through collaterised loan obligations, to providing SME lending through a range of alternative finance platforms in which it has a material stake.
In addition, GLI is proposing that shareholders sanction an issue of convertible unsecured loan stock (CULS) at a conversion price (to be announced at a later date) above the market price in order to replace the aforementioned high interest loan facility of £30m and on which the company has drawn down £23m of borrowings. Given that GLI has a net asset value of 52.4p a share, and the share price is currently 35p, then issuing CULS has several advantages. Namely, it gives GLI access to a lower cost loan facility which in turn can be used to create value for shareholders by making further portfolio investments. It also makes no sense whatsoever to replace a loan facility with equity funding from shareholders at this stage given GLI's shares are trading a third below book value.
Moreover, any dilution on conversion of the CULS is unlikely to be too significant bearing in mind that GLI has 211m shares in issue at present and shareholders are being asked to dis-apply their pre-emption rights with regards to a maximum of 60m shares arising on conversion of the CULS, the clear implication being that the conversion price of the CULS into ordinary shares will be closer to 50p a share than the current share price. I don't think that investors selling down GLI shares post the news of the placing and open offer of ZDPs and the proposed issue of CULS have grasped this important fact.
Sustainability of the dividend
They may have been spooked though by the board's statement on the future dividend policy. Namely, that aggregate dividends declared in respect of each annual accounting period are to be paid out of the net income of the company in respect of that accounting period. The board may, however, exceptionally pay dividends and special dividends out of capital. Bearing this in mind, the ability to pay dividends is dependent on a number of factors, including the level of income returns from GLI's portfolio of investments. There can be no guarantee that the portfolio of investments will achieve the target rates of return referred to above or that dividends will be paid in respect of any year or period.
Indeed, in my analysis last month I highlighted that analysts predict GLI will have cash earnings of 1.97p per share in 2016, a sum insufficient to fund its 5p per share dividend ('High yield P2P play', 18 November 2015). That said, if the dividend turns out to be lower in the future, but the company's borrowing costs are reduced significantly and its balance sheet is better financed through the ZDP and CULS issues, then I can see potential for greater capital upside for shareholders as the board will have greater flexibility to invest for investment gains.
And as I pointed out in that same article an investment in GLI Finance's shares is a vote of confidence in the board's ability to: meet the funding gap on the dividend; successfully back enough winners in the portfolio of 19 investee P2P companies to generate capital upside in its net asset value; launch additional managed funds to ramp up its asset management business; and for GLI Alternative Finance to expand its portfolio quickly enough to generate additional fee income for GLI Finance. I am positive and that's why I am keeping faith even though the holding is showing a net loss of 22 per cent since I initiated coverage at 53.25p ('Funded for growth', 25 Feb 2014), and that's after factoring in the seven quarterly dividends of 1.25p a share in the interim. I rate the ordinary shares a recovery buy. As to whether you wish to take up your allocations of ZDPs depends on your portfolio requirements, but I would point out that the 6.5 per cent 2019 ZDP's are trading above the 100p issue price.
Please note that for a limited period of time, my book Stock Picking for Profit is being offered for sale at a promotional price of £11.99 plus postage, subject to availability, full details enclosed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ First Property: Run profits at 47.5p ('Investing for bumper gains', 30 Nov 2015)
■ Paragon: Run profits at 384p; Redde: Run profits at 174p; Fairpoint: Run profits at 175p ('Capitalising on investor overreactions', 1 Dec 2015)
■ LMS Capital: Tender your pro-rata allocation ('LMS tender on the money', 1 Dec 2015)
■ Vertu Motors: Buy at 78p, new target range of 85p to 90p ('In the fast lane', 2 Dec 2015)
■ MS International: Run profits at 210p, target bull market high of 240p ('Engineered recovery', 2 Dec 2015)
■ Mountview Estates: Buy at 11,500p ('Mountview's accounts reveal hidden value', 2 Dec 2015)
■ Character: Buy at 485p, new target 600p ('Playtime for a popular Character', 2 Dec 2015)
■ UK housebuilding sector: Buy and hold until end March 2016 ('Time to start building once more', 7 December 2015)
■ GLI Finance: Recovery buy at 35p ('Refinancing for GLI Finance', 9 December 2015)
■ Ensor: Hold at 90p and await news of disposals; Renewable Energy Generation: Await capital payout of 60p a share in January 2016 ('M&A updates', 9 December 2015)
■ Non-Standard Finance: Buy at 89p and take up open offer; Arbuthnot Banking Group: Buy at 1,530p, break-up value 2,200p ('Speciality finance plays', 9 December 2015)
■ For a limited period and strictly subject to stock availability, Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com at a special promotional price of £11.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
